Certain provisions of the coronavirus economic stimulus legislation are subject to the ongoing issuance of government regulations and other government action; thus, certain details regarding the legislation may be clarified, revised, or added.
Effective July 6, 2020, the Federal Reserve Bank of Boston announced that the “Main Street Lending Program” is now fully operational and ready to begin purchasing commitments from eligible lenders. After months of periodic updates and uncertainty as to final program terms, the launch of the programs is likely to come as a relief for many who have been counting on Main Street Lending Program debt to fill funding gaps. Others who may be eligible borrowers appear to be holding off while exhausting other funding and cost-cutting measures, waiting to see whether the administrative costs and other burdens imposed under the Main Street Lending Program justify the financial benefits.
The descriptions below are intended as a resource for potentially eligible borrowers to assess whether the Main Street Lending Program may be worth considering. All descriptions are of a general nature and are qualified in their entirety by reference to the Federal Reserve Board and the Federal Reserve Bank of Boston’s Main Street Lending Program websites, which may be found here and here. For a simplified flowchart summary of borrower and lender eligibility requirements and general program terms, see also Appendix I.
Initially announced in early April, the Federal Reserve Board’s Main Street Lending Program is intended to support small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic but which have been unable to secure adequate credit accommodations from other banking institutions due to the current unusual and exigent circumstances. Relative to the Small Business Administration’s Payroll Protection Program (PPP), the Federal Reserve Board has stated that Main Street funds are designed to support small and medium-sized businesses that were unable to access the PPP or that require additional financial support after receiving a PPP loan.
The three Main Street programs–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 and, collectively with the MSNLF and the MSELF, the Main Street Program) –share many consistent features, other than certain nuances relating to maximum loan size, collateral requirements, and permitted uses of proceeds. The Main Street Program is funded by appropriation under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act).
Generally, qualifying borrowers will be permitted to borrow five-year debt at LIBOR + 3 percent with principal deferred for two years and interest deferred for one year. All Main Street Program facilities amortize principal 15 percent in years three and four, respectively, and 70 percent in year five at maturity. Maximum loan size varies by facility ($35 million under the MSNLF, $50 million under the MSPLF, and $300 million under the MSELF) and is determined as a multiple of either four times or six times borrower’s 2019 adjusted EBITDA (pro forma for the Main Street borrowing and giving effect to borrower’s other existing outstanding and undrawn available debt). Borrowers must borrow from eligible lenders (generally, U.S. banking institutions or U.S. subsidiaries of foreign banking institutions), which eligible lender are entitled to sell 95 percent participations in Main Street Program loans to a facility-specific Federal Reserve special purpose vehicle (the Main Street SPV).
Eligible borrowers, together with their affiliates, can elect to seek funding under only one of the Main Street Program facilities. In order to utilize the MSELF, the borrower must have an existing eligible revolving or term debt to “upsize.” Borrowers eligible to upsize existing loans under the MSELF may nevertheless seek a loan under the MSNLF or MSPLF, but lending limits and/or existing lender consent requirements may influence a borrower’s determination of the most suitable facility.
Eligible lenders may extend loans on their standard documentation for similarly situated borrowers, adjusted to comply with certain Main Street Program requirements, and have the option to condition their loans on the prior binding approval by the Main Street SPV to purchase its 95 percent participation in the loan.
Potential borrowers must establish their eligibility by making a series of certifications and covenants that are largely consistent across the Main Street Program facilities and that can be viewed here. These certifications and covenants generally include the following:
- Borrower is a for-profit business established prior to March 13, 2020;
- Borrower is not an “Ineligible Business,” defined by cross-reference to 13 CFR 120.110, generally excluding lending, passive real estate, life insurance, gambling, and speculative business endeavors (including private equity funds), among others;
- Borrower is a business created or organized in the United States or under its laws and has significant operations in, and a majority of its employees based in, the United States;
- “Significant operations” in the United States is evaluated together with the borrower’s subsidiaries and generally considered satisfied if greater than 50 percent of the consolidated group’s assets, net income, net operating revenues, or annual consolidated operating expenses are generated in the United States (this list is not exhaustive and is intended to be illustrative);
- A “majority of employees” in the United States is also evaluated together with the borrower’s subsidiaries and determined as the average number of employees over the 12 months prior to origination and including as employees all full-time, part time, seasonal, or otherwise employed persons, but excluding volunteers and independent contractors;
- Borrower has 15,000 employees or fewer or had 2019 annual revenues of $5 billion or less, together with its affiliates as determined in accordance with the SBA’s affiliation principles set forth in 13 CFR 121.301(f);
- Borrower’s employee headcount is determined, together with its affiliates, as the average employee headcount over the 12 months prior to origination and including as employees all full-time, part time, seasonal, or otherwise employed persons, but excluding volunteers and independent contractors;
