The Federal Reserve Bank of Boston published the necessary legal forms and agreements for borrowers and lenders to participate in the Main Street Lending Program (Program) on May 27, 2020. In addition, the Federal Reserve Bank of Boston published Frequently Asked Questions (FAQs) providing more information regarding eligibility and conditions of participation in the Program. While providing additional information and clarification for participation in the Program, the Federal Reserve has not announced when the Program will begin or when it will begin accepting applications.
The Program will operate through three facilities: the Main Street New Loan Facility (New Loan Facility), the Main Street Priority Loan Facility (Priority Loan Facility), and the Main Street Expanded Loan Facility (Expanded Loan Facility). In order to support businesses that were in sound financial condition before the onset of the COVID-19 pandemic, the Program will provide financial assistance in the form of four-year loans to businesses employing up to 15,000 employees or with revenues of up to $5 billion. The loans are not forgivable, but principal and interest payments on the loans will be deferred for one year.
The Program’s initial terms were announced on April 9, 2020 and subsequently updated and expanded on April 30, 2020. For more detailed information on the Program see “Federal Reserve Modifies and Details the Main Street Lending Program.” Below is a summary of the additional guidance and materials that were recently provided.
New Lender Forms
The Federal Reserve issued new lending documents and agreements that a lender will be required to provide to the Federal Reserve in order to be eligible to lend under the Program. A list of the forms may be found here. Borrower applications and forms will be provided by the lender.
Refinancing Existing Loans Under the Priority Loan Facility
Genezally, proceeds from the Program may not be used to repay the principal balance of, or to pay any interest on, any debt, unless the debt or interest payment is mandatory and due. However, Priority Loan proceeds may be used at the time of origination to refinance existing debt owed by the borrower to a lender that is not the eligible lender under the Priority Loan Facility.
Lenders are Required to Retain 15% of Priority Loans
Under the New Loan Facility and Expanded Loan Facility, lenders are only required to retain 5% of the loan or upsized tranche; however, due to the increased leverage ratio under the Priority Loan Facility, lenders are required to retain 15% of Priority Loans. As compared to loans under the New Loan Facility, Priority Loans may be larger, and as compared to loans under the Expanded Loan Facility, Priority Loans are not subject to the 35% of debt size limitation and do not share in any security associated with the underlying loan.
The Lender for an Upsized Tranche Under the Expanded Loan Facility Does Not Need to Be the Lender That Originated the Loan
Under the Expanded Loan Facility, the lender does not have to be the original lender that extended the loan underlying the upsized tranche. However, the lender must have purchased the interest in the underlying loan as of December 31, 2019, and the lender must have assigned an internal risk rating to the underlying loan equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system as of that date.
Determining “Significant Operations in the United States”
To be a borrower under the Program, the borrower must have “significant operations in the United States.” To determine if the borrower meets this criterium, the business’ operations should be evaluated on a consolidated basis together with its subsidiaries, but not its parent companies or affiliates. For example, an Eligible Borrower has significant operations in the United States if, when consolidated with its subsidiaries, greater than 50% of the Eligible Borrower’s:
- assets are located in the United States;
- annual net income is generated in the United States;
- annual net operating revenues are generated in the United States; or
- annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) are generated in the United States.
A U.S. Company That Is a Subsidiary of a Foreign Company Can Qualify as a Borrower
If the borrower itself is created or organized in the United States or under the laws of the United States, and the borrower on a consolidated basis has significant operations in and a majority of its employees based in the United States, a borrower may be a subsidiary of a foreign company. However, the borrower must use the proceeds of a Main Street loan only for the benefit of the borrower, its consolidated U.S. subsidiaries, and other affiliates of the borrower that are U.S. businesses. The proceeds of a Main Street loan may not be used for the benefit of the borrower’s foreign parents, affiliates or subsidiaries.
An Affiliated Group May Not Participate in Both the Main Street Program and the Primary Market Corporate Credit Facility (PMCCF)
An affiliated group of companies can participate in only one Main Street Program, and cannot participate in both a Main Street Program and the PMCCF. Therefore if any affiliate of the business has participated in the PMCCF, the business may not borrow under any Main Street Program.
An Affiliated Group of Companies Can Participate in Only One Main Street Program
If an affiliate has previously participated, or has a pending application to participate, in a Main Street Program, the business can only participate in the Main Street Program by using the same Main Street facility accessed by its affiliate. For example, if a borrower’s affiliate has participated in the New Loan Facility, then the borrower would only be able to participate in the New Loan Facility and would be prohibited from participating in either the Priority Loan Facility or Expanded Loan Facility.
However, the affiliated group’s total participation in a single facility may not exceed the maximum loan size that the affiliated group is eligible to receive on a consolidated basis. As a result, a borrower’s maximum loan size would be limited by its own leverage level, the leverage level of the affiliated group on a consolidated basis, and the size of any loan extended to other affiliates in the group.
