On June 15, 2020, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) proposed the expansion of its Main Street Lending Program (the “Program”), which was originally established to support lending to small and medium-sized for-profit businesses, to include qualifying nonprofit organizations. On July 17, 2020, the Federal Reserve moved forward with the expansion, releasing updated term sheets for the Nonprofit Organization New Loan Facility (the “NONLF”), governing newly-originated loans, and the Nonprofit Organization Expanded Loan Facility (the “NOELF” and together with the NONLF, the “Nonprofit Facilities”), governing the upsizing of existing loans. The term sheets can be found on the Federal Reserve’s website: https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm.

We previously discussed the Federal Reserve’s proposed expansion of the Program to include the Nonprofit Facilities, including the requirements for participation, in our earlier blog entitled “Federal Reserve Considers Expanding the Main Street Lending Program to Accommodate Nonprofit Organizations – Comments Welcome” (“MSLP Blog 1”), which can be found here . With its July 17^th announcement, the Federal Reserve modified certain of these requirements, as summarized below. Readers should therefore review the following summary in conjunction with MSLP Blog 1. Capitalized terms not otherwise defined in this blog have the meanings set forth in MSLP Blog 1.

On July 23, 2020, the Federal Reserve released Frequently Asked Questions (“FAQs”) for the Nonprofit Facilities. We will discuss the details of the FAQs in a separate blog.

Background

The Program is authorized under the CARES Act and administered by the Federal Reserve Bank of Boston (the “Reserve Bank”). The Program is designed to support for-profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic, but are now challenged in maintaining their operations and payroll.

To effectuate the Program, the Reserve Bank has set up a special purpose vehicle (the “SPV”) to purchase a 95% participation in newly-originated Eligible Loans under the NONLF or Upsized Tranches of existing Eligible Loans under the NOELF, in each instance, originated by Eligible Lenders for the benefit of Eligible Borrowers. The Eligible Lender must retain its 5% interest in the Eligible Loan or Upsized Tranche until the earlier of the maturity date or the date that the SPV sells all of its participation. The SPV and the Eligible Lender will share the risk on a pari passu basis.

Updated Term Sheets – What’s New?

The following features of the Nonprofit Facilities, which are more particularly described in MSLP Blog 1, remain unchanged from the Federal Reserve’s June 15^th proposal:

1. The initial requirement that an Eligible Borrower be a Nonprofit Organization;^[1]
2. The requirements for an Eligible Lender;[2]
3. The requirements for an Eligible Loan;
4. The certifications required of Eligible Lenders and Eligible Borrowers;
5. The requirements for transaction, loan origination and loan servicing fees; and
6. The date that the SPV will cease purchasing loan participations (September 30, 2020, subject to extension by the Federal Reserve and the Treasury Department).

The Federal Reserve also included in its June 15^th proposal a list of other qualifying requirements for Eligible Borrowers, which are likewise described in detail in MSLP Blog 1. But in an effort to provide Nonprofit Organizations with greater access to the Nonprofit Facilities, on July 17^th, the Federal Reserve announced the following modifications to these requirements:

