CARES Act Update – Overview of Expanded Main Street Lending Program

Jackson Walker
Contact

Jackson Walker

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) [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.

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 Treasury Secretary under the authority of Section 4003(b)(4) of the CARES Act, the Board of Governors of the Federal Reserve System (the “Board”) and the U.S. Treasury Department (the “Treasury”) established the Main Street Business Lending Program (the “Program”) that provides for up to $600 billion of new or expanded credit facilities to small and medium-sized businesses and nonprofit organizations that were in “sound financial condition” before the onset of the COVID-19 pandemic and issued original term sheets for each facility under the Program.

This update summarizes the terms of the Program as it stands today, describes the main terms and requirements 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, and June 18, 2020, articles on the Program.

Overview of the Program

Loan Facilities

The Program now offers five different loan facilities (individually, a “Facility,” and collectively, the “Facilities”):

  1. Main Street New Loan Facility (MSNLF) [See MSNLF Term Sheet published July 28, 2020]
  2. Main Street Priority Loan Facility (MSPLF) [See MSPLF Term Sheet published July 28, 2020]
  3. Main Street Expanded Loan Facility (MSELF) [See MSELF Term Sheet published July 28, 2020]
  4. **Nonprofit Organization New Loan Facility (NONLF) [See NONLF Term Sheet published July 28, 2020]
  5. **Nonprofit Organization Expanded Loan Facility (NOELF) [See NOELF Term Sheet published July 28, 2020]

**On Friday, July 17, 2020, the Board authorized the establishment of the NONLF and the NOELF to provide greater access to credit for nonprofit organizations such as educational institutions, hospitals, and social service organizations; however, the Program is not yet accepting submission of NONLF or NOELF Loans for purchase of a participation interest.

Under each of the Facilities, the Federal Reserve Bank of Boston (FRB Boston) will lend to a special purpose vehicle (SPV), 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 from Eligible Lenders in Eligible Loans under the Facilities.

Program Basics
  • Purpose: The purpose of the Program and the Facilities is to facilitate lending to small and medium-sized U.S. businesses and nonprofit organizations by Eligible Lenders to mitigate the adverse economic effects of the COVID-19 pandemic. It is intended to help companies and nonprofit organizations 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, or to refinance or accelerate payment of existing debt, except (i) at the time of origination of a loan under the MSPLF if the debt was owed to a different, unaffiliated lender, or (ii) under the limited exception for mandatory and due debt and interest payments after the origination of the subject Program loan.
  • 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 an “Eligible Borrower” under the Program, the for-profit business or nonprofit organization must satisfy each of the respective requirements:
    • For-Profit Businesses:[1]
      • Established before March 13, 2020;
      • Not eligible under 13 CFR 120.110(b)-(j) and (m)-(s),[2] as modified by regulations implementing the Paycheck Protection Program (PPP);
      • With either (1) 15,000 employees or fewer or (2) 2019 annual revenues of up to $5 billion (additional information for determining compliance with these numbers is available in the For-Profit FAQs);
