Expansion Of Federal Reserve Main Street Lending Program Intends To Attract More Borrowers

Troutman Pepper
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Pepper Hamilton LLP

[co-authors: Frank Montes de Oca, Michael Karpen, Hazen Dempster]*

On, June 8, the Federal Reserve Bank of Boston (Boston Fed) announced additional revisions to the Main Street Lending Program (MSLP) in advance of the program’s impending launch. Changes were made to certain material terms of all the Main Street Facilities, including expansion of the available loan amounts with the intention of including more small and medium-sized businesses as potential borrowers under the MSLP.

The Board of Governors of the Federal Reserve System also announced that it is working to establish soon a program for non-profit organizations.

  • Under all Facilities in the MSLP, the term has been extended to a 5 year maturity and principal payments will now be deferred for the first two years of the program. Given this change, the amount of principal repaid for all MSLP loans for years 3 through 5 will be, respectively, 15%, 15% and 75%. Interest will accrue during the first year of the loans and becomes payable in cash beginning in the second year of the loans.

  • The range of available loan amounts were expanded for all three programs. In an effort to increase the number of Eligible Borrowers, the ranges are now as follows:

New Loans

Priority Loans

Expanded Loans

Minimum Loan Size

$250,000

(previously $500,000)

$10M

Maximum Loan Size

The lesser of $35M (previously $25M), or an amount that, when added to outstanding and undrawn available debt, does not exceed 4.0x adjusted EBITDA

The lesser of $50M (previously $25M), or an amount that, when added to outstanding or undrawn available debt, does not exceed 6.0x adjusted EBITDA

The lesser of $300M (previously $200M), or an amount that, when added to outstanding or undrawn available debt, does not exceed 6.0x adjusted EBITDA

The Main Street Expanded Loan Facility also removed the limitation that the maximum loan size could not exceed 35% of an Eligible Borrower’s total pari passu secured debt. There is now only a 6.0x adjusted EBITDA limitation on the Expanded Loan Facility.

  • All three Facilities now require an Eligible Lender to retain only 5% of an MSLP loan. While the Federal Reserve had previously required lenders under the Priority Loan Facility to retain 15% of the loan, this has been lowered to 5% in line with the other two programs. Additional guidance was also provided to reassure lenders that the 95% of the loan participation sold to the Boston Fed’s SPV will qualify for sale treatment and can be removed from the lender’s balance sheet for accounting purposes.

  • For multi-lender facilities, the Boston Fed clarified that multiple lenders can “upsize” an existing loan under the Expanded Loan Facility to a single borrower. A lender may not share the retained 5% participation interest with other lenders under a multi-lender facility. If multiple lenders wish to provide financing through the Expanded Loan Facility, they must each separately make a loan under the Facility and submit to the SPV the sale of the 95% participation interest in its own loan. The aggregate of all loans made under the Expanded Loan Facility cannot exceed the lesser of $300M or 6.0x adjusted EBITDA.

  • Limited recourse equipment financing is now excluded from the Priority Loan program collateral priority requirements. The intention is to allow equipment capital or finance leasing and purchase money equipment loans which is only secured by the equipment itself to be excluded from the Priority Loan collateral basket as typically seen in credit facilities. However, the use of the term “limited recourse” is unclear and further guidance will be required.

  • Additional guidance regarding the prepayment under the MSLP Facilities will permit Eligible Lenders to set the terms of prepayment allocation. While prepayment will not be penalized under any facility, the Boston Fed explained that the lenders can prescribe how the prepayment will be allocated to future payments in their loan documents. Lenders are encouraged to apply the prepayment to the next payment so that the remaining 15%, 15% and 70% payment structure remains largely intact.

  • The Boston Fed has clarified that for borrowers that prepare their audited financial statements for the borrower and its consolidated subsidiaries, EBITDA should be calculated based on those consolidated financial statements. Borrowers will need to include affiliates only if an affiliate separately applies for a loan under the MSLP.

* Troutman Sanders

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.

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