Federal Reserve Releases Details Of Main Street Lending Program

[co-authors: Hazen Dempster, Michael Karpen, Richard Pollak]*

On April 9, the Federal Reserve released term sheets for its widely anticipated Main Street Lending Program to ensure credit flows to small and mid-sized businesses in the United States with up to 10,000 employees or no more than $2.5 billion in annual revenue in 2019.¹ The Main Street Program will consist of two loan facilities: (1) the Main Street New Loan Facility for new unsecured term loans to be originated on or after April 8, 2020 (New Loans)² and (2) the Main Street Expanded Loan Facility for increases to borrowers’ existing term loans that were originated before April 8, 2020 (Upsized Tranche Loans).³ The combined size of the Main Street Program (including both the New Loan Facility and the Expanded Loan Facility) will be up to $600 billion and will support up to $630 billion of New Loans and Upsized Tranche Loans.⁴

The term sheets for the New Loan Facility and the Expanded Loan Facility are open for public comment until April 16, meaning that the Main Street Program is not yet up and running and also that the requirements and terms of the Main Street Program will almost certainly change in some respects, although we have no reason to believe that the fundamental terms will change materially.⁵

Main Street Program Structure
Who is an Eligible Borrower under the Main Street Program?
What are the terms of Eligible Loans under the Main Street Program?
Other Terms Applicable to Both New Loans and Upsized Tranche Loans
What are the other requirements and restrictions of eligible loans?
What is currently uncertain about the Main Street Program?
What should potential borrowers do next?

Main Street Program Structure

The Main Street Program is not a direct loan program from the Federal Reserve or the U.S. government. Instead, it provides for the establishment of an indirect special purpose funding vehicle (SPV) by the Federal Reserve. Eligible Borrowers (described below) may obtain a qualifying loan from an Eligible Lender (defined to include U.S. federally insured depository institutions, U.S. bank holding companies or U.S. savings and loan holding companies). The SPV will purchase a 95 percent participation interest in the qualifying loans at par from the Eligible Lenders, with Eligible Lenders retaining the remaining 5 percent and the related risk.

Note that, as of this date, alternative lenders (i.e., non-banks), such as debt funds, are not included in the list of Eligible Lenders and accordingly will not be eligible to make qualifying loans that are then sold to the SPV under the Main Street Program.

We recommend that Eligible Borrowers seeking loans under the Main Street Program contact their relationship banks or existing lenders if they are Eligible Lenders in the first instance since they will likely be able to offer the quickest and most efficient execution since they have already performed underwriting, “know your customer“ and other internally required procedures on the borrower. In addition, many, if not most, loans under the Main Street Program will require third-party consents and modifications to existing credit agreements to accommodate loans made under the Main Street Program. [Back to Top]

Who is an Eligible Borrower under the Main Street Program?

Eligible Borrowers are businesses that meet the following four requirements:

1. the business has either no more than 10,000 employees or had no more than $2.5 billion in 2019 annual revenue (businesses can satisfy either of the two size criteria and need not satisfy both to qualify)
2. the business must be created or organized in the United States or under the laws of the United States
3. the business must have significant operations in the United States
4. the business must have a majority of its employees based in the United States.

There are also maximum debt and leverage thresholds that borrowers must satisfy to obtain loans under the Main Street Program, as discussed below in the “What are the terms of Eligible Loans under the Main Street Program?” section. Businesses that exceed those debt leverage levels and any business with zero or negative EBITDA will be unable to obtain loans under the Main Street Program.

Note that the term sheets are silent as to how to count the number of employees (i.e., full-time, part-time, furloughed employees, etc.) and whether any affiliate aggregation rules similar to those contained in the Small Business Administration’s Paycheck Protection Program will apply, either for purposes of the 10,000 employee test, the $2.5 billion annual revenue test, or the U.S. employee majority test. Under the current drafts of the term sheets, there is nothing to indicate that a U.S. subsidiary of a foreign company would not be eligible for the Program if it otherwise met the eligibility criteria. In addition, the term sheets do not address when the number of employees is to be calculated, even though the number of a business’s employees could have recently changed due to layoffs or furloughs as a result of the coronavirus pandemic. [Back to Top]

What are the terms of Eligible Loans under the Main Street Program?

