On April 30, 2020, the Federal Reserve announced details of its $600 billion Main Street Lending Program established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The purpose of the Main Street Lending Program is to facilitate lending to businesses that were in sound financial condition prior to the COVID-19 pandemic and have either fewer than 15,000 employees or had less than $5 billion of revenue in 2019. The loans will be provided through Eligible Lenders described below and prospective borrowers should consult with Eligible Lenders as to the appropriateness of the program for their financial situation and whether there are alternative private lending facilities available that do not have the restrictions and burdens of a government-backed loan. A borrower that has received a loan under the Paycheck Protection Program may also receive a loan under the Main Street Lending Program. All of the loans provided under this program will be full recourse and will not be forgivable.

The program will operate through three different facilities:

The Federal Reserve Bank of Boston will create a special purpose vehicle (SPV) that will purchase, on a recourse basis, 95 percent participations in qualifying loans made under the MSNLF and the MSELF and 85 percent participations in qualifying loans made under the MSPLF. The SPV may purchase participations in eligible loans on or prior to September 30, 2020, unless the program is extended.

Eligible Borrowers: To be eligible for the program, a borrower must be an entity that is organized for profit as a partnership, limited liability company, corporation, or certain other business forms, and must meet the following criteria:

• established prior to March 13, 2020;
• cannot be a type of business that the Small Business Administration (SBA) has designated as an ineligible business in its rules;
• either 1) has 15,000 or fewer employees or 2) had annual revenues for 2019 of $5 billion or less;
• created or organized in the United States or under the laws of the United States with significant operations in and a majority of its and its affiliates employees based in the United States;
• participates in only one of the MSPLF, the MSELF, or the MSNLF, or the Primary Market Corporate Credit Facility; and
• has not received loans or financial support that was made available under the CARES Act to certain air carriers and businesses critical to national security.

How is the number of employees calculated? In accordance with SBA regulations, count all individual employees, whether full- or part-time, using the average of the number of employees for each pay period for the prior 12 months. It is not a "full-time equivalent" calculation. Count all employees of affiliates, which includes parent companies and subsidiaries, and employees from temporary agencies. Do not count volunteers or independent contractors. More detail is available here.

In determining the number of employees of the borrower and its affiliates, do the same SBA affiliation rules apply as were applicable to the Paycheck Protection Program Loans? Yes. These SBA affiliation rules generally do not impact public companies, but private companies with private equity or venture capital investors, in certain circumstances, may need to aggregate their employees with the employees of portfolio companies of some of their investors which have certain types of control over the companies. The SBA affiliation rules can be found here.

How is annual revenue calculated? The borrower would calculate 2019 annual revenues by either its consolidated revenue set forth in GAAP audited financial statements or its annual receipts for fiscal year 2019 as reported to the IRS. If the borrower does not yet have audited financial statements or annual receipts for 2019, the borrower should use its most recent audited financial statements or annual receipts.

Eligible Lenders: U.S. insured depository institutions (including a bank, savings association, or credit union), a U.S. branch or agency of a foreign bank, U.S. bank holding companies, U.S. savings and loan holding companies, U.S. intermediate holding companies of a foreign banking organization, or any U.S. subsidiary of the foregoing.

Loan Terms: The following chart sets forth the terms of the loans under the various facilities under the program. In all instances, the loan must be originated after April 24, 2020, and in the case of loans under the MSELF must have a remaining maturity of at least 18 months (taking into account any adjustments made to the maturity of the loan after April 24, 2020, including at the time of upsizing).

• "Existing outstanding and undrawn available debt" is calculated as of the date of the loan application and includes:
  • all amounts borrowed under any loan facility,
  • all publicly issued bonds or private placement facilities,
  • unused commitments under any loan facility, but excluding 1) any undrawn commitment that serves as a backup line for commercial paper issuance, 2) any undrawn commitment that is used to finance receivables, including seasonal financing of inventory, 3) any undrawn commitment that cannot be drawn without additional collateral, and 4) any undrawn commitment that is no longer available due to a change in circumstance.
• For MSNLF loans, the requirement that the loan may not be "contractually subordinated in terms of priority" to the Eligible Borrower's other loans or debt instruments does not prevent: 1) the issuance of a secured MSNLF loan (including a second lien) to an Eligible Borrower whether or not such Eligible Borrower has an outstanding secured loan of any lien position or maturity; 2) the issuance of an unsecured MSNLF loan regardless of the term or secured or unsecured status of the Eligible Borrower's existing indebtedness; or 3) an Eligible Borrower from incurring new secured or unsecured debt so long as the new debt does not have a higher contractual priority in bankruptcy than the MSNLF loan.
• For MSELF loans where the upsized tranche is part of a syndicated facility, the Eligible Lender must be one of the lenders that holds an interest in the upsized loan. Only lenders participating in the upsized tranche must be Eligible Lenders.

How is EBITDA calculated? Under the program, EBITDA will be calculated using the methodology previously used by the Eligible Lender to calculate EBITDA when extending credit to the Eligible Borrower if there are existing loans or, for new loans, a methodology used for similarly situated borrowers on or before April 24, 2020.