      • 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;
      • That have not also participated in, and will commit that it will not seek to participate simultaneously in, another Facility under the Program or the Primary Market Corporate Credit Facility (a facility established by the Federal Reserve under section 13(3) of the Federal Reserve Act (FRA), using equity committed by the Treasury Secretary, to support bond and loan issuances (PMCCF));[3]
      • That have not received support from a program established by the Treasury under Subtitle A of Title IV of the CARES Act; and
    • Nonprofits:[4]
      • In continuous operation since January 1, 2015 (i.e., was established on or before January 1, 2015 and has been engaged in activities in furtherance of its tax-exempt purpose since then);
      • Not eligible under 13 CFR 120.110(b)-(j) and (m)-(s),[2] as modified by regulations implementing the Paycheck Protection Program (PPP);
      • With either (1) 15,000 employees or fewer or (2) 2019 annual revenues of up to $5 billion (additional information for determining compliance with these numbers is available in the Nonprofit FAQs);
      • With at least 10 employees (at the time of origination of the Facility and with its affiliated entities);
      • With an endowment of less than $3 billion (as of the date of origination);
      • With total “non-donation revenues” (gross revenues minus donations[5]) equal to or greater than 60% of expenses for the period from 2017 through 2019;
      • Satisfying each of the following ratios:
        • a ratio of (i) adjusted 2019 EBIDA to (ii) unrestricted 2019 operating revenue, greater than or equal to 2%;
        • a ratio, expressed as a number of days, of (i) liquid assets at the time of origination to (ii) average daily expenses over the previous year, equal to or greater than 60 days;
      • Organized under the laws of the United States;
      • That have not also participated in, and will commit that it will not seek to participate simultaneously in, another Facility under the Program or the PMCCF;
      • That have not received support from a program established by the Treasury under Subtitle A of Title IV of the CARES Act; and
      • That are able to make all the applicable certifications and covenants required under the Program. [See NONLF Certifications & Covenants and NOELF Certifications & Covenants]
    • Affiliation: To determine the number of employees or 2019 revenues, the employees and revenues of the business or nonprofit organization must be aggregated with the employees and revenues of its affiliated entities in accordance with the affiliation test set forth in 13 CFR 121.301(f).
    • Multiple Facilities: 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; however, an Eligible Borrower may receive more than one loan under a single Facility type, provided that: the sum of MSNLF loans cannot exceed $35 million; the sum of MSPLF loans cannot exceed $50 million; the sum of MSELF upsized tranches cannot exceed $300 million; the sum of the NONLF loans cannot exceed $35 million; and the sum of the NOELF upsized tranches cannot exceed $300 million.
  • Timing: Unless the Federal Reserve and Treasury extend the Program, the SPV will cease purchasing participations in Program loans on December 31, 2020. However, FRB Boston will continue to operate the SPV after such date until the loan participations held by the SPV mature or are sold.
Loan Terms

