The Board of Governors of the Federal Reserve System (the “Federal Reserve”) is seeking public comment on a proposal to expand the availability of its existing Main Street Lending Program (the “Program”) to nonprofit organizations.  Comments from lenders, borrowers, and other stakeholders are due by June 22, 2020.  The feedback form can be found here under the heading “Comment Period.”

The Program is authorized under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and will be administered by the Federal Reserve Bank of Boston (the “Reserve Bank”).  The Federal Reserve established the Program to support lending to small and medium-sized for-profit businesses that were in sound financial condition prior to the onset of the COVID-19 pandemic, but are now challenged in maintaining their operations and payroll.  Under the Program, the United States Treasury Department will make a $75 billion equity investment in a single common special purpose vehicle (the “SPV”) established by the Reserve Bank, using funds appropriated under the CARES Act.  In turn, the SPV will purchase participations in recourse loans originated by qualifying lenders for the benefit of qualifying borrowers.  Ultimately, the SPV will be able to purchase a total of up to $600 billion in loan participations under the Program.

Currently, the Program operates through three established facilities for qualifying for-profit businesses: the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility.  As proposed by the Federal Reserve, the Program would be expanded to add two new lending facilities for similarly-situated nonprofit organizations: (i) the Nonprofit Organization New Loan Facility (the “NONLF”), accommodating newly-originated loans; and (ii) the Nonprofit Organization Expanded Loan Facility (the “NOELF” and together with the NONLF, the “Nonprofit Facilities”), accommodating the upsizing of existing loans.

To effectuate the proposed Nonprofit Facilities, the SPV will purchase participations in newly-originated “Eligible Loans” under the NONLF or “Upsized Tranches” of existing Eligible Loans under the NOELF, in each instance, originated by “Eligible Lenders” for the benefit of “Eligible Borrowers” (as such terms are defined below).

An “Eligible Lender” is a U.S. federally insured depository institution (including a bank, savings association or credit union), a U.S. branch or agency of a foreign bank, a U.S. bank holding company, a U.S. savings and loan holding company, a U.S. intermediate holding company of a foreign banking organization, or a U.S. subsidiary of the foregoing.

An “Eligible Borrower” is a “Nonprofit Organization” (meaning a tax-exempt nonprofit organization described under section 501(c)(3) of the Internal Revenue Code (the “IRC”) or a tax-exempt veterans’ organization described under Section 501(c)(19) of the IRC)[1] that:

1. Was established prior to, and has been in continuous operation since, January 1, 2015;
2. Meets at least one of the following two conditions: (i) has 15,000 employees or fewer or (ii) had 2019 annual revenues of $5 billion or less;
3. Has at least 50 employees;
4. Has an endowment of less than $3 billion;
5. Has 2019 revenues from donations that are less than 30% of total 2019 revenues;[2]
6. Has a ratio of adjusted 2019 earnings before interest, depreciation, and amortization (“EBIDA”) to unrestricted 2019 operating revenue,[3] greater than or equal to 5%;
7. Has a ratio (expressed as a number of days) of: (i) liquid assets[4] at the time of the origination of the Eligible Loan or Upsized Tranche, as applicable, to (ii) average daily expenses over the previous year, equal to or greater than 90 days;
8. At the time of the origination of the Eligible Loan or Upsized Tranche, has a ratio of: (i) unrestricted cash and investments to (ii) existing outstanding and undrawn available debt, plus the amount of any loan under the NONLF or NOELF, as applicable, plus the amount of any CMS Accelerated and Advanced Payments[5], that is greater than 65%;
9. Is 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;
10. Does not also participate in the other Nonprofit Facility, the MSNLF, MSPLF, or MSELF, or the Federal Reserve’s Primary Market Corporate Credit Facility or Municipal Liquidity Facility; and
11. Has not received specific support pursuant under Subtitle A of Title IV of the CARES Act.[6]

An “Eligible Loan” is a secured or unsecured term loan (in the case of either of the Nonprofit Facilities) or revolving credit facility (in the case of the NOELF) made by an Eligible Lender to an Eligible Borrower that: (i) in the case of the NONLF, was originated after June 15, 2020 or (ii) in the case of the NOELF, (1) was originated on or before June 15, 2020; (2) has a remaining maturity of at least 18 months (accounting for any adjustments made to the maturity of the loan after June 15, 2020, including at the time of upsizing); and (3) the upsized tranche of such loan that is the subject of the NOELF (the “Upsized Tranche”) is a term loan; provided, that the Eligible Loan (in the case of the NONLF) or the Upsized Tranche (in the case of the NOELF) incorporates the following terms:

• Five-year maturity;
• Principal payments deferred for a two-year period and interest payments deferred for a one-year period (unpaid interest will be capitalized);
• Principal amortization of 15% at the end of year three, 15% at the end of year four and a balloon payment of seventy percent 70% at the end of year five;
• Interest rate equal to one- or three-month LIBOR plus 300 basis points (3.00%)[7];
• Minimum principal amount of $250,000 for the NONLF and $10 million for the NOELF, and maximum principal amount of the lesser of (i) $35 million for the NONLF and $300 million for the NOELF, or (ii) the Eligible Borrower’s average 2019 quarterly revenue;
• In the case of the NONLF, as of the origination date and at all times during its term, the Eligible Loan will not be subordinated to any of the Eligible Borrower’s other loans or debt instruments;
• In the case of the NOELF, as of the upsizing date and at all times during its term, the Upsized Tranche will be senior to or pari passu with the Eligible Borrower’s other loans or debt instruments, other than mortgage debt;
• Prepayment is permitted without penalty.

