Federal Reserve Chairman Jerome Powell announced on May 19, 2020, before a Senate Committee that the Main Street Lending Program (Program) is anticipated to be launched around the end of May. Prospective borrowers should be preparing for making loan applications with participating lenders when the Program commences.

As described in our earlier Alerts, the Federal Reserve and the U.S. Department of Treasury are making available up to $600 billion in new financing for eligible small and mid-sized businesses. Unlike loans under the Paycheck Protection Program (PPP) which, subject to certain conditions, are forgivable, loans under the Program are not forgivable. These loans must be repaid, may require collateral arrangements satisfactory to the lender, and impose on borrowers a number of restrictions, including the prohibition of dividends and stock repurchases as well as significant compensation increases for highly compensated executives. The Program is designed to provide secondary market liquidity for Program loans, with each lender retaining a portion of each loan it originates and the Federal Reserve providing liquidity for lenders by purchasing loan balances not retained by lenders.

Critical to an eligible business is the amount such business may borrow under the Program. The following briefly summarizes the Program’s loan limits. It is important to understand that simply meeting the Program’s criteria is no assurance that a borrower will actually receive a loan. These loans will be negotiated between the lender and the borrower. As described in the Federal Reserve’s FAQs, “Eligible Lenders will apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower.”

The Program, as currently revised, is comprised of three separate facilities:

• Main Street New Loan Facility to facilitate new loans to eligible businesses (New Loans);

• Main Street Expanded Loan Facility to facilitate the extension of already existing loans for eligible businesses (Expanded Loans); and

• Main Street Priority Loan Facility, similar to New Loans, but increases the amount eligible lenders will retain of eligible loans to 15% (Priority Loans).

What is the Maximum Loan a Prospective Borrower May Receive?

The Program sets a maximum loan amount depending on the particular loan facility. However, each loan facility imposes limitations based on the prospective borrower’s “adjusted 2019 EBITDA” and “existing outstanding and undrawn available debt”:

• New Loans: the lesser of (i) $25 million or (ii) an amount that, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed four times the eligible borrower’s adjusted 2019 EBITDA

• Priority Loans: the lesser of (i) $25 million or (ii) an amount that, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed six times the eligible borrower’s adjusted 2019 EBITDA

• Expanded Loans: the lesser of (i) $200 million, (ii) 35% of the eligible borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the eligible loan and equivalent in secured status (i.e., secured or unsecured) or (iii) an amount that, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed six times the eligible borrower’s adjusted 2019 EBITDA

In summary, each Program loan is capped at an amount equal to (i) a multiple (either four or six) of the borrower’s adjusted 2019 EBITDA less (I’m not sure what this is meant to mean – less than, except if) (ii) such borrower’s existing outstanding and undrawn available debt. These two terms are more fully analyzed below.

What is Adjusted EBITDA?

The common definition of EBITDA is the adjustment of a company’s net income by adding back interest, taxes, depreciation and amortization expenses. EBITDA is generally considered a quick, but imperfect, calculation of a company’s cash flow. There is no formal definition of EBITDA and frequently EBITDA is a poor proxy for cash flow for certain industries, such as capital-intensive businesses with large depreciation. The definition of “adjusted EBITDA” is even less uniform. The term is typically used to reflect EBITDA further adjusted to remove nonrecurring items and other abnormalities within EBITDA to make comparisons between similarly situated companies more useful.

In partial recognition of these limitations, the ultimate arbiter of adjusted EBITDA is the Program lender. If the borrower has an existing, loan from the lender, then the lender is obligated to apply to the Program loan the same adjusted EBITDA methodology. Alternatively, if there was no such relationship, then the lender is to apply to the Program loan such adjusted EBITDA methodology applied to “similarly situated borrowers.” Note that such methodology must predate April 24, 2020, to prevent lenders and borrowers from potentially gaming the system. Note that for Expanded Loans, the lender must use the adjusted EBITDA methodology it previously used when originating or amending the underlying loan on or before April 24, 2020.

What is Adjusted 2019 EBITDA?

The Federal Reserve’s Term Sheets do not define over what period adjusted EBITDA is to be calculated. It can be reasonably inferred that it means the prospective borrower’s fiscal year ending in 2019. The Federal Reserve’s FAQs clarify how a prospective business is to determine the 2019 annual revenues for determining eligibility within the $5 billion limit. For such purpose, the FAQs allow prospective businesses to calculate revenues as provided in the borrower’s “2019 generally accepted accounting principles-based audited financial statements” or as reported to the IRS for the borrower’s fiscal year 2019.

However, the flexibility granted lenders in determining adjusted EBITDA should apply to assess a more accurate time period to determine adjusted EBITDA. For example, a borrower which commenced operations in 2018 with a fiscal year ending March 31, 2019, may have little or no EBITDA, but may have demonstrated financial success the latter half of the year and such borrower’s adjusted EBITDA for the year ending December 31, 2019, would be more appropriate. By way of another example, a borrower which commenced operations in 2019 with a fiscal year ending December 31, 2019, would not even have a full year of earnings to assess the maximum loan amount. In such situations, it may be appropriate, depending on the borrower, to allow for lenders to annualize EBITDA. Hopefully, the Federal Reserve will provide Program lenders clarity on this point and allow lenders the flexibility consistent with the purpose of the Program.

What About Borrowers Without EBITDA?

If a prospective borrower has no (or very little) 2019 EBITDA, such prospective borrower cannot borrow under the Program. Under the Term Sheets, there is no relief for prospective borrowers who may have significant tangible assets or have tremendous future earning potential – arguably, those borrowers should be able to access normal credit.

However, the Federal Reserve’s FAQs, recognizing that “the credit risk of asset-based borrowers, as a matter of practice, is generally not evaluated on the basis of EBITDA,” did offer a ray of hope for such borrowers noting that the Federal Reserve and the Treasury Department “will be evaluating the feasibility of adjusting the loan eligibility metrics of the Program for such borrowers.”

What is Existing Outstanding and Undrawn Available Debt?

The Federal Reserve’s FAQs define “existing outstanding debt” to include “all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, non-bank financial institution, or private lender, as well as any publicly issued bonds or private placement facilities.”

The term “undrawn available debt” for a potential borrower under the Program is defined under the FAQs as “all unused commitments under any loan facility, excluding any undrawn commitment that (i) serves as a backup line for commercial paper issuance, (ii) is used to finance receivables (including seasonal financing of inventory), (iii) cannot be drawn without additional collateral, or (iv) is no longer available due to change in circumstance.” Existing outstanding debt and undrawn available debt is to be calculated as of the date of the loan application.

It should be noted that the Program lender must commit that it will not cancel or reduce any existing committed lines of credit outstanding to the borrower, except (i) termination upon an event of default as provided in the existing loan documents, (ii) reduction or termination of uncommitted lines of credit, (iii) expiration of existing lines of credit in accordance with their terms or (iv) reduction of availability under existing lines of credit in accordance with their terms due to changes in borrowing bases or reserves in asset-based or similar loans.

What Should Prospective Borrowers Do Next?

Prospective borrowers should prepare in advance of the launch of the Program to try to avoid the initial logjam that frustrated initial PPP borrowers. This includes a determination of the borrower’s adjusted 2019 EBITDA and existing outstanding and undrawn available debt consistent with the Program’s guidelines.

Prospective borrowers should prepare in advance of the launch of the Program to try to avoid the initial logjam that frustrated initial PPP borrowers. This includes an assessment of the borrower’s eligibility under the Program, current cash needs and availability of existing credit (currently outstanding and undrawn) and the benefits and risks of taking on a Program loan.