Lender Certifications and Covenants. In connection with a loan under the MSNLF, the Eligible Lender must make certain covenants and certifications, including:

• The Eligible Lender must commit that it will not request the Eligible Borrower to repay debt extended by the Eligible Lender to the Eligible Borrower, or pay interest on such outstanding obligations, until the Eligible Loan or the upsized tranche, as applicable, is repaid in full, unless the debt or interest payment is mandatory and due, or in the case of default and acceleration.
• The Eligible Lender must commit that it will not cancel or reduce any existing committed lines of credit to the Eligible Borrower, except in an event of default.

Required Borrower Certifications and Covenants: The certifications and covenants required from Eligible Borrowers include:

• The Eligible Borrower must commit to refrain from using the proceeds of the Eligible Loan to repay other loan balances. However, in the case of a loan under the MSPLF, the Eligible Borrower may, at the time of origination of the Eligible Loan, refinance existing debt owed to a lender that is not the Eligible Lender.
• The Eligible Borrower must commit to refrain from repaying the principal balance of, or paying interest on, other debt until the Eligible Loan or upsized tranche is repaid in full, unless the debt or interest payment is mandatory and due.
• The Eligible Borrower must commit that it will not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender.
• The Eligible Borrower must certify that it has a reasonable basis to believe that, as of the date of origination or upsizing of the loan and after giving effect to the loan or upsizing, it has the ability to meet its financial obligations for at least 90 days and does not expect to file for bankruptcy during such 90-day period.
• The Eligible Borrower must attest that it meets the EBITDA leverage condition stated above.
• The Eligible Borrower must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act, which are discussed below under Restrictions on Borrowers.
• Eligible Lenders and Eligible Borrowers will each be required to certify that the entity is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act. The conflicts of interest provisions provide that any business that is directly or indirectly owned by the president, senior executive branch officials or members of congress (or their family members) is prohibited from participating in CARES Act programs. In effect, an Eligible Borrower will have to make sure that none of these persons holds an equity stake of 20 percent or greater in the Eligible Borrower.

Is there a required certification by the Eligible Borrower of "necessity" related to the COVID-19 pandemic? Such a certification is notably absent in the current guidance relating to the Main Street Lending Program that has been made available by the Federal Reserve.

Retaining Employees:

An Eligible Borrower participating the facility must make commercially reasonable efforts to maintain its payroll and retain its employees during the time that the Eligible Loan or upsized tranche is outstanding. These efforts include undertaking good-faith efforts to maintain payroll and retain employees in light of its capacities, the economic environment, its available resources and the business need for labor. An Eligible Borrower may still apply for loans under the program even if it has already laid off or furloughed worked as a result of the disruptions from COVID-19.

Fees:

The Eligible Lender will pay a 100-basis point (75 basis points in the case of the MSELF) facility fee to the SPV (which it may require the Eligible Borrower to pay). An Eligible Borrower will pay an Eligible Lender an origination fee of up to 100 basis points (75 basis points in the case of the MSELF) of the principal amount of the Eligible Loan or the upsized tranche. The SPV will pay an Eligible Lender 25 basis points of the principal amount of its participation in the Eligible Loan or upsized tranche per annum for loan servicing.

Restrictions on Borrowers: Under Section 4003(c)(3)(A)(ii) of the CARES Act, an Eligible Borrower under the Main Street Lending Program must agree to the following restrictions:

• Stock Repurchases. Until the date 12 months after the date on which the direct loan is no longer outstanding, an Eligible Borrower may not repurchase an equity security that is listed on a national securities exchange of such Eligible Borrower or any parent company of such Eligible Borrower while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of the CARES Act.
• Dividends and Distributions. Unless waived by the U.S. Treasury, until the date 12 months after the date on which the direct loan is no longer outstanding, an Eligible Borrower may not pay dividends or make other capital distributions with respect to its common stock.
• Limitations on Compensation. During the period beginning on the date on which the loan agreement is executed and ending on the date that is one year after the date on which the loan or loan guarantee is no longer outstanding:
  • no officer or employee of the Eligible Borrower whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into before March 1, 2020):
    • will receive from such Eligible Borrower total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by such officer or employee from such Eligible Borrower in calendar year 2019; or
    • will receive from such Eligible Borrower severance pay or other benefits upon termination of employment with such Eligible Borrower which exceeds twice the maximum total compensation received by such officer or employee from such Eligible Borrower in calendar year 2019; and
  • no officer or employee of such Eligible Borrower whose total compensation exceeded $3,000,000 in calendar year 2019 may receive during any 12 consecutive months of such period total compensation in excess of the sum of a) $3,000,000 plus b) 50 percent of the excess over $3,000,000 of the total compensation received by such officer or employee from such Eligible Borrower in calendar year 2019.
  "Total compensation" includes salary, bonuses, awards of stock, and other financial benefits provided by an Eligible Borrower to an officer or employee of such Eligible Borrower.

  For more information on the executive compensation provisions, please see our client alert: CARES Act Executive Compensation Provisions.