Private Equity Funds Are Not Eligible to Borrow Under the Program, but a Portfolio Company of a Private Equity Fund May Be
While private equity funds are an ineligible business pursuant to SBA regulation 13 CFR 120.110, a portfolio company of a private equity fund could be an eligible borrower if it meets the eligibility rules, including the affiliation test as applied to all businesses subject to outside ownership or control pursuant to 13 CFR 121.301(f). For example, assume Business X seeks to borrow under the Program. Business X has fewer than 15,000 employees and its 2019 annual revenues were below $5 billion. However,
Fund Y owns more than 50 percent of the voting equity of Business X and Businesses A, B, C, and D. As a result, Businesses A, B, C, D, X, and Fund Y are all affiliated entities. In order for Business X to be a borrower under the Program, it must meet one of the following two conditions: (a) the aggregate number of employees of Business X and its affiliated entities must be 15,000 or fewer; or (b) the aggregate 2019 annual revenues of Business X and its affiliated entities must be $5 billion or less.
Financial Companies Are Ineligible Businesses
To participate in the Program, a Business must not be an ineligible business as defined by the Small Business Administration at 13 CFR 120.110(b)-(j) and (m)-(s). 13 CFR 120.110(b) provides that financial businesses primarily engaged in the business of lending, such as banks and finance companies, are ineligible businesses and as such cannot participate in the Program.
Adjusted EBITDA With Respect to a Single Borrower or Similarly Situated Borrowers
The lender should require the borrower to calculate its 2019 Adjusted EBITDA by using the methodology that the lender has previously required for EBITDA adjustments when extending credit to the borrower, or, if the borrower is a new customer, the methodology used for similarly situated borrowers on or before April 24, 2020. Similarly situated borrowers are borrowers in similar industries with comparable risk and size characteristics.
If the lender has used multiple EBITDA methods for the borrower or similarly situated borrowers, the lender should choose the most conservative method it has employed. In all cases, the lender must use a single method recently applied before April 24, 2020. The lender may not “cherry pick” or apply adjustments used at different points in time or for a range of purposes. Additionally, the lender should document the rationale for its selection of an adjusted EBITDA methodology and its process for identifying similarly situated borrowers when it originates a New Loan or Priority Loan.
Demonstrating That a Borrower Is “Unable to Secure Adequate Credit Accommodations From Other Banking Institutions”
A borrower does not need to certify that no credit from other sources is available to the borrower. Instead, a borrower may certify that it is unable to secure “adequate credit accommodations” because the amount, price, or terms of credit available from other sources are inadequate for the borrower’s needs during the current unusual and exigent circumstances. Borrowers are not required to demonstrate that credit applications have been denied by other lenders or otherwise document that the amount, price, or terms of credit available elsewhere are inadequate.
Lenders Should Use Their Own Loan Documentation
A lender should use its own loan documentation used in its ordinary course lending to similarly situated borrowers, adjusted only as appropriate to reflect the requirements of the Program. Appendix A contains a checklist of the items that must be reflected in the loan documentation in order for the Main Street SPV to purchase a participation in a loan. Appendix B includes certain model covenants that lenders can elect to reference when drafting their loan documentation in order to satisfy the Appendix A requirements. Appendix C includes a list of the financial information that lenders must require borrowers to provide on an ongoing basis until the loans mature.
Accounting for the Transfer of an Undivided Participation Interest to the Main Street SPV
The transfer of an undivided participation interest in a New Loan, Priority Loan, or Expanded Upsized Tranche is structured with the intent to (a) meet the accounting definition of a participating interest; (b) qualify as a true sale under the Bankruptcy Code; and (c) meet the criteria for sale accounting outlined in ASC 860, Transfers and Servicing.
For an Expanded Upsized Tranche, the lender must find that the Upsized Tranche is a separate and distinct unit of account for accounting purposes. The lender must consider the following factors:
- the characteristics of the Expanded Upsized Tranche compared to the characteristics of the existing term loan or revolving credit facility (e.g., maturity date, amortization schedule, collateral requirement, payment date, and interest rate); and
- how the lender operationalizes the Expanded Upsized Tranche, including whether scheduled principal and interest payments are commingled with payments on the existing term loan or revolving credit facility, whether the payments made by the borrower clearly indicate which loan the payment is intended to settle, and whether the lender separately maintains detailed record-keeping.
The Main Street SPV’s Role if a Borrower Enters Distress
Once a borrower misses a payment on a Program loan (beyond the grace period), or the borrower or lender enters into bankruptcy or other insolvency proceedings, the Main Street SPV will have the option to elevate its participation to an assignment to be in privity with the eligible borrower. However, the Federal Reserve does not expect the Main Street SPV to use this right as a matter of course. Rather, the Federal Reserve would expect eligible lenders to follow market-standard workout processes and to exercise the standard of care set out in the Loan Participation Agreement (i.e., to exercise the same duty of care in approaching such proceedings as it would exercise if it retained a beneficial interest in the entire loan). In general, the Federal Reserve expects that the Main Street SPV generally would not expect to elevate and assign except in situations where (i) the economic interests of the eligible lender and the Main Street SPV are misaligned, or (ii) the loan amount is relatively large in comparison to other loans in the Main Street SPV’s portfolio of participations.