The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides emergency economic stimulus to small businesses and certain eligible recipients in response to the economic distress caused by the COVID-19 pandemic. The Coronavirus Economic Stabilization Act of 2020 (CESA), at Title IV, Subtitle A of the CARES Act, authorizes the U.S. Treasury Secretary to, among other things, establish and administer a program of loans, loan guarantees, and other investments to provide liquidity to eligible businesses related to losses incurred as a result of coronavirus.

Timeline of Program

• On April 9, 2020, pursuant to CESA and Section 13(3) of the Federal Reserve Act (12 U.S.C. § 343(3)), together with the U.S. Treasury Secretary under the authority of Section 4003(b)(4) of the CARES Act, the Federal Reserve and the U.S. Treasury Department (Treasury) approved the establishment of a $600 billion Main Street Business Lending Program (the “Program”) and issued original term sheets for the MSNLF and the MSELF.
• On June 8, 2020, the Federal Reserve Bank of Boston (FRB Boston) released additional information concerning the Program, including updated Term Sheets [See MSNLF Term Sheet, MSPLF Term Sheet, and MSELF Term Sheet] and Frequently Asked Questions (FAQs). Together, the Term Sheets and the FAQs provide a detailed outline of the requirements and mechanics of the Program.
• On June 11, 2020, the FRB Boston published borrower certifications and covenants [See MSNLF Certifications & Covenants, MSPLF Certifications & Covenants, and MSELF Certifications & Covenants] in addition to the lender transaction specific certifications and covenants and other Program forms and agreements that were published [See Main Street Lending Program Forms and Agreements for a complete listing].
• On June 15, 2020, the FRB Boston opened the Program for lender registration.

This update summarizes the terms of the Program, describes the main terms and open issues under the Program, and outlines certain matters to be analyzed and considered with respect thereto. Please note this article replaces and supersedes our April 13, 2020, article on the program given the breadth and depth of the recent actions taken by the Federal Reserve and Treasury.

Loan Facilities

The Program offers three different loan facilities (collectively, the “Facilities”):

1. Main Street New Loan Facility (MSNLF);
2. Main Street Priority Loan Facility (MSPLF); and
3. Main Street Expanded Loan Facility (MSELF).

Under each of the Facilities, the FRB Boston will lend to a special purpose vehicle (SPV) on a recourse basis, and the SPV will provide funding for each of the Facilities. The Treasury, using funds appropriated under Section 4027 of the CARES Act, will make an initial equity investment of $75 billion in the SPV, and the SPV will be able to purchase up to a total of $600 billion of participations in Eligible Loans under the Facilities.

Unless the Federal Reserve and Treasury extend the Program, the SPV will cease purchasing participations in Eligible Loans on September 30, 2020. However, FRB Boston will continue to fund the SPV after September 30, 2020, until the loan participations held by the SPV mature or are sold.

Program Basics

• Purpose: The purpose of the Program and the Facilities is to facilitate lending to small and medium-sized US Businesses by Eligible Lenders to mitigate the adverse economic effects of the COVID-19 pandemic. It is intended to help companies that were financially sound before the pandemic maintain their operations and payroll until conditions normalize. Loan proceeds from any of the Facilities may not be used to benefit foreign parents, affiliates or subsidiaries.
• Eligible Lenders: Institutions eligible to lend under the Program include:
  • U.S. federally insured depository institutions, including banks, savings associations, and credit unions;
  • U.S. branches or agencies of foreign banks;
  • U.S. bank holding companies;
  • U.S. savings and loan holding companies;
  • U.S. intermediate holding companies of foreign banking organizations; and
  • U.S. subsidiaries of any of the foregoing.
• Eligible Borrowers: To be eligible to borrow under the Facilities, the borrower must be a Business:^[1]
  • that was established before March 13, 2020;
  • that is not of a type that is ineligible under 13 CFR 120.110(b)-(j) and (m)-(s), as modified by regulations implementing the Paycheck Protection Program (PPP);
  • with up to 15,000 employees or annual revenues in 2019 of up to $5 billion (additional information for determining compliance with these numbers is available in the FAQs);
  • that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States;^[2]
  • has not received support from a program established by the Department of the Treasury under Subtitle A of Title IV of the CARES Act; and
  • that is able to make all the certifications and covenants required under the Program.