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

--> Scroll to see full table data
Term
MSNLF (New)
MSPLF (Priority)
MSELF (Expanded)
NONLF (New)
NOELF (Expanded)
Loan Type Term Loan Term Loan Existing Term Loan or Revolving Credit Facility[6] Term Loan Existing Term Loan or Revolving Credit Facility[7]
Origination Date After April 24, 2020 After April 24, 2020 Existing facility originated on or before April 24, 2020, and upsized tranche originated after April 24, 2020 After June 15, 2020 Existing facility originated on or before June 15, 2020, and upsized tranche originated after June 15, 2020
Minimum Loan Size $250,000 $250,000 $10 million $250,000 $10 million
Maximum Loan Size[8] The lesser of (i) $35 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding debt and committed but undrawn debt, does not exceed four times the Eligible Borrower’s adjusted 2019 EBITDA The lesser of (i) $50 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding debt and committed but undrawn debt, does not exceed six times the Eligible Borrower’s adjusted 2019 EBITDA The lesser of (i) $300 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding debt and committed but undrawn debt, does not exceed six times the Eligible Borrower’s adjusted 2019 EBITDA Lesser of (i) $35 million or (ii) the Eligible Borrower’s average 2019 quarterly revenue Lesser of (i) $300 million or (ii) the Eligible Borrower’s average 2019 quarterly revenue
Refinance with Loan Proceeds No, with the limited exception for mandatory and due debt[9] and interest payments after the origination of the Eligible Loan Yes, if (i) the debt was owed to a different, unaffiliated lender or (ii) for mandatory and due debt9 and interest payments after the origination of the Eligible Loan No, with the limited exception for mandatory and due debt[9] and interest payments after the origination of the Eligible Loan No, with the limited exception for mandatory and due debt[9] and interest payments after the origination of the Eligible Loan No, with the limited exception for mandatory and due debt[9] and interest payments after the origination of the Eligible Loan
Interest Rate Adjustable rate of LIBOR (1 or 3 month) + 300 bps Adjustable rate of LIBOR (1 or 3 month) + 300 bps Adjustable rate of LIBOR (1 or 3 month) + 300 bps Adjustable rate of LIBOR (1 or 3 month) + 300 bps Adjustable rate of LIBOR (1 or 3 month) + 300 bps
Principal Amortization Schedule 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year
Principal Deferral 2 years 2 years 2 years 2 years 2 years
Interest Deferral 1 year (unpaid interest will be capitalized) 1 year (unpaid interest will be capitalized) 1 year (unpaid interest will be capitalized) 1 year (unpaid interest will be capitalized) 1 year (unpaid interest will be capitalized)
Prepayment Yes, without penalty Yes, without penalty Yes, without penalty Yes, without penalty Yes, without penalty
Maturity 5 years 5 years 5 years[10] 5 years 5 years[10]
Cross-Acceleration Provisions Yes Yes Yes[11] Yes Yes[12]
Collateral Secured or unsecured Secured or unsecured Secured if the underlying term loan or revolving credit facility is secured; additional collateral may also be required Secured or unsecured Secured if the underlying term loan or revolving credit facility is secured; additional collateral may also be required
Priority/Security Requirement May not, at the time of origination or at any time during the term of the Eligible Loan, be contractually subordinated in terms of priority to any of the Eligible Borrower’s other loans or debt instruments Must, at the time of origination and at all times during the term of the Eligible Loan, be senior to or pari passu with, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt[13] The upsized tranche must, at the time of upsizing and at all times the upsized tranche is outstanding, be senior to or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt[13][14] May not, at the time of origination or at any time during the term of the Eligible Loan, be contractually subordinated in terms of priority to any of the Eligible Borrower’s other loans or debt instruments The upsized tranche must, at the time of upsizing and at all times the upsized tranche is outstanding, be senior to or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt[13]
Loan Forgiveness None None None None None
Loan Origination Fee[15] 1% of the principal amount of the Eligible Loan 1% of the principal amount of the Eligible Loan 0.75% of the principal amount of the upsized tranche at the time of upsizing 1% of the principal amount of the Eligible Loan 0.75% of the principal amount of the upsized tranche at the time of upsizing
Transaction Fee[16] 1% of the principal amount of the Eligible Loan 1% of the principal amount of the Eligible Loan 0.75% of the principal amount of the upsized tranche at the time of upsizing 1% of the principal amount of the Eligible Loan 0.75% of the principal amount of the upsized tranche at the time of upsizing
Servicing Fee[17] 0.25% of the principal amount of the participation, per annum 0.25% of the principal amount of the participation, per annum 0.25% of the principal amount of the participation in the upsized tranche, per annum 0.25% of the principal amount of the participation, per annum 0.25% of the principal amount of the participation in the upsized tranche, per annum
--> Scroll to see full table data