Size

New Loans: Each New Loan will be a new unsecured loan in an amount not to exceed the lesser of:

• $25 million, or

• an amount that would not result in the Eligible Borrower’s pro forma total leverage ratio exceeding 4x based on its 2019 EBITDA (stated in the term sheets as being earnings before interest, taxes, depreciation and amortization) calculated on a pro forma basis assuming all of its undrawn bank debt commitments were fully drawn.

Upsized Tranche Loans: Each Upsized Tranche Loan will be a new term loan made in the form of an upsized tranche to an Eligible Borrower’s qualifying existing term loan (i.e., the existing term loan must have been originated by an Eligible Lender before April 8, 2020) in an amount not to exceed the lesser of:

• $150 million

• 30 percent of the Eligible Borrower’s outstanding bank debt plus the amount of its committed undrawn bank debt availability, or

• an amount that would not result in the Eligible Borrower’s pro forma total leverage ratio exceeding 6x based on its 2019 EBITDA calculated on a pro forma basis assuming all of its undrawn bank debt commitments were fully drawn.

What constitutes an existing term loan?

Note, as the term sheets are currently drafted, only borrowers with an existing term loan that was made by an Eligible Lender (i.e., U.S. federally insured depository institution, U.S. bank holding company or U.S. savings and loan holding company) may obtain an Upsized Tranche Loan.

• A preexisting revolving credit facility without an existing term loan facility would not qualify even if the revolver had an accordion feature permitting a term loan.

• An Eligible Borrower with an existing term loan made only by Ineligible Lenders (i.e., non-bank lenders, such as an alternative lender or debt fund) would not be able to obtain an Upsized Tranche Loan under the Main Street Program.

The minimum size of New Loans and Upsized Tranche Loans is $1 million.

Collateral

New Loans will be unsecured. Upsized Tranche Loans must be secured on a pro rata basis with any collateral securing Eligible Borrowers’ qualifying existing term loans (regardless of whether the existing term loan was initially secured or the security was added at the time of the Upsized Tranche Loan). [Back to Top]

Other Terms Applicable to Both New Loans and Upsized Tranche Loans

1. four-year maturity
2. no payments of principal or interest for one year
3. a floating rate of interest equal to SOFR plus between 250 and 400 basis points
4. prepayment is permitted without penalty.

Fees

Under both the New Loan Facility term sheet and the Upsized Tranche Facility term sheet, Eligible Borrowers are required to pay a 100-basis point origination fee to Eligible Lenders.

Under the New Loan Facility term sheet, Eligible Lenders are required to pay the SPV a facility fee equal to 100 basis points on the amount of the SPV’s participation. Eligible Lenders are permitted to pass this facility fee on to Eligible Borrowers. There appears to be no restriction on Eligible Borrowers’ obligation to pay lenders’ legal fees and expenses.

In both the New Loan Facility term sheet and the Upsized Tranche Loan term sheet, the SPV will pay Eligible Lenders an annual servicing fee equal to 25 basis points on their participation in eligible loans. [Back to Top]

What are the other requirements and restrictions of eligible loans?

Applicable to Eligible Borrowers

An Eligible Borrower must make the following attestations with respect to eligible loans:

1. a commitment to not use the eligible loan proceeds to repay other loan balances or, unless the eligible loan is repaid in full, repay other debt of equal or lower priority (other than mandatory principal payments)
2. a commitment not to seek to cancel or reduce any of its outstanding lines of credit with the Eligible Lender or any other lender
3. an attestation that it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 (COVID-19) pandemic, and that it will make reasonable efforts to maintain its payroll and retain its employees with the proceeds of the eligible loan during the term of the eligible loan
4. an attestation that it meets the EBITDA leverage conditions for the eligible loan it is receiving
5. an attestation that until 12 months after the eligible loan is no longer outstanding, it will not permit:
   • officers and employees whose total compensation exceeded $425,000 in the 2019 calendar year to receive total compensation during any 12 consecutive months of such period greater than their 2019 compensation, or receive severance pay or other termination benefits exceeding twice their maximum total 2019 compensation, or
   • officers and employees whose total compensation exceeded $3 million in the 2019 calendar year to receive during any 12 consecutive months of such period total compensation in excess of $3 million, plus 50 percent of the excess of such 2019 compensation over $3 million.
6. an attestation that it will not pay dividends or make capital distributions with respect to any of its common stock while the loan is outstanding and for 12 months thereafter
7. an attestation that it will not repurchase any of its equity securities or those of its parent company that are listed on a national securities exchange (i.e., NYSE or NASDAQ) while the loan is outstanding and for 12 months thereafter, except as required by existing contractual obligations⁶
8. a certification that it is eligible to participate in the Main Street Program, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.