The SPV will purchase at par value a 95% participation in an Eligible Loan or Upsized Tranche, with the SPV and the Eligible Lender sharing the risk in the Eligible Loan or Upsized Tranche on a pari passu basis.  The Eligible Lender must retain its 5% interest in the Eligible Loan or Upsized Tranche until the earlier of the maturity date of the Eligible Loan or Upsized Tranche or the date that the SPV sells all of its participation in the Eligible Loan or Upsized Tranche.

Additionally, under the NOELF, the Eligible Lender must retain its interest in the Eligible Loan underlying the Upsized Tranche until the earlier of the maturity date of the underlying Eligible Loan, the maturity date of the Upsized Tranche, or the date that the SPV sells its 95% participation.  Also, any collateral securing the underlying Eligible Loan must also secure the Upsized Tranche on a pro rata basis.

Eligible Lenders and Eligible Borrowers will be required to make certain certifications and covenants in connection with the Nonprofit Facilities.  In particular, Eligible Lenders must agree, among other things, to: (i) refrain from requesting the Eligible Borrower to repay indebtedness to the Eligible Lender, or make interest payments on such outstanding obligations, until the Eligible Loan or Upsized Tranche is paid in full, except where the debt service payment is mandatory and due, or in the case of a default or acceleration; and (ii) not cancel or reduce any existing lines of credit benefitting the Eligible Borrower, except upon an event of default.

By comparison, Eligible Borrowers must agree, among other things, to: (i) not repay the principal balance of, or make interest payments on, any other debt until the Eligible Loan or Upsized Tranche is paid in full, except where the debt service payment is mandatory and due; (ii) not seek to cancel or reduce any of its lines of credit with the Eligible Lender or any other lender; and (iii) make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan or Upsized Tranche.

The SPV will charge the Eligible Lender a transaction fee equal to 100 basis points (1.00%) of the principal amount of the Eligible Loan under the NONLF and 75 basis points (0.75%) of the principal amount of the Upsized Tranche under the NOELF; provided, that the Eligible Purchaser may pass down this fee to the Eligible Borrower.  The Eligible Lender also has discretion to charge the Eligible Borrower a loan origination fee of up to 100 basis points of the principal amount of the Eligible Loan under the NONLF and up to 75 basis points of the principal amount of the Upsized Tranche under the NOELF.  In addition, the SPV will pay the Eligible Lender an annual loan servicing fee of 25 basis points (0.25%) of the principal amount of its participation in the Eligible Loan or Upsized Tranche.

The SPV will cease purchasing loan participations on September 30, 2020, subject to extension by the Federal Reserve and the Treasury Department.  We will continue to monitor the Federal Reserve’s efforts to expand the Program to include the Nonprofit Facilities and, upon the release of further guidance, we will update this blog accordingly. 

[1] The Federal Reserve has discretion to include other forms of organizations as a Nonprofit Organization at a future date.

[2] “Donations” include proceeds from fundraising events, federated campaigns, gifts, and funds from similar sources.

[3] In calculating adjusted 2019 EBITDA, the Eligible Lender must use the same methodology it has previously used for adjusted EBIDA when extending credit to the Eligible Borrower or a similarly-situated borrower on or before June 15, 2020.  “Operating revenue” is calculated as unrestricted operating revenue, excluding funds committed to be spent on capital, and including a proxy for endowment income in place of unrestricted investment gains or losses.  In calculating the proxy for endowment income, the Eligible Lender must use the same methodology it has used for the Eligible Borrower or a similarly-situated borrower on or before June 15, 2020.

[4] “Liquid assets” means unrestricted cash and investments that can be accessed and monetized within 30 days.

[5] The CMS Accelerated and Advance Payment program is a loan program designed to increase cash flow to Medicare providers and suppliers affected by the COVID-19 pandemic.

[6] For the avoidance of doubt, nonprofit organizations that received Payroll Protection Program (PPP) loans are eligible to participate in the NONLF and NOELF; provided, however, they must still qualify as “Eligible Borrowers.”

[7] LIBOR is scheduled to be phased out at the end of 2021.  As such, the Federal Reserve recommends that Eligible Lenders and Eligible Borrowers include fallback language in their loan documents in the event that LIBOR becomes unavailable during the term of an Eligible Loan or Upsized Tranche.