To determine eligibility, a Business’s employees and 2019 revenues are calculated by aggregating the employees and 2019 revenues of the Business itself with those of the Business’s affiliated entities in accordance with the affiliation test set forth in 13 CFR 121.301(f). An affiliated group of companies can participate in only one Program facility, and cannot participate in both a Program facility and the Primary Market Corporate Credit Facility (PMCCF). FAQ E.10 outlines these restrictions.

Nonprofit organizations and debtors in bankruptcy are ineligible borrowers under the Program. Please note, however, on June 15, 2020, the Federal Reserve issued draft term sheets for a Nonprofit Organization New Loan Facility and a Nonprofit Organization Expanded Loan Facility for public consultation. The final terms and conditions of these facilities will be announced on the Federal Reserve Board website.

• Participation in Other Stimulus Programs: Businesses that have received loans under the Small Business Administration’s Paycheck Protection Program (PPP) or Economic Injury Disaster Loan (EIDL) program, are permitted to borrow under the Program if they are otherwise Eligible Borrowers. An Eligible Borrower may only participate in one of the Facilities and may not also participate in the PMCCF; however, an Eligible Borrower may receive more than one loan under a single Main Street facility, provided that: the sum of MSNLF loans cannot exceed $35 million; the sum of MSPLF loans cannot exceed $50 million; and the sum of MSELF upsized tranches cannot exceed $300 million. 

Loan Terms

The following table identifies the key terms and features of the Facilities:

Required Certifications and Covenants

• Eligible Lenders: In addition to certifications required by applicable statutes and regulations, the Eligible Lender must:
  • covenant not to request that the Eligible Borrower repay principal of, or pay interest on, other outstanding debt between the parties until the Eligible Loan is repaid in full, except (i) if the principal or interest payment is mandatory and due, or (ii) in the case of default and acceleration;
  • covenant that it will not cancel or reduce any existing committed lines of credit to the Eligible Borrower, except in an event of default;
  • certify that the methodology used for calculating the Eligible Borrower’s adjusted 2019 EBITDA is the same methodology it used for the Eligible Borrower and other similarly situated borrowers on or before April 24, 2020 (or, in the case of the MSELF, the same methodology it used for the Eligible Borrower when originating or amending the Eligible Loan on or before April 24, 2020); and
  • certify that it is eligible to participate in the applicable Facility, including that it is not a covered entity subject to the conflict of interest prohibition in Section 4019(b) of the CARES Act.

• Eligible Borrowers: In addition to certifications required by applicable statutes and regulations, the Eligible Borrower must:
  • covenant not to repay the principal of, or pay interest on, other outstanding debt until the Eligible Loan (or the upsized tranche, in the case of the MSELF) is repaid, except if the principal or interest payment is mandatory and due (However, in the case of the MSPLF, at the time the Eligible Loan is originated, the Eligible Borrower may refinance existing debt owed to a lender other than the Eligible Lender);
  • covenant that it will not seek to cancel or reduce committed lines of credit with the Eligible Lender or any other lender;
  • certify that, as of the origination date (or, in the case of the MSELF, the date of the upsize), it reasonably believes that, after giving effect to the Eligible Loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that period;
  • covenant that it will comply with the restrictions on compensation, stock repurchase, and capital distribution that apply to direct loan programs under Section 4003(c)(3)(A)(ii) of the CARES Act, except that an S-corporation or other tax pass-through entity that is an Eligible Borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the Eligible Borrower’s earnings; and
  • certify that it is eligible to participate in the applicable Facility, including that it is not a covered entity subject to the conflict of interest prohibition in Section 4019(b) of the CARES Act.

The Eligible Lender must obtain these certifications and covenants from the Eligible Borrower at the time the Eligible Loan is originated. The Eligible Lender may rely on these certifications and covenants, and on any subsequent reporting, by the Eligible Borrower.

