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The Federal Reserve (the “Fed”) has announced[1] further changes to its now $600 billion Main Street Lending Program. From the program’s initial construct, which seemed aimed at larger companies, minimum loan sizes have been reduced to $250,000, allowing smaller businesses to apply for loans. The program, to be administered by the Federal Reserve Bank of Boston, would provide liquidity to eligible businesses that were in sound financial condition before the COVID-19 pandemic but have been adversely affected by the reduced economic activity surrounding the pandemic. This program is in addition to other programs from the Small Business Administration (SBA) through the SBA’s Payroll Protection Program (the “PPP”) and Disaster Loan Program, and other programs that may be established by the Treasury Department or the Fed.

In response to the COVID-19 pandemic, the Fed established several platforms intended to channel dollars into the economy. Some of the programs are designed to get cash directly into midsize or larger companies, including the Main Street New Loan Facility, the Main Street Priority Loan Facility and the Main Street Expanded Loan Facility. Other programs, such as the Secondary Market Corporate Credit Facility and the Term Asset-Backed Securities Loan Facility, are aimed at supporting financial institutions by taking assets off their balance sheets in order to encourage further lending to businesses and consumers. Some of the Fed facilities are hybrid in nature, such as the PPP and the Primary Market Corporate Facility, by purchasing interests in loans made by lenders to eligible borrowers. The Fed’s Municipal Liquidity Facility will provide loans to states and municipalities. This alert will focus on the Fed’s Main Street Facilities. Our firm has published other alerts on the PPP, the SBA’s COVID-19 Disaster Loan Program and many other COVID-19-related topics, which you can access here.

Main Street Lending Program

The Main Street Lending Program establishes a $600 billion fund to be advanced through eligible lenders (“Eligible Lenders”) making qualifying new loans (“New Loans”) or increasing qualifying existing loans (the so-called “Expanded Loans”; together with the New Loans, the “Main Street Loans”) to smaller and medium size qualifying businesses (“Eligible Borrowers”). The Fed has created a special purpose vehicle (the “Fed SPV”) which will purchase a 95% participation interest[2] in each Main Street Loan made by Eligible Lenders. The Treasury Department has invested $75 billion in the Fed SPV pursuant to the CARES Act.

Given the participation arrangement, Main Street Loans will be underwritten, arranged, negotiated and administered by the Eligible Lender. Eligible Borrowers generally should not have to interact with the Fed SPV or the Fed. The Fed SPV and the Eligible Lender will enter into a separate participation agreement setting out the Fed SPV’s approval and consent rights and other requirements with respect to the Eligible Loan.

Because the Main Street Loans will be funded through existing commercial lenders, Eligible Borrowers with existing Eligible Lenders should first talk with those lenders about this program. That said, the Fed has recently released standard legal documents that together establish the architecture of the program, but each Eligible Lender will use its own form loan documents, modified as needed to conform to the terms of the Main Street Lending Program. Model language has been suggested for certain provisions but is not required. For the Expanded Loans, with respect to multi-lender facilities, Eligible Lenders can use language in existing documents to the extent negotiated in good faith prior to April 24, 2020. Thus, these new advances will be documented through amendments, restatements or supplements of existing credit agreements. As commercial loans, these loans should be subject to the usual closing conditions and lender diligence, along with the additional analysis required to comply with the Main Street Lending Program. Main Street Loans must be repaid.

The Main Street Loans must conform to the terms and conditions set forth in the Main Street New Loan Facility term sheet, the Main Street Priority Loan Facility term sheet or the Main Street Expanded Loan term sheet released by the Fed. The three term sheets are largely similar, with some important distinctions. The following summary sets forth the key terms and indicates where the term sheets differ from each other.

Summary of Key Terms of Main Street Lending Programs

[1] See https://www.federalreserve.gov/newsevents/pressreleases/monetary20200608a.htm.
[2] Participation interests are arrangements between lenders where the participating lender assumes a profits and risk interest in a loan but generally does not become a party to the underlying loan documents between the Eligible Borrower and the Eligible Lender.
[3] The methodology used by the Eligible Lender to calculate adjusted 2019 EBITDA must be the methodology it has previously used for adjusting EBITDA when extending credit to the Eligible Borrower or similarly situated borrowers on or before April 24, 2020. Please note that for an upsized tranche under the Expanded Loan Facility, the methodology used by the Eligible Lender to calculate adjusted 2019 EBITDA must be the methodology it previously used for adjusting EBITDA when originating or amending the Eligible Loan.