- Revenue of borrower and its affiliates may be either their aggregated annual revenue per GAAP 2019 audited financial statements or annual receipts for the fiscal year 2019, as reported to the Internal Revenue Service;
- Affiliation under SBA’s principles at 13 CFR 121.301(f) has presented a significant eligibility challenge for borrowers backed by private equity, venture capital, and other fund investors given that the SBA’s relatively broad affiliation principles will tend to find affiliation between otherwise unrelated portfolio companies through common ownership or control; generally under these principles (i) affiliation is a bright line at 50 percent or more of voting interests, (ii) affiliation will be imputed where even minority owners have certain “bad” negative control rights over borrower, such as a unilateral consent over incurring debt and issuing dividends, and (iii) affiliates of affiliates are also deemed part of borrower’s aggregate group to the extent they share a common controlling person or entity;
- Neither borrower nor any of its affiliates has participated in, nor will borrower participate in, any other Main Street Program or the Primary Market Corporate Credit Facility (the PMCCF, another program established by the Federal Reserve to support bond and loan issuances); if any other affiliate of a borrower (also determined in accordance with the SBA’s affiliation principles set forth in 13 CFR 121.301(f) and as discussed immediately above) has participated in a Main Street Program, that borrower can only apply for a Main Street Program loan under the same facility and with borrowing of all affiliates counting towards that facility’s maximum loan size (i.e., $35 million under the MSNLF, $50 million under the MSPLF, and $300 million under the MSELF);
- Borrower is not “insolvent,” generally defined as being in bankruptcy or generally failing to pay undisputed debts as they became due during the 90 days preceding the date of borrowing, and borrower has a reasonable basis to believe it has the ability to meet its financial obligations for at least 90 days after origination;
- Certification of borrower’s CEO and CFO that borrower is not subject to the CARES Act’s Section 4019(c) “Conflict of Interest Prohibition,” applicable where the certain specific high-ranking government officials (e.g., President of the United States, Vice President of the United States, head of an Executive department, member of Congress, or immediate family members of the foregoing) own 20 percent or more of the vote or value of any class of equity interest of borrower;
- Borrower agrees to abide by the CARES Act’s Section 4003(c)(3)(A) restrictions on compensation, stock repurchases, and capital distributions, for the term of the loan plus 12 months;
- Compensation limits apply solely to officers and employees of borrower with “total compensation”–defined broadly to include all salary, bonuses, awards of stock, and other financial benefits provided by the borrower and its affiliates to an officer or employee of the borrower–exceeding $425,000 in calendar 2019 or any subsequent 12 month period; public company borrowers must calculate total compensation according to the methodology set out in item 402(c) of Regulation S-K, and borrowers which are not public companies may calculate total compensation either according to the methodology set out in item 402(c) of Regulation S-K or, in certain circumstances, according to federal tax rules;
- Officers and employees receiving total compensation in excess of (i) $425,000 but equal to or less than $3,000,000 during the relevant period cannot be paid in excess of the amount they were paid in calendar 2019 or any subsequent 12-month period, and (ii) $3,000,000 during the relevant period cannot be paid more than the sum of $3,000,000 and 50 percent of the excess over $3,000,000 they were paid in calendar 2019 or any subsequent 12-month period;
- Limits on repurchases of equity securities prohibit borrower from repurchasing its equity securities or equity securities of any of its parent companies to the extent such equity securities are listed on a national securities exchange (except under contractual obligations in effect as of March 27, 2020);
- Limits on distributions prohibit borrower from paying dividends or making other capital distributions with respect to its common stock or common stock equivalents (except under contractual obligations in effect as of March 27, 2020, and distributions reasonably required to cover owners’ tax obligations of borrowers which are S corporations or other tax pass-through entities);
- Borrower is unable to secure adequate credit accommodations from other banking institutions; guidance further clarifies that this is not a requirement that borrower be unable to obtain any other credit but only that the credit that is available to it (if any), whether by virtue of amount, price, or other turns, is inadequate for the borrower’s needs during the current unusual and exigent circumstances;
- Borrowers must agree to undertake “commercially reasonable efforts” during the term of the facility loan to maintain payroll and retain employees; further color is provided that (1) borrowers should be undertaking good-faith efforts to maintain payroll and retain employees, in light of their capacities, the economic environment, its available resources, and the business need for labor, and (2) a potential borrower will not be disqualified solely on the basis of having already laid off or furloughed workers as a result of disruptions from COVID-19;
- Under the MSNLF and MSELF, borrowers must agree to not repay other debt or interest unless mandatory and due, with certain exceptions (e.g., utilizing revolving lines of credit and refinancing debt maturing within 90 days), while under the MSPLF the same prohibition applies, except that borrowers may refinance existing debt solely at origination with proceeds of the priority loan;
- If borrower is a holding company–i.e., all or substantially all of its assets are equity interests in other entities–then any Main Street loan must be fully guaranteed on a joint and several basis by its subsidiaries which provide the adjusted EBITDA used to determine loan sizing.
In addition, eligible borrowers must agree to certain financial reporting and other collateral and security requirements, among others, as described below in greater detail in the descriptions of each Main Street Program facility.