Additional Considerations

• Loan Classification: For the MSNLF and MSPLF loans, if the Eligible Borrower had other loans outstanding with the Eligible Lender on December 31, 2019, these loans must have had an internal risk rating on that date equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date. For the MSELF, the Eligible Loan must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system as of December 31, 2019.
• Assessment of Borrower’s Financial Condition: Eligible Lenders must assess the borrower’s financial condition at the time the borrower submits an application.
• SPV Purchase of Loan Participations: The SPV will purchase at par value a 95% participation in the Eligible Loan (or, in the case of the MSELF, 95% in the upsized tranche of the Eligible Loan) on the following terms:
  • The Eligible Lender must retain 5% of the Eligible Loan (or, in the case of the MSELF, 5% of the upsized tranche) until the earlier of loan maturity (or, in the case of the MSELF, maturity of the upsized tranche) or the SPV’s sale of all of its participation.
  • Risk in the Eligible Loan (or, in the case of the MSELF, the upsized tranche) will be shared by the SPV and the Eligible Lender on a pari passu basis. With respect to the MSELF, The Eligible Lender must also retain its interest in the underlying Eligible Loan until the underlying Eligible Loan matures, the upsized tranche of the Eligible Loan matures, or the SPV sells all of its 95% participation, whichever comes first, and any collateral securing the Eligible Loan (at the time of upsizing or on any subsequent date) must secure the upsized tranche on a pro rata basis.
  • The Eligible Lender must complete the sale of the participation to the SPV expeditiously after the origination of the Eligible Loan (or, in the case of the MSELF, after the Eligible Loan’s upsizing).
  • The sale of the participation to the SPV must be structured as a true sale.

The regulatory capital treatment of the Eligible Loan (and any credit risk mitigation treatment associated with any collateral securing the Eligible Loan) applies only to the 5% interest retained by the Eligible Lender.

• Retention of Employees: Each Eligible Borrower must make commercially reasonable efforts to maintain its payroll and retain its employees, in light of its capacities, the economic environment, its available resources, and the business need for labor while the Eligible Loan is outstanding. However, borrowers that have already laid off or furloughed employees due to COVID-19 disruptions are nevertheless eligible to apply for one of the Facilities.
• Program Forms and Agreements: Each participating Eligible Lender in instructed to use its own loan documentation to document the Facilities. Such documentation should be substantially similar, including with respect to required covenants, to the loan documentation that the Eligible Lender uses in its ordinary course lending to similarly situated borrowers, adjusted only as appropriate to reflect the requirements of the Program. In order for the SPV to participate in a loan, the loan documentation must reflect the required components set out in the charts attached as Appendix A to the FAQs.
• Federal Reserve Disclosure Relating to Program Loans: The Federal Reserve plans to publish, at least monthly, the following with respect to the Program:
  • names of all Program lenders;
  • names of Program borrowers;
  • amounts borrowed;
  • interest rates charged; and
  • overall costs, revenues, and fees of the Program.

More to Come

The Board of Governors of the Federal Reserve System and Secretary of the Treasury has reserved the right to make adjustments to the terms and conditions summarized above.  JW will continue to monitor developments and any further guidance issued by the Federal Reserve.

^[1] To qualify as a “business” under the Program, the borrower must be an entity that is organized for profit as one of the following: partnership; limited liability company; corporation; cooperative; trust; joint venture with no more than 49% participation by foreign business entities; or tribal business concern (as defined in 15 U.S.C. § 657a(b)(2)(C)).
^[2] The proceeds of a loan must be used only for the benefit of U.S. businesses and may not be used for the benefit of foreign parents, affiliates or subsidiaries.
^[3] Only the upsized portion of the loan qualifies for the terms of the MSELF, and the upsized tranche will be a term loan.
^[4] PPP loans should be factored in as outstanding debt for the purposes of determining the maximum loan amount.
^[5] Existing loan must have a remaining maturity (i.e., term) of at least 18 months.
^[6] For MSELF Upsized Tranches where the underlying loan is part of a multi-lender facility, any cross-default or cross-acceleration provision that was negotiated in good faith prior to April 24, 2020, as part of the underlying loan will be deemed sufficient.
^[7] The term “mortgage debt” means (i) debt secured by real property at the time of the MSPLF or MSELF Loan’s origination; and (ii) limited recourse equipment financings (including equipment capital or finance leasing and purchase money equipment loans) secured only by the acquired equipment.
^[8] Paid by Eligible Borrower to Eligible Lender.
^[9] Paid by Eligible Lender or Eligible Borrower to SPV.
^[10] Paid by SPV to Eligible Lender.