Required Certifications and Covenants

To participate in the Program, both Lenders and Borrowers must make certain certifications and covenants which vary by Facility and are available below.

  • Lender Certifications and Covenants (Facility Specific)
  • Borrower Certifications and Covenants (Facility Specific)
  • Notable Certifications and Covenants. Interested borrowers and lenders should consult the FRB Boston’s MSLP website for the most up-to-date information concerning the Borrower and Lender Certifications and Covenants. The following are some (but not all) of the notable certifications and covenants required under the Program.
    • Restrictions on the Eligible Borrower’s Ability to Repay Existing Debt
      • The Eligible Borrower may not repay the principal balance of, or pay any interest on, any debt until the Facility is repaid in full unless the debt or interest payment is mandatory and due.[9]
        • Payment of interest or principal on outstanding debt on (or after) the payment due date is permissible, provided that the payment due date was scheduled prior to the date of origination of the Facility. Payment of interest or principal on such debt ahead of schedule during the life of the Facility is not permissible, unless required by a mandatory prepayment clause as specifically permitted under the Program.
        • For future debt incurred by the Eligible Borrower in compliance with the terms and conditions of the Facility, principal and interest payments are “mandatory and due” on their scheduled dates or upon the occurrence of an event that automatically triggers mandatory prepayments.
        • If an Eligible Borrower has an existing debt arrangement that requires prepayment of more than a de minimis amount upon the incurrence of new debt, the Eligible Borrower cannot receive an MSNLF Loan, an MSELF upsized tranche, an NONLF or an NOELF upsized tranche unless such requirement is waived or reduced to a de minimis amount by the relevant creditor.
      • Under the MSPLF only, the Eligible Borrower may refinance the Eligible Borrower’s existing debt to a lender that is not the Eligible Lender or one of its affiliates.
      • The Eligible Borrower may not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender; however, this does not prohibit (i) the reduction or termination of uncommitted lines of credit, (ii) the expiration of existing lines of credit in accordance with their terms, or (iii) the 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 structures.
      • The following are permissible: (i) repayment of a line of credit (including a credit card) in accordance with the Eligible Borrower’s normal course of business usage for such line of credit (this includes partial repayment of an Eligible Borrower’s existing line of credit with the Eligible Lender); (ii) taking on and paying additional debt obligations required in the normal course of business and on standard terms, including inventory and equipment financing, provided that such debt is secured only by the newly acquired property (e.g., inventory or equipment), and, apart from such security, is of equal or lower priority than the applicable Facility; and (iii) refinancing debt that is maturing no later than 90 days from the date of such refinancing (Eligible Lenders and Eligible Borrowers are expected to act in good faith with respect to this requirement and in light of the goals of the Program).
    • Restrictions on Compensation, Stock Repurchase, and Capital Distributions
      • The Eligible Borrower must comply with the compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act.
        • Restrictions on compensation affect certain employees and officers with total compensation over $425,000.
        • Certain restrictions on repurchases of equity securities apply to Borrowers that have, or have a parent company that has, equity securities that are listed on a national securities exchange.
        • Until 12 months after the date on which the Eligible Loan is no longer outstanding, the Eligible Borrower must agree not to pay dividends or make other capital distributions (including discretionary dividend payments) with respect to the common stock equivalents (including common stock in a corporation and equivalent interests in a partnership, limited liability company, a business organized as a trust or other legal entity) of the Eligible Borrower, except as provided below.
          • Preferred stock or any other equity interest in a Borrower that provides for mandatory or preferential payment of dividends or other distributions shall be subject to these restrictions unless both the equity interest and the obligation to pay dividends or distributions existed as of March 27, 2020.
          • Dividends and other capital distributions do not include repurchases or redemptions.
          • A Borrower that is an S corporation or other tax pass-through entity may make distributions in respect of its common stock equivalents to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings. Such distributions shall be subject to an annual reconciliation, with any surplus or deficiency to be deducted from or added to distributions, as applicable, in the following year.
    • Unavailability of Credit Elsewhere. The Eligible Borrower must certify that it is unable to secure adequate credit accommodations from other banking institutions or that the amount, price, or terms of credit available from other sources are inadequate for the Eligible Borrower’s needs during the current unusual and exigent circumstances.
    • Insolvency. The Eligible Borrower must certify that, as of the origination (or upsize) date of the Facility, 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.
  • Verification of Certifications and Covenants. As noted in the FAQs, Eligible Lenders are required to collect the required certifications and covenants from each Eligible Borrower at the time of origination or upsizing. Eligible Lenders may rely on an Eligible Borrower’s certifications and covenants, as well as any subsequent self-reporting by the Eligible Borrower. Eligible Lenders are not expected to independently verify the Eligible Borrower’s certifications or actively monitor ongoing compliance with covenants required for Eligible Borrowers under the Main Street term sheets. If an Eligible Lender becomes aware that an Eligible Borrower made a material misstatement or otherwise breached a covenant during the term of an MSNLF Loan, MSPLF Loan, MSELF upsized tranche, NONLF Loan, or NOELF upsized tranche, the Eligible Lender should notify the FRB Boston. If the Board determines that the borrower made a material misstatement in certifications, or materially breached covenants, relating to CARES Act, the FRA, or the Board’s Regulation A, the Board will notify the Eligible Lender to trigger a mandatory prepayment of the Facility along with any accrued and unpaid interest thereon.