These requirements would prohibit a borrower from using proceeds of an eligible loan to pay down a revolving line of credit, even on a temporary basis, until it needs to deploy the proceeds.

An Eligible Borrower may receive either a New Loan under either the New Loan Facility or an Upsized Tranche Loan under the Expanded Loan Facility, but not both.

Eligible Borrowers may obtain financing under the Main Street Program even if they have received a loan under the Paycheck Protection Program, but may not obtain financing under the Federal Reserve’s Primary Market Corporate Credit Facility.

Unlike the loans under the Paycheck Protection Program, loans made under the Main Street Program are not forgivable or guaranteed by the U.S. government.

An Eligible Borrower is not required to make the following attestations that the CARES Act required be made for eligible loans under the “Mid-Sized Business Assistance” component of the CARES Act:

1. that the loan proceeds will be used to retain at least 90 percent of its workforce, at full compensation and benefits, until September 30, 2020
2. that it intends to restore not less than 90 percent of its workforce that existed as of February 1, 2020, and to restore all compensation and benefits to its workers no later than four months after the termination of the public health emergency
3. that it will not outsource or offshore jobs for the loan term and two years after repayment
4. that it will not abrogate existing collective bargaining agreements for the loan term and two years after repayment
5. that it will remain neutral in any union organizing effort for the loan term.

Eligible Borrowers are not required to issue warrants or equity interests in their business in order to obtain an eligible loan as is required for loans to targeted industries under the CARES Act (i.e., passenger air carriers [and related industries, such as ticketing and inspection, repair, replacement and overhaul services], cargo air carriers and businesses deemed critical to national security).

Applicable to Eligible Lenders

An Eligible Lender must make the following attestations with respect to eligible loans:

1. an attestation that the proceeds of the eligible loan will not be used to repay or refinance preexisting loans or lines of credit made by the Eligible Lender to the Eligible Borrower
2. an attestation that it will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower. [Back to Top]

What is currently uncertain about the Main Street Program?

How EBITDA is calculated for determining loan availability and sizes

While the Federal Reserve has not specified how EBITDA is to be calculated, we believe potential borrowers should expect that the calculations of EBITDA will not include the many add-backs commonly accepted in market credit agreements and that the add-back will be limited to basic interest, taxes, depreciation and amortization. This limited calculation could dampen or lower, potentially significantly, the ability of many businesses to obtain loans under the Main Street Program. Companies may be surprised to find that their EBITDA is much lower, their leverage is much higher, and the size of the loan for which they qualify is much lower when calculated using the Federal Reserve’s methodology than the EBITDA calculation in their credit agreements and the calculation they are accustomed to using for operating and planning purposes.

The eligibility of existing term loans from a syndicate of lenders that includes both Eligible Lenders and Ineligible Lenders

We believe businesses should be able to add an increase to a term loan provided that only Eligible Lenders provide the amount of the increased loan. It should be noted that there does not appear to be anything in the Federal Reserve’s current term sheets that expressly prohibits an Ineligible Lender (such as an alternative lender or debt fund) from being a co-lender in any Upsized Tranche Loan, although it would not be able to sell its portion of any such loan to the Federal Reserve, making its participation in the Program much less desirable and therefore less likely, notwithstanding the significant presence and importance of the alternative lending industry in the market.

The ability of an Eligible Lender to declare a default, accelerate or terminate preexisting lines of credit of an Eligible Borrower receiving an eligible loan from the Eligible Lender

As discussed above, Eligible Lenders making eligible loans are required to attest that they will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower. It is not clear whether this would preclude lenders from declaring a default, accelerating or terminating a preexisting line of credit for reasons other than the uncertainty caused by the coronavirus, such as an independent default of the Eligible Borrower, and whether Eligible Lenders would (or could) ever agree to such a requirement.

