On May 27, 2020, the FRB Boston (the FRB Boston) released form documents and expanded explanatory materials including updated Frequently Asked Questions (the FAQs) for the Main Street Lending Program (the MSLP).
This announcement followed (i) the April 30, 2020 announcement that the Federal Reserve Board (the Federal Reserve) unanimously voted to expand the much-anticipated MSLP to facilitate lending to small and medium-sized businesses and (ii) the April 9, 2020 announcement that the Federal Reserve would purchase up to $600 billion in loans under the MSLP with the U.S. Treasury Department contributing $75 billion pursuant to the Coronavirus Aid, Relief and Economic Security Act. The FRB Boston will serve as the program administrator for the Federal Reserve and the MSLP documentation and FAQs can be found here.
This latest Federal Reserve announcement still does not provide a definitive launch date for the MSLP, but recent comments by Federal Reserve Board members have targeted the launch of the MSLP by early June. In addition, the release of these materials should permit lenders to fully flesh out their basic lending parameters and documentation under the MSLP. A more detailed summary of the actions taken by the Federal Reserve on April 9, 2020 and April 30, 2020 can be found in our previous alerts here and here.
As currently promulgated, the MSLP will offer three options: the Main Street Expanded Loan Facility (the Expanded Loan or MSELF), the Main Street New Loan Facility (the New Loan or MSNLF), and the Main Street Priority Loan Facility (the Priority Loan or MSPLF). Each of these facilities has a maximum loan amount of the lesser of $25 million in the case of the MSNLF or MSPLF, or $200 million in the case of the MSELF, or an amount that, when added to the Borrower’s existing outstanding and undrawn available debt, does not exceed four times the Borrower’s adjusted 2019 EBITDA in the case of the MSNLF or six times the Borrower’s adjusted 2019 EBITDA in the case of the MSPLF or MSELF, as applicable. To implement the MSLP, the FRB Boston has set up a special purpose vehicle (the SPV) to purchase participations in loans originated by eligible lenders.
Notable MSLP loan documentation available on the website of the FRB Boston is as follows:
- Participation Agreement documentation: The economic participation by the SPV will be recorded in a Loan Participation Agreement under the Main Street Lending Program that provides transaction specific terms and incorporates by reference the Standard Terms and Conditions, which sets forth substantive contractual provisions governing the participation.
- Servicing Agreement and Co-Lender Agreement: The Servicing Agreement sets forth the obligations and rights of the originating lender as servicer of the MSLP loan, along with the Participation Agreement and any applicable Co-Lender Agreement. The Co-Lender Agreement is an agreement between the borrower and the lender, which accommodates multiple lenders but is not a requirement in syndicated facilities wherein the loan documentation likely already contains the mechanisms for accommodating multiple lenders.
- No Credit Agreement (and related documentation): Importantly, the program administrator did not include a form credit agreement (and associated documentation), and lenders will need to adjust their existing templates to satisfy the MSLP parameters as well as the covenants and other provisions required by the program administrator.
Notable FAQ Guidance
- Not surprisingly, borrowers that received a loan under the Paycheck Protection Program (the PPP) administered by the Small Business Administration (the SBA) may also participate in the MSLP. Unlike the PPP, the MSLP does not have a potential “forgiveness” feature.
- U.S. subsidiaries of a foreign company may participate in the MSLP to the extent such entity satisfies threshold criteria for operation within the United States and provided that MSLP funds are only used for the benefit of U.S. based entities.
- The FAQs clarify that while private equity funds are not eligible to borrow under the MSLP, portfolio companies of such funds may qualify, provided they meet the size requirements taking into account the relevant “affiliation” rules. This guidance echoes similar guidance provided under the PPP by the SBA.
- The FAQs provide additional clarity around the adjusted EBITDA calculations under the MSLP that lenders should be utilizing. Prior guidance provided that EBITDA must be determined utilizing the same methodology the lender previously required in extending credit to the applicable borrower (in connection with lending under the MSELF). In situations where the lender had a new borrower (or where EBITDA was not calculated in connection with the prior loan), lenders were directed to utilize a methodology the lender has used prior to April 24, 2020 for extending credit to similarly situated borrowers. The FAQs clarify that in situations where the lender has used multiple EBIDTA calculations with respect to the borrower or (similarly situated borrowers, if applicable), the lender must use the most conservative method it has previously employed and document its reasoning for selection of such methodology.
- The FAQs clarify that, in connection with the requirement that borrowers certify that they are unable to secure adequate credit from alternative sources, borrowers may meet this requirement if they determine that available credit is inadequate as a result of the amount, price, or other terms.
- While the FAQs encourage lenders to facilitate extending credit under the MSLP to distressed borrowers affected by the pandemic, the FAQs indicate that lenders must apply customary credit risk determinations taking into account the borrower’s ability to repay; accordingly, lenders may struggle to understand what accommodations, if any, they should provide to distressed borrowers who may not meet their traditional underwriting standards but nonetheless are otherwise eligible under the MSLP.
What Should Borrowers Do Now?
- Interested borrowers should review existing guidance to determine eligibility for the MSLP.
- A borrower should begin reviewing available documentation on the website of the FRB Boston for evaluating relevant issues. In particular, the MSLP documentation includes specific certifications and covenants that are required under the MLSP to be executed by the principal executive officer and principal financial officer of the borrower (or individuals performing similar functions).
- Borrowers should also review their existing debt documents, if applicable, to understand additional debt restrictions and related covenants and any required amendments or other documentation to facilitate the MSLP loan.
- Finally, each eligible borrower should connect with its existing banking relationship(s) to determine whether such lender plans to participate in the MSLP and to understand such lender’s applicable underwriting criteria and procedures. By taking these steps now, once the MSLP becomes operational, a borrower will be in a position to submit its application immediately to a participating eligible lender and may be able to expedite the portion of the application process that is within its control.
What Should Lenders Do Now?
- Eligible lenders should carefully review MSLP parameters and criteria to determine whether participating in the MSLP makes sense for the lender.
- If the lender desires to participate in the MSLP, it will need to register as an eligible lender with the FRB Boston. Lenders should review all documentation applicable to the program, including the following documentation on the website of the FRB Boston related to its qualification:
- The Lender Registration Certification and Covenants and the Lender Wire Instructions, which (in their current forms) must be signed by both the principal executive officer and principal financial officer of the lender (or individuals performing similar functions) and include certifications and covenants which should be reviewed by legal counsel including a certification that the lender is an “Eligible Lender”; and
- The Lender Wire Instructions regarding payments made by the MSLP SPV to the lender under the participation agreements or servicing agreements, which (in its current form) must be signed the lender’s principal financial officer (or individual performing similar functions).
- Lenders should solidify underwriting procedures and loan documentation they will utilize in connection with the MSLP, taking into account the requirements and documentation provided by the FRB Boston. As noted above, the program administrator did not include a form credit agreement (and customary associated documentation) and lenders will need to utilize their existing loan documentation as modified for the applicable facility and MSLP parameters. Accordingly, lenders will need to put some thought and consideration into the forms they intend to create from their existing templates to be utilized in the MSLP.
- Lenders should identify negotiable terms and conditions within their loan documentation so that they can clearly and efficiently communicate to borrowers on matters that are open (and are not open) to negotiation.