Additional Considerations

  • Loan Classification: All Eligible Borrowers must have been in “sound financial condition” prior to the onset of the COVID-19 pandemic. 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. If an existing loan was originated or purchased by an Eligible Lender after December 31, 2019, the Eligible Lender should use the internal risk rating given to that loan at origination or purchase, as applicable, to determine if the loan satisfied has an internal risk rating equivalent to a “pass” as of such date for purposes of upsizing.
  • Assessment of Borrower’s Financial Condition; Underwriting: Eligible Lenders must assess the borrower’s financial condition at the time the borrower submits an application. Pursuant to the FAQs, Eligible Lenders should apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower. An Eligible Lender may require additional information and documentation in making this evaluation and will ultimately determine whether an Eligible Borrower is approved for a Program loan in light of these considerations. Businesses that otherwise meet the Eligible Borrower requirements may not be approved for a loan or may not receive the maximum allowable amount.
  • Guarantees: Personal guarantees are not required under Program terms. However, an Eligible Lender may require a guarantee as part of its own underwriting process. As with collateral providing security for a Program loan, guarantees must extend to the entire loan such that the SPV and Eligible Lender share losses on a pari passu basis.
  • Insolvency: The Program may not involve the extension of credit to a business that is insolvent or to a business that is borrowing for the purpose of on-lending the proceeds to a business that is insolvent (pursuant to Federal Reserve Act Section 13(3) and related regulations under 12 CFR 201.4(d)(5)). Under the applicable regulations, a business is “insolvent” if it is subject to a bankruptcy proceeding or other similar insolvency proceeding or is generally not paying undisputed debts as they come due during the 90-day period preceding participation in the Program. As noted above, the Borrower Certifications include a certification by the Eligible Borrower to satisfy this requirement.
  • 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 and the NOELF, 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 and NOELF, 5% of the upsized tranche) until the earlier of loan maturity (or, in the case of the MSELF and NOELF, maturity of the upsized tranche) or the SPV’s sale of all of its participation.
    • The SPV and the Eligible Lender will share the risk in the Eligible Loan (or, in the case of the MSELF and the NOELF, the upsized tranche) on a pari passu basis. With respect to the MSELF and the NOELF, 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. 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 and NOELF, after the Eligible Loan’s upsizing).
    • The sale of the participation to the SPV must be structured as a “true sale.”

For Eligible Lenders subject to the federal banking agencies’ capital rule, 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.

    • If the Eligible Lender funded an Eligible Loan before seeking to sell a participation to the SPV, the full amount of the loan would be treated as a loan by the Eligible Lender to the relevant Eligible Borrower and would count towards the Eligible Lender’s lending limit until such time as the SPV purchases the participation.
    • If the Eligible Lender enters into a loan agreement to extend an Eligible Loan to an Eligible Borrower for which the funding of the loan is contingent on the Eligible Lender receiving a binding commitment from the SPV to purchase a participation, then, upon the Eligible Lender satisfying certain funding and notice requirements under the Program, the Eligible Lender need only include the retained percentage of the loan when calculating its lending limit to the Eligible Borrower.[18]

Credit unions that participate in the Program are subject to any capital requirements implemented by the National Credit Union Administration.

  • 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.
  • Existing Loan Covenants: Eligible Borrowers should carefully review the documents evidencing existing loans that will remain outstanding after the closing of the Program loan to ensure that the Program loan is permitted under the terms of such documents. If such documents prohibit or limit additional indebtedness and/or liens, the Eligible Borrower may need to obtain the prior written consent of the existing lender(s) to procure the Program loan.
  • Federal Reserve Disclosure Relating to Program Loans: The Federal Reserve plans to publish, at least monthly, the following with respect to the Program:
    1. names of all Program lenders;
    2. names of Program borrowers;
    3. amounts borrowed;
    4. interest rates charged; and
    5. overall costs, revenues, and fees of the Program.
  • Multiple Loan Applications: An Eligible Borrower may submit applications for a Program loan to more than one Eligible Lender. However, an Eligible Borrower is required to notify each Eligible Lender to which it submits an application of any other pending or accepted applications. If an Eligible Borrower’s application for a Program loan is declined by an Eligible Lender, the Eligible Borrower may apply through a different Eligible Lender.
  • Program Forms and Agreements: Each participating Eligible Lender is 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 as more particularly set forth in the appendices to the relevant FAQs.

More to Come

The Board and Treasury Secretary have 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 and the Treasury Secretary.

As noted in prior articles, the facts, laws, and regulations regarding COVID-19 are developing rapidly and frequently changing. Since the date of publication, there may be new or additional information not referenced in this update.

