Federal Reserve Modifies and Details the Main Street Lending Program

Nelson Mullins Riley & Scarborough LLP

The U.S. Treasury and the Board of Governors of the Federal Reserve Board announced on April 30 the revised terms and more specific details of the Main Street Lending Program for lending to mid-sized businesses and published a set of Frequently Asked Questions (FAQs) to clarify the operation of the program. The Main Street Lending Program is authorized by the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, and is complementary to the Paycheck Protection Program and other SBA loan programs under the Act.

In order to support businesses that were in sound financial condition before the onset of the COVID-19 pandemic, the Main Street Lending 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 Federal Reserve stated that a start date for the program will be announced soon.

After announcing the program’s initial terms on April 9, 2020, the Federal Reserve sought public comment. (For a summary of the program as originally proposed, click here.) In response to the public comments, the Federal Reserve more specifically defined the businesses eligible to borrow under the program, created three loan facilities to provide more credit on more exact terms, and increased the number of eligible lenders. Below is a summary outlining some of the changes to the program.

Broadened and Refined Borrower Eligibility

General Requirements

Businesses with up to 15,000 employees or up to $5 billion of annual revenue will now be eligible for the program’s four-year, low-cost loans. Initially, the program’s eligibility limits were set at 10,000 employees and $2.5 billion of revenue.
Additionally, a business will be eligible under the program if it:

  • was established prior to March 13, 2020;
  • is not an ineligible business (described below);
  • was created or organized in the U.S. or under U.S. laws with significant operations in and a majority of its employees based in the U.S.;
  • does not participate in any other Main Street loan facility or the Primary Market Corporate Credit Facility; and
  • has not received specific support pursuant to Subtitle A of Title IV of the CARES Act.

Businesses that have received Paycheck Protection Program loans are still eligible to participate in the Main Street Lending Program.

Ineligible Businesses

The Federal Reserve is using the SBA’s regulations that set forth certain categories of ineligible businesses, which are found in 13 CFR 120.110(b)-(j) and (m)-(s). These include but are not limited to: financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors; life insurance companies; pyramid sales distribution plans; businesses engaged in any illegal activity; and businesses deriving more than 33% of gross annual revenue from legal gambling activities.

Adding Employees and Revenues of Affiliates

The FAQs state that when determining eligibility, a business’ employees and 2019 revenue must be aggregated with those of the business’ affiliated entities, in accordance with the affiliation test used by the SBA and set forth in 12 CFR 121.301(f). These are generally the same affiliation rules used by the SBA for the Paycheck Protection Program.

How to Calculate 2019 Annual Revenues

Businesses may use either of the following methods to calculate 2019 annual revenues for purposes of determining eligibility:

  • A business may use its (and its affiliates’) annual “revenue” per its 2019 GAAP audited financial statements; or
  • A business may use its (and its affiliates’) annual receipts for the fiscal year 2019, as reported to the Internal Revenue Service. The term “receipts” has the same meaning used by the SBA in 13 CFR 121.104(a).

The borrower (or its affiliate) should use its most recent audited financial statements or annual receipts if the borrower (or its affiliate) does not yet have audited financial statements or annual receipts for 2019.

Maintaining Payroll and Retaining Employees

If a borrower has already laid off or furloughed workers as a result of COVID-19 disruptions, they are not barred from participation in the facilities and are still eligible to apply.
Under each of the Main Street facilities, borrowers should make commercially reasonable efforts to maintain payroll and retain employees during the time the loan or upsized tranche is outstanding. A commercially reasonable effort is a good faith effort in light of the borrower’s capacities, the economic environment, available resources, and the business need for labor.

Pro Forma Ability to Meet Financial Obligations

Under each of the Main Street facilities, a borrower must certify that it believes that, as of the date of origination of its Main Street loan, after giving effect to the loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.

Three Loan Facilities

The program now has three loan facilities: the Main Street New Loan Facility, the Main Street Expanded Loan Facility, and the Main Street Priority Loan Facility. Initially, only two facilities were announced as part of the program – the Main Street New Loan Facility, for the origination of new loans, and the Main Street Expanded Loan Facility, for the expansion of existing bank loans. Each of these facilities will be funded through the Federal Reserve Bank of Boston.

