On May 27, 2020, the Federal Reserve Bank of Boston (the “Boston FRB”), which will administer the Federal Reserve’s Main Street Lending Program (the “Program”), released updates to the ‎Federal Reserve’s Frequently Asked Questions with respect to the Program (the “FAQs”), along with form documents that will implement ‎the legal structure of the Program and its three facilities, the Main Street New Loan ‎Facility (the “MSNLF”), the Main Street Expanded Loan Facility (the “MSELF”), and the Main Street ‎Priority Loan Facility (the “MSPLF”).‎  Links to the FAQs and the various legal documents are available on the Boston FRB’s website.

Among the form documents published by the Boston FRB are the forms of certifications and covenants that the Main Street borrower (the “Borrower”) and lender must make to the Boston FRB and its special purpose vehicle (the “SPV”) in connection with a Main Street loan. This QuickStudy analyzes the required certifications and covenants that the Borrower must make when applying for a loan under the Program. The Borrower must submit to its lender these written certifications and covenants, which run to the benefit of the lender, the SPV, the Boston FRB, the Federal Reserve and the Treasury Department (each, a “Beneficiary”).  In the event of a breach of any certifications and covenants, the Beneficiaries are afforded certain remedies, as described in more detail below.

Mandatory Prepayment Remedy

A Main Street loan would become subject to mandatory prepayment in full upon discovery of a knowing material misrepresentation or a material breach by the Borrower of certain certifications and covenants regarding the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and Section 13(3) of the Federal Reserve Act. These certifications and covenants include the following:

• CARES Act Eligibility Requirements. The Borrower must certify that it complies with certain eligibility requirements under the CARES Act, including that it is a U.S. business, has not received “specific support” pursuant to other CARES Act programs which establish relief specific to air passenger and cargo carriers and businesses critical to national security, and is not a “Covered Entity” for purposes of the conflicts of interest prohibition in Section 4019(b). In general, a “Covered Entity” is an entity owned 20 percent or more by the President, the Vice President, the head of an Executive department, a member of Congress, or a family member of any of those persons (each, a “Covered Person”). The conflict of interest certification creates a standard for the due diligence that the Borrower must conduct, which involves checking beneficial ownership against certain publicly available data.¹
• CARES Act Payment Restrictions.The Borrower must covenant that, during the term of the loan and for one year after repayment of the loan, it will abide by the restrictions on executive compensation, repurchases of publicly traded securities, and payment of dividends and other distributions on common stock (other than tax distributions from pass through entities) that apply to direct loan programs under the CARES Act.
• Section 13(3) Requirements. The Borrower must certify that as of the date of funding, it is not “insolvent,” a term that is defined at 12 CFR 201.4(d)(5)(iii). Additionally, the Borrower must certify that it is “unable to secure adequate credit accommodations from other banking institutions.” In making this certification, the Borrower need not establish that credit from other sources is unavailable. Instead, the Borrower need only demonstrate that the amount, price, or terms of credit available to the Borrower is inadequate for the Borrower’s current needs, taking into account the circumstances of COVID-19.

The lender must incorporate the mandatory prepayment remedy into its loan agreement, using either the model provision contained in Appendix B to the FAQs or a substantially similar provision.

General Indemnification

Aside from the mandatory prepayment remedy, the certifications and covenants include an indemnity in favor of the Beneficiaries that covers any liability or loss of a Beneficiary associated with any material breach of any of the Borrower’s certifications or covenants, whether or not covered by the mandatory prepayment remedy. In addition to those described above, certifications and covenants that are subject to indemnification include the following:

• Program Eligibility Requirements. To use any facility under the Program, the Borrower must certify that it is a business established prior to March 13, 2020, is not an “Ineligible Business” as defined in the Small Business Administration (“SBA”) regulations at 13 CFR 120.110, and complies with the maximum size requirement and facility limitations of the Program. The maximum size requirement provides that the Borrower must have (i) 15,000 employees or less, or (ii) 2019 annual revenues of $5 billion or less. The facility limitations restrict the Borrower to one of the three facilities under the Program and prohibit the Borrower from accessing any of the facilities if it has used the Primary Market Corporate Credit Facility. In measuring compliance with the maximum size requirement and facility limitations, the Borrower must account for its affiliates using the SBA affiliation rules at 13 CFR 121.301(f).
• Financial Records Requirements. Because the Borrower is required to calculate its 2019 adjusted EBITDA to determine its maximum loan size under the Program, the Borrower must certify that it has provided financial records to the lender and a calculation of its 2019 adjusted EBITDA, reflecting only those adjustments permitted by the methodology that the Borrower has agreed upon with the lender. The Borrower must further certify that (i) its financial records fairly present,in all material respects, its financial condition for the covered period in accordance with GAAP (if applicable), and (ii) such EBITDA calculations are true and correct in all material respects. The SBA affiliation rules apply here as well, so the Borrower must include its affiliates in the calculation of 2019 adjusted EBITDA. Similarly, if the Borrower is a holding company, it must include those subsidiaries that are providing a guarantee on a joint and several basis.
• Prohibition on Early Repayment of Other Debt. The Borrower must commit that it will not repay other debt, unless the payment is mandatory and due, until (i) the Main Street loan is repaid in full or (ii) neither the SPV nor any governmental assignee of the SPV holds an interest in the loan. Responding to comments from market participants, the FAQs provide an exception under the MSPLF that will allow the Borrower to use loan proceeds to refinance existing debt to another lender. In addition, all three facilities permit a Borrower to refinance debt that is maturing within 90 days of the date of the refinancing.
• Forward-Looking Solvency Certification.The Borrower must certify that it has a reasonable basis to believe that, after giving effect to the loan, the Borrower has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during such period.

Unlike the mandatory prepayment remedy, the indemnification remedy is already included in the form of Borrower certifications and covenants, so the lender is not required to include a separate provision in its loan agreement to implement this remedy.