[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] (b) Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances); (c) Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under § 120.111); (d) Life insurance companies; (e) Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify); (f) Pyramid sale distribution plans; (g) Businesses deriving more than one-third of gross annual revenue from legal gambling activities; (h) Businesses engaged in any illegal activity; (i) Private clubs and businesses which limit the number of memberships for reasons other than capacity…;(m) Loan packagers earning more than one third of their gross annual revenue from packaging SBA loans; (n) Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude; (o) Businesses in which the Lender or CDC, or any of its Associates owns an equity interest; (p) Businesses which: (1) Present live performances of a prurient sexual nature; or (2) Derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature; (q) Unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or Departments sustaining a loss in any of its programs, and businesses owned or controlled by an applicant or any of its Associates which previously owned, operated, or controlled a business which defaulted on a Federal loan (or guaranteed a loan which was defaulted) and caused the Federal government or any of its agencies or Departments to sustain a loss in any of its programs. For purposes of this section, a compromise agreement shall also be considered a loss; (r) Businesses primarily engaged in political or lobbying activities; and (s) Speculative businesses (such as oil wildcatting).
[3] A Borrower that has received a PPP loan is permitted to borrow under the Program, provided that it meets the other Program eligibility criteria.
[4] To qualify as a “nonprofit organization” under the Program, the borrower must be a tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC) or a tax-exempt veterans’ organization described in section 501(c)(19) of the IRC.
[5] Donations include proceeds from fundraising events, federated campaigns, gifts, donor-advised funds, and funds from similar sources, 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. Expenses equal total expenses minus depreciation, depletion, and amortization.
[6] Only the upsized portion of the loan qualifies for the terms of the MSELF, and the upsized tranche will be a term loan.
[7] Only the upsized portion of the loan qualifies for the terms of the NOELF, and the upsized tranche will be a term loan.
[8] PPP loans should be factored in as outstanding debt for the purposes of determining the maximum loan amount.
[9] With respect to debt that predates the Facility, principal and interest payments are “mandatory and due” (a) on the future date upon which they were scheduled to be paid as of the date of origination of the Facility, or (b) upon the occurrence of an event that automatically triggers mandatory prepayments under a contract for indebtedness that the Eligible Borrower executed prior to the date of origination of a Facility, except that any such prepayments triggered by the incurrence of new debt can only be paid: (i) if such prepayments are de minimis, or (ii) under the MSPLF at the time of origination of an MSPLF.
[10] Existing loan must have a remaining maturity (i.e., term) of at least 18 months.
[11] 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.
[12] For NOELF 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 June 15, 2020, as part of the underlying loan will be deemed sufficient.
[13] The term “mortgage debt” means (i) debt secured only by real property at the time of origination; and (ii) limited recourse equipment financings (including equipment capital or finance leasing and purchase money equipment loans) secured only by the acquired equipment.
[14] If the MSPLF is secured because the Eligible Borrower has other secured debt that is not “mortgage debt”, then the Collateral Coverage Ratio for the MSPLF at the time of its origination must be either (i) at least 200% or (ii) not less than the aggregate Collateral Coverage Ratio for all of the Borrower’s other secured loans or debt instruments (other than mortgage debt). “Collateral Coverage Ratio” means (i) the aggregate value of any relevant collateral security, including the pro rata value of any shared collateral, divided by (ii) the outstanding aggregate principal amount of the relevant debt. For the avoidance of doubt, if an Eligible Borrower has no other secured debt (other than mortgage debt), the Collateral Coverage Ratio and pari passu requirements do not apply to the collateral that secures the MSPLF.
[15] Paid by Eligible Borrower to Eligible Lender.
[16] Paid by Eligible Lender or Eligible Borrower to SPV.
[17] Paid by SPV to Eligible Lender.
[18] Per the Texas Department of Banking, in instances where funding from the SPV occurs more than one business day after the loan is funded by the Eligible Lender, provided such delays were outside of the Eligible Lender’s control, the entirety of the loan will be treated as a loan to the relevant Eligible Borrower and count towards the Eligible Lender’s lending limit. Pursuant to his authority under Texas Finance Code § 37.008(a)(3), the Banking Commissioner has determined that any amount of the loan exceeding the Eligible Lender’s lending limit will not be considered a violation and will instead be treated as nonconforming for the interim period. Once the Eligible Borrower receives full payment from SPV for the portion of the loan that has been sold as a participation to the SPV, that portion of the loan will no longer be treated as a loan to the relevant Eligible Borrower for purposes of the Texas Department of Banking’s lending limit regulations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Jackson Walker | Attorney Advertising

Written by:

Jackson Walker
Contact
more
less

Jackson Walker on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.