The revised program now includes a third facility – the Main Street Priority Loan Facility, also for the origination of new loans with different terms and risk profile than the New Loan Facility. While both the New Loan Facility and Priority Loan Facility originate new loans, the amount retained by the originating bank or institution, the maximum loan size as a multiple of EBITDA, and the amortization of the loan will all be greater under the Priority Loan Facility than under the New Loan Facility. Attached as Exhibit A is a table comparing the terms of the three facilities. Below are some of the key changes to the facilities as published in the facilities’ updated term sheets and described further in the FAQs:

Expansion of Minimum and Maximum Loan Values

Under the New Loan Facility, the minimum loan size is decreased from $1 million to $500,000. Under the Expanded Loan Facility, the minimum loan size is increased from $1 million to $10 million, while the maximum loan size is increased from $150 million to $200 million.

Change in Interest Rate

The interest rate under the New Loan Facility and the Expanded Loan Facility was changed from an adjustable rate of SOFR + 250-400 basis points to LIBOR (1 or 3 month) + 300 basis points. The Priority Loan Facility will bear the same LIBOR (1 or 3 month) + 300 basis points interest rate.

Published Amortization Schedule

The New Loan Facility will have principal amortization of 33% at the end of the second year, 33% at the end of the third year, and 33% at maturity, while the Priority Loan Facility and Expanded Loan Facility will have principal amortization of 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity.

Change to Adjusted EBITDA and Guidance on Methodology

Adjusted EBITDA may now be used when calculating maximum loan amounts. Under the New Loan Facility and Priority Loan Facility, the methodology used by the lender to calculate adjusted 2019 EBITDA must be a methodology it previously used for adjusting EBITDA when extending credit to the borrower or to similarly situated borrowers on or before April 24, 2020. Under the Expanded Loan Facility, the methodology used by the lender to calculate adjusted 2019 EBITDA for the borrower must be the methodology it previously used for adjusting EBITDA when originating or amending the underlying loan on or before April 24, 2020.

Change to Existing Outstanding and Undrawn Available Debt

The definition of “existing outstanding and undrawn available debt,” which is used to calculate borrowing caps under the program and generally included all forms of borrowings and unused loan facility commitments, has been modified. Unused commitments under any loan facility now excludes (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 change in circumstance.

Addition of Loan Classification

In order to receive a loan under the New Loan Facility or Priority Loan Facility, any existing loan of the borrower outstanding with the lender as of December 31, 2019, must have an internal risk rating that was equivalent to “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system as of that date. Under the Expanded Loan Facility, any existing loan or revolving credit facility must have had a risk rating based on the lender’s internal rating system, equivalent to a “pass” in an internal risk rating that was equivalent to “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system as of December 31, 2019.

Addition of Revolving Credit Facility

Borrowers may now qualify to upsize secured or unsecured term loans or revolving credit facilities with an eligible lender under the Expanded Loan Facility. Under previous guidance, only term loans would qualify a borrower for a loan under the Expanded Loan Facility. The term loan or revolving credit facility must have been originated on or before April 24, 2020 and 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).

True Sale Requirement

Under each of the facilities, lenders may sell a portion of the loan or upsized tranche to the Main Street SPV at par value. Under the New Loan Facility and Expanded Loan Facility, lenders may sell 95% participation to the Main Street SPV. Under the Priority Loan Facility, lenders may sell 85% participation to the Main Street SPV. In each case, all such sales will be structured as “true sales” and must be completed expeditiously after the origination of the loan or upsized tranche.

A true sale is a complete transfer of the asset, in which the SPV would have a legal right to the receivables, repayment of the loan or upsized tranche, and the loan would receive off-balance-sheet accounting treatment for the lender.

Increased Number of Eligible Lenders

Under all three facilities, the definition of eligible lenders has been broadened to include entities owned or controlled by foreign banks. Specifically eligible lenders are now:

  • U.S. insured depository institutions;
  • U.S. bank holding companies;
  • U.S. savings and loan holding companies;
  • U.S. branch or agency of a foreign bank;
  • U.S. intermediate holding company of a foreign banking organization; or
  • U.S. subsidiaries of any of the foregoing.

Eligible lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application.

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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