1. Continuous Operation Requirement: The Eligible Borrower has been in continuous operation since January 1, 2015 (shortened from the previous two-pronged requirement that the Eligible Borrower: (i) was established prior to January 1, 2015, and (ii) has been in continuous operation since January 1, 2015).
2. No Ineligible Businesses: The Eligible Borrower is not an “Ineligible Business.” An “Ineligible Business” is a type of business listed in 13 CFR 120.110(b)-(j) and (m)-(s), as modified by the Small Business Administration’s (the “SBA”) regulations implementing the Paycheck Protection Program (“PPP”) on or before April 24, 2020.[3] Some examples of “Ineligible Businesses” include businesses primarily engaged in lending (including banks and investment companies); passive real estate investment companies; life insurance companies; businesses engaged in legal gambling activities; government-owned entities; certain loan packagers; certain businesses providing prurient sexual material; businesses primarily engaged in political or lobbying activities; and speculative businesses.
3. Employee Requirement: The Eligible Borrower must have at least 10 employees (down from 50 employees);
4. Non-Donation Revenues: The Eligible Borrower’s total non-donation revenues (meaning gross revenues minus donations) must be greater than or equal to 60% of expenses (meaning total expenses minus depreciation, depletion, and amortization) for the period from 2017 through 2019;[4]
5. Operating Margin: The Eligible Borrower’s ratio of adjusted 2019 earnings before interest, depreciation, and amortization (“EBIDA”) to unrestricted 2019 operating revenue,[5] must be greater than or equal to 2% (down from 5%).
6. Cash on Hand: The Eligible Borrower’s ratio (expressed as a number of days) of: (i) liquid assets[6] at the time of the origination of the Eligible Loan or Upsized Tranche, as applicable, to (ii) average daily expenses over the previous year, must be greater than or equal to 60 days (down from 90 days).
7. Debt Repayment Capacity: At the time of the origination of the Eligible Loan or Upsized Tranche, the Eligible Borrower’s ratio of: (i) unrestricted cash and investments to (ii) existing outstanding and undrawn available debt, plus the amount of any loan under the NONLF or NOELF, as applicable, plus the amount of any CMS Accelerated and Advanced Payments, must be greater than 55% (down from 65%).

Further information about the Program, and the Nonprofit Facilities in particular, can be found on the Reserve Bank’s website: https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-program.aspx. As noted in the Federal Reserve’s July 17^th press release, the Nonprofit Facilities are not yet operational. We will continue to provide updates regarding the Nonprofit Facilities upon the release of further guidance from the Federal Reserve. To that end, we will be publishing a separate blog in the near future discussing the recently-released FAQs. In the interim, if you have any questions, please contact Neal Pandozzi at npandozzi@apslaw.com or Jonathan Cabot at jcabot@apslaw.com.

[1] “Nonprofit Organization” means a tax-exempt nonprofit organization described under section 501(c)(3) of the Internal Revenue Code (the “Code”) or a tax-exempt veterans’ organization described under Section 501(c)(19) of the Code; provided, that the Federal Reserve may include other forms of organizations as a Nonprofit Organization at a future date.

[2] Interested lenders can register now for the Nonprofit Facilities through the Main Street Lender Portal: https://mainstreet.frb.org/s/login/?ec=302&startURL=%2Fs%2F.

[3] See e.g., the SBA’s Interim Final Rule implementing the PPP, https://www.sba.gov/sites/default/files/2020-04/PPP%20Interim%20Final%20Rule_0.pdf.

[4] The original requirement was for 2019 revenues from donations to be less than 30% of an Eligible Borrower’s total 2019 revenues. “Donations” was originally defined to include proceeds from fundraising events, federated campaigns, gifts, and funds from similar sources. In the updated term sheets, the Federal Reserve has modified this definition to now include donor-advised funds, but exclude (i) government grants, (ii) revenues from a supporting organization, (iii) grants from private foundations that are disbursed over the course of more than one calendar year, and (iv) any contributions of property other than money, stocks, bonds, and other securities (noncash contributions), provided that such noncash contribution is not sold by the organization in a transaction unrelated to the organization’s tax-exempt purpose.

[5] The methodology for calculating adjusted 2019 EBIDA and the definition of “operating revenue” (including the methodology for calculating the proxy for endowment income (a component of operating revenue)) remain unchanged from the Federal Reserve’s original proposal.

[6] “Liquid assets” is defined as unrestricted cash and investments that can be accessed and monetized within 30 days. In the updated term sheets, the Federal Reserve now permits an organization to include in “liquid assets” the amount of cash receipts it reasonably estimates to receive within 60 days related to the provision of services, facilities, or products, or any other program service that exceed its reasonably estimated cash outflows payable within the same 60-day period.