Last week, the Federal Reserve updated the terms of its Main Street Lending Program (MSLP) with its first set of guidance to expand the scope of available loan options and the pool of eligible borrowers. You can find our recaps of the Federal Reserve’s initial announcement of the program and its first guidance here and here. As the Federal Reserve works to create the infrastructure necessary to operationalize the MSLP, some features of the program have been clarified, while outstanding questions remain. Here are our main points of emphasis, whether important considerations for borrowers or lenders, true clarifications provided by the guidance, or outstanding issues:

• Affiliate Rules Apply: In counting employees and determining 2019 revenue for borrower eligibility purposes, affiliate employees and revenue must be counted in accordance with the rules of 13 CFR 121.301(f). Not addressed is whether such affiliates’ EBITDA is also to be aggregated in determining a borrower’s maximum loan size.
• Eligibility: Passive owners, developers, and landlords of real estate generally are not eligible for a MSLP loan. The guidance refers to 13 CFR 120.110 for certain ineligible businesses, which includes “[p]assive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds” (13 CFR 120.110(c)).
• Nonprofits: Nonprofits are not eligible, though the Federal Reserve recognizes the need and hopes to address this in the future. There is no timeframe for the Federal Reserve’s additional input on this topic.
• Ineligible Lender Participation: The definition of “Eligible Lenders” has not been expanded to include private lenders, but Expanded Loan upsize tranches may be originated based on an underlying multi-lender facility that includes private lenders (and other ineligible lenders), so long as an Eligible Lender retains the entire 5% interest in the upsize tranche and retains its interest in the underlying loan until the upsize tranche or the underlying loan matures, whichever comes first. There is no minimum percentage of the underlying loan that the Eligible Lender is required to own and retain.
• Determining EBITDA: In determining maximum loan amounts based on EBITDA, lenders are now allowed to calculate based on the same methodology previously used to calculate adjusted 2019 EBITDA when extending credit to the Eligible Borrower or “similarly situated borrowers” on or before April 24, 2020. This flexibility potentially opens up eligibility to more businesses, but if EBITDA was not previously used in extending credit to the particular Eligible Borrower or “similarly situated borrowers,” then no other metric is provided. If EBITDA is not available as a metric, certain borrowers may be ineligible for the program until the Federal Reserve provides another metric in further guidance.
• No EBITDA: As EBITDA is not as useful for determining creditworthiness for asset-based borrowers, the Federal Reserve notes that it is looking into how to adjust the eligibility metrics for such borrowers. There is no timeframe for the Federal Reserve’s additional input on this topic.
• Individual Lender Underwriting: Notwithstanding a borrower’s eligibility under the MSLP rules and its qualifying maximum loan amount, each Eligible Lender should apply its own underwriting standards and can determine in its sole discretion both whether to originate an MSLP loan to a particular borrower and whether to lend to such borrower its qualifying maximum loan amount.
• Nature of Deferred Payments: While principal and interest payments under all MSLP loans are deferred for the first year, interest during that first year will be capitalized and added to the principal balance.
• Involvement of Other Current Lenders: MSLP loans cannot be subordinate to any other debt of an Eligible Borrower (other than mortgage debt under the Priority Loan and Expanded Loan programs). Borrowers, therefore, will have to approach their other lenders to discuss subordination and intercreditor arrangements. Even without these priority rules, most loan facilities contain prohibitions against additional debt, so borrowers would always need to involve their current lenders.   
• Borrower Certifications and Covenants: In a change from the initial April 9, 2020, term sheets for the MSLP, an Eligible Borrower no longer must certify that it “requires financing” due to the COVID-19 pandemic. Also, it must use “commercially reasonable efforts” (as opposed to “reasonable efforts” in the April 9 term sheets) to maintain its payroll and retain its employees, which the Federal Reserve clarifies to mean good faith efforts based on its capacities, the economic environment, its available resources, and the business need for labor. Thus, there are no hard and fast payroll and employee retention requirements (at this time) under the MSLP as there are under the Paycheck Protection Program.
• Permitted Distributions: Restrictions on dividends and other capital distributions will not apply to distributions made by a pass-through tax entity (such as partnerships, most LLCs, and S corps) to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
• Further Changes Requested: The American Bankers Association has urged the Federal Reserve to consider additional adjustments to the MSLP, “including further lowering the minimum loan size, increasing flexibility in loan terms, and offering additional reference rate options. Doing so would increase bank participation and allow this program to reach even more small and midsize businesses in need.”
• Program Start and Finish: No start date for the MSLP has been set, though, as of now, it is set to end on September 30, 2020.

This list is certainly not exhaustive, as the MSLP is a massive undertaking being implemented in a short time period, so the details and challenges are myriad.