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In an April 9, 2020, press release,[1] the Federal Reserve (the “Fed”) announced additional actions to provide up to $2.3 trillion in loans to support the economy. The Fed’s stated goal is to “assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus pandemic.” These actions are in addition to other programs from the Small Business Administration through the SBA’s Payroll Protection Program (the “PPP”) and Disaster Loan Program, and other programs that may be established by the Treasury Department or the Fed.

In response to the COVID-19 pandemic, the Fed established several platforms intended to channel dollars into the economy. Some of the programs are designed to get cash directly into midsize or larger companies, including the Main Street New Loan Facility, the Main Street Expanded Loan Facility and the Primary Market Corporate Facility. Other programs, such as the Secondary Market Corporate Credit Facility and the Term Asset-Backed Securities Loan Facility, are aimed at supporting financial institutions by taking assets off their balance sheets in order to encourage further lending to businesses and consumers. Some of the Fed facilities are hybrid in nature, such as the PPP and the Primary Market Corporate Facility, by purchasing interests in loans made by lenders to eligible borrowers. The Fed’s Municipal Liquidity Facility will provide loans to states and municipalities. This alert will focus on the Fed’s Main Street Facilities. Our firm has published other alerts on the PPP, the SBA’s COVID-19 Disaster Loan Program, and many other COVID-19 related topics, which you can access here.

Main Street Lending Program

The Main Street Lending Program is a $600 billion fund designed to encourage eligible lenders (“Eligible Lenders”) to make eligible new loans (“New Loans”) or to increase an eligible amount of existing loans (the so-called “Expanded Loans”; together with the New Loans, the “Main Street Loans”) to smaller and medium size qualifying businesses. To accomplish this, the Fed will create a special purpose vehicle (the “Fed SPV”) which will partner with Eligible Lenders to make the Main Street Loans to eligible borrowers (“Eligible Borrowers”). The Treasury Department will invest $75 billion in the Fed SPV.

The Fed SPV will, in return for funding 95% of the principal amount of an Eligible Loan, acquire a participation interest in the Eligible Loan. Participation interests are arrangements between lenders where the participating lender assumes a profits and risk interest in a loan but generally does not become a party to the underlying loan documents between the Eligible Borrower and the Eligible Lender. As such, the Main Street Loans will, from an Eligible Borrower’s perspective, be underwritten, arranged, negotiated and administered by the Eligible Lender. The Fed SPV and the Eligible Lender would, if following the commercial standard, be party to a separate participation agreement setting out the Fed SPV’s approval and consent rights and other requirements with respect to the Eligible Loan.

Because the Main Street Loans will be funded through existing commercial lenders, Eligible Borrowers with existing lenders should first talk with those lenders about this program. We can anticipate that the lender will prefer to use its own forms of loan documents, modified to match the Main Street program. For the Expanded Loans, these new advances may be documented through amendments, restatements or supplements of existing credit agreements. As commercial loans, these loans should be subject to the usual closing conditions and lender diligence, along with the additional analysis required to comply with the Main Street program.

The Main Street Loans must conform to the terms and conditions set forth in the Main Street New Loan Facility term sheet or the Main Street Expanded Loan term sheet released by the Fed. The two term sheets are largely similar, with some important distinctions. The following summary will lay out the key terms and indicate where the Expanded Loan term sheet differs from the New Loan term sheet. The term sheets are not always clear on their face, and will likely require further clarification and guidance from the Fed. The term sheets also seem to assume a single lender/single borrower structure, rather than structures where a borrower and its subsidiaries may be parties to a single credit facility. Finally, certain terms that are often negotiated in credit agreements are used in the term sheets without definition (such as EBITDA). The FAQ section of this alert following the term sheets will highlight some of these issues.

Summary of Key Terms of Main Street Lending Programs[2]

FAQs

1. Is this program the same as the Mid Size Lending Program referred to in the CARES Act?

   The Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (the CARES Act), signed into law on March 27, 2020, among other things allocated $454 billion for the Department of the Treasury to use for loans and loan guarantees to, and other investments in, programs or facilities established by the Fed to provide liquidity to the financial system that lends to eligible businesses. We note that the funds committed by the Treasury to the Main Street Lending Program and other facilities are a fraction of the funds allocated for such purposes under the CARES Act. Accordingly, the Treasury may announce other programs or increase its commitment to the Fed programs announced on April 9, 2020, at a later date.

2. The interest rate is determined as SOFR plus a margin. What is SOFR?

   SOFR is the “Secured Overnight Financing Rate”. The Federal Reserve Bank of New York describes it as “a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.”[3] SOFR is a leading candidate to replace the common LIBOR-based interest rate that is used for pricing of commercial loans and many other financial instruments. LIBOR will cease being published at the end of 2021, and the loans made under the Main Street Lending Program will have a four-year term. While beyond the scope of this alert, there are a variety of ways that SOFR will differ from LIBOR as an interest rate measurement. The Fed term sheets do not provide guidance on how to define or measure SOFR in the context of a commercial loan. We anticipate that this term, like others, will be further developed in later Fed publications and may be informed by a limited number of precedents and model credit agreements already using a SOFR-based reference rate.