The ability of borrowers that are taxed as flow-through entities to make tax distributions to their members

The term sheets currently do not provide any exception to allow for tax distributions with respect to “pass through” entities for tax purposes, such as S corporations or limited liability companies. If this restriction is not modified after the comment period, the effect may be to limit the Main Street Program to entities formed as C corporations. Note this restriction would also preclude REITs from participating in the Main Street Program.

What will Eligible Lenders do with eligible loans after origination, and who will be the lender Eligible Borrowers will need to deal with during the term of eligible loans?

As stated above, after initially making eligible loans under the Main Street Program, Eligible Lenders will sell a 95 percent participation interest in the eligible loan at par value to the newly established SPV purchasing the participation interest in the respective New Loan or Upsized Tranche Loan. While the exact details have not been announced, holders of participation rights do not generally have the right to exercise or to cause the selling lender of the participation to exercise voting rights in respect of the loan, except as to certain customary high-level material matters.

Accordingly, it appears (but is not yet clear) that borrowers of eligible loans should only need to deal with the bank(s) from which they obtained the eligible loan or any of its assignees permitted under the Main Street Program and not the U.S. government, the Federal Reserve or the SPV that purchased the 95 percent interest in the eligible loan. What limitations may be imposed on the ability of lenders to modify the loan documentation without the consent of the SPV is not yet clear.

When will loans under the Main Street Program be available, when can Eligible Borrowers apply, and how do Eligible Borrowers apply for eligible loans under the Main Street Program?

The term sheets released by the Federal Reserve are preliminary in nature and are subject to a comment period until April 16, 2020. Also, the Federal Reserve has not yet provided specific mechanisms and procedures to apply and obtain eligible loans. We expect the Federal Reserve will publish more detailed procedures on how to apply and obtain loans under the Main Street Program soon after the April 16 comment period ends. The exact timing, however, remains unknown.

Is the Main Street Program the same as the “Mid-Sized Business Assistance” component of the CARES Act?

The Main Street Program does not appear to be the “Mid-Sized Business Assistance” component of the CARES Act. The Federal Reserve stated that it was establishing the Main Street Program under its inherent authority under the Federal Reserve Act. While the Main Street Program incorporates some of the requirements of the “Mid-Sized Business Assistance” component described in the CARES Act, the Main Street Program is being launched by the Federal Reserve independent of the “Mid-Sized Business Assistance” component of the CARES Act, and, in fact, the Main Street Program contains a number of provisions that are inconsistent with the provisions that are required for loans made pursuant to the “Mid-Sized Business Assistance” component of the CARES Act.⁷ Furthermore, as discussed above, the term sheets for the Main Street Program do not require Eligible Borrowers to make a number of the attestations that “Eligible Borrower[s] applying for a direct loan under [the Mid-Sized Business Assistance Program in the CARES Act] shall make.”⁸ Finally, the CARES Act expressly contemplates that it does not limit or prohibit the Federal Reserve from independently launching the Main Street Program as it has done.⁹

The announced Main Street Program uses only $75 billion of funding from the Treasury Department. Together with other programs announced to date, it appears that the Treasury Department has used no more than $165 billion of the $454 billion allocated for such purposes under the CARES Act. However, at this time there is no indication that Federal Reserve, the U.S. Treasury Department or any other governmental authority is launching another lending program pursuant to the “Mid-Sized Business Assistance” component authorized under the CARES Act. [Back to Top]

What should potential borrowers do next?

Businesses that have determined that they may need or may benefit from loans under the Main Street Program should work with finance counsel to assess their particular facts and circumstances, eligibility for the various U.S. governmental programs and which may be more beneficial, and the limitations and implications of obtaining debt funding from any U.S. governmental programs under their existing debt and other agreements.

Due to the potential size of loans under the Main Street Program compared to the size of Paycheck Protection Program loans and the different terms, conditions and requirements, we believe loans obtained under the Main Street Program will require greater scrutiny of the restrictive covenants contained in potential borrowers’ existing credit facilities and will likely require borrowers to work with their existing lenders and counsel to obtain necessary amendments and consents to receive loans under the Main Street Program.

Endnotes