3. The term sheets impose requirements for the loans that may be at odds with other commitments my company has to other lenders, shareholders or other parties. Can my company take out a Main Street Loan?

   Borrowers should review the terms of their documents governing any other debt, shareholder rights, employee contracts promising certain compensation and other material contracts to ensure none of those agreements would be violated by acceptance of a Main Street Loan. Moreover, the Main Street Loan documents, particular for Expanded Loans, may contain customary language that would prevent the Main Street Loan from closing if its terms would cause a cross-default under the terms of other loan documents or other material agreements.

4. My company has many subsidiaries, and all of the material subsidiaries are co-borrowers or guarantors with the parent. Can Main Street Loans be made on a consolidated basis to co-borrowers?

   The term sheets seem to contemplate a single-borrower structure. The term sheets just announce the Fed’s basic framework for the program. Borrowers frequently enjoy an economy of scale and other efficiencies by financing their subsidiaries collectively through a single credit agreement. We could anticipate that the Fed will allow this financing structure to continue, but must continue to review additional Fed guidance when available.

5. The program requires a statement of my company’s 2019 revenue. Does this mean I can provide my audited, consolidated revenue, or something else?

   The term sheets do not further explain “2019 revenue.” We note that commercial lenders are accustomed to looking at audited annual financial statements. We also note that some audits have been delayed due to the COVID-19 shutdowns. The Fed may provide additional guidance on this subject.

6. My loan documents contain a negotiated definition of EBITDA. Can I use the EBITDA definition in my loan documents?

   While this is not formally defined in the term sheets, the Fed does spell out that EBITDA constitutes “earnings before interest, taxes, depreciation, and amortization.”

7. Can U.S. subsidiaries owned by non-U.S. entities or persons receive a Main Street Loan?

   The term sheets say that borrowers must be created or organized in the United States or under the laws of the United States with significant operations, and a majority of its employees based in the United States [italics added for emphasis]. This language is drawn from the CARES Act. On its face, this does not prevent Borrowers that are subsidiaries or owned by non-U.S. entities or persons from receiving a Main Street Loan. However, “significant operations” and “majority of its employees” are not further described, and further guidance may be needed to clarify these terms.

8. What does the “existing, outstanding, and committed but undrawn debt” phrase mean where used in the term sheets?

   This language is used in determining, in part, the maximum amount of a Main Street Loan. It seems, on its face, to refer to both loans that are outstanding (like term loans) and commitments a borrower may have from a lender to fund a loan in the future, such as under a revolving line of credit or a committed delayed draw term loan. Thus, it seems a borrower may have to include the maximum amount of its revolver, for example, in this calculation, even if it has no revolving loans outstanding.

   Note that credit facilities that have a letter of credit subfacility usually treat the issued, outstanding but undrawn face amount of a letter of credit as reducing availability under a revolving line of credit.

9. What if a borrower has an uncommitted line of credit?

   Since the term sheets expressly refer to “committed … debt,” it would seem that borrowers that are parties to discretionary, uncommitted lines of credit would not need to include any undrawn capacity on those lines for purposes of a Main Street Loan.

10. The term sheets state that neither a lender nor a borrower “will cancel or reduce any existing lines of credit” to the borrower during the term of the Main Street Loan. Can a lender or borrower still exercise options either of them may otherwise have had under a credit facility to reduce or terminate commitments? Can a lender exercise discretion it otherwise has to impose borrowing base reserves or otherwise limit availability under an asset-based loan agreement?

    We hope the Fed will provide additional guidance on questions such as these. If no formal guidance is forthcoming, we would counsel a lender or a borrower to discuss its intention with its Federal Reserve Bank. The Fed seems inclined with these restrictions to ensure that the Main Street Loans provide additional liquidity to borrowers, and are not instead used to replace or refinance other existing debt.

11. Is any portion of a loan made pursuant to the Main Street Lending Program forgivable like the loans made pursuant to the SBA’s Paycheck Protection Program (“PPP Loans”)?

    No.

12. If my company or any of its subsidiaries has applied for or received a PPP Loan, is a Main Street Loan prohibited?

    No, but borrowers that also have PPP Loans and Main Street Loans should keep careful records demonstrating that proceeds of PPP Loans were used for payroll costs and other eligible costs allowed under the PPP to avail the company of the forgiveness features of the PPP Loans.

[1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm
[2] This summary is based solely on the Fed’s press release as noted in the first paragraph of this alert. We expect the Fed to release additional guidance, clarification and additions to these terms.
[3] https://apps.newyorkfed.org/markets/autorates/SOFR