Consequences for material misrepresentations and material covenant breaches may include immediate mandatory repayment of the loan amount. Borrowers who knowingly make material misrepresentations may be subject to civil and criminal liability.
Common Features of Main Street Program Facilities
For borrowers who can meet the eligibility requirements, a Main Street Program loan may be available on terms that will be attractive to some (for others, the juice may not be worth the squeeze). Many terms for the Main Street Program facilities are consistent across the facilities, including:
- Term loans with five-year maturity
- Adjustable rate of LIBOR plus 300 basis points
- Prepayment permitted without penalty
- Interest payments deferred for one year
- Principal payments deferred for two years
- Principal amortizes 15 percent at the end of the third year, 15 percent at the end of the fourth year, and a balloon payment of 70 percent at maturity at the end of the fifth year
- Cross acceleration to other debt
- Borrower prohibited from repaying principal of or interest on any other debt while Main Street Program debt is outstanding, except when (1) mandatory and due or (2) under the MSPLF only, at origination to a lender other than the eligible lender; generally, debt is mandatory and due when a payment is contractually scheduled or on the occurrence of an event that triggers mandatory prepayment (which cannot be the borrowing of Main Street Program debt under the MSNLF or MSELF), with further safe harbors for ordinary course usage of lines of credit, borrowing and repaying purchase money financing, and refinancing debt that is maturing within 90 days
- Mandatory prepayment can be triggered by Main Street SPV if it determines that borrower made any material misrepresentation at origination or materially breaches any Main Street required covenant after origination
- Facility debt cannot be contractually subordinated to any other debt of the borrower
- Annual financial reporting requirement, all of which information will be available to the Main Street SPV, of substantially all material information about borrower, including total assets and liabilities, expenses, Adjusted EBITDA, accounts receivable, details of other indebtedness, etc.
- Adjustments to borrower’s 2019 EBITDA, used to determine the maximum debt a borrower is eligible to borrow, must be consistent with past practice–i.e., a methodology previously applied by lender to adjust borrower’s EBITDA, if applicable, or otherwise as lender utilizes for similarly situated borrowers
- Origination fee payable by borrower to lender of 100 basis points under the MSNLF and MSPLF and 75 basis points under the MSELF (plus an additional fee, which may be passed along to borrower, of the same amount payable by lender to the Main Street SPV)
Facility-Specific Provisions–Main Street New Loan Facility
Loans made under the Main Street New Loan Facility will be subject to the following (in addition to generally applicable provisions described above):
- Minimum loan size of $250,000 and a maximum loan size that is the lesser of (1) $35 million or (2) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed four times (4x) the borrower’s adjusted 2019 EBITDA
- New loans under this facility may be secured or unsecured, and may be unsecured even if borrower has other secured debt
Facility-Specific Provisions–Main Street Expanded Loan Facility
Loans made under the Main Street Expanded Loan Facility will be subject to the following (in addition to generally applicable provisions described above):
- Minimum Loan Size of $10 million and maximum loan size that is the lesser of (1) $300 million or (2) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times (6x) the borrower’s adjusted 2019 EBITDA
- Expanded loans under this facility may be secured or unsecured but may only be unsecured if borrower has no other secured debt (other than mortgage debt) and, otherwise, must be secured by a lien that is senior to or pari passu with all other liens on the relevant collateral (other than mortgage debt)
Facility-Specific Provisions–Main Street Priority Loan Facility
Loans made under the Main Street Priority Loan Facility will be subject to the following (in addition to generally applicable provisions described above):
- Minimum loan size of $250,000 and maximum loan size that is the lesser of (1) $50 million or (2) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times (6x) the borrower’s adjusted 2019 EBITDA
- Priority loans under this facility may be secured or unsecured but may only be unsecured if borrower has no other secured debt (other than mortgage debt) and, otherwise, must be secured by a lien that is senior to or pari passu with all other liens on the relevant collateral (other than mortgage debt)
- If priority loans are secured, the ratio of the value of the collateral security to each dollar of priority loan debt must be either (1) at least 2:1 or (2) not less than the ratio of collateral value to debt for all of borrower’s other secured debt (other than mortgage debt)
Borrower’s Process–Eligibility to Funding
In making an initial eligibility determination, potentially eligible borrowers are urged to consult with counsel that has followed the Main Street Program closely since inception, as there are important nuances to eligibility that have been revised over the three months between announcement and launch (including, in particular, affiliation analysis under 13 CFR 121.301(f), compensation limitations and exceptions, and collateral and security requirements, among others). Eligible borrowers must initially determine whether to upsize an existing facility through the MSELF, for which an eligible and interested lender must be available among existing lenders, or otherwise to pursue a new loan or priority loan under their respective facilities. Loans under the MSNLF and MSPLF may be with an eligible existing lender or an eligible new lender, although it may be easier to leverage existing banking relationships when seeking a Main Street Program lender.
Once eligibility is confirmed and borrower has engaged with an eligible and interested lender, negotiating loan documentation on the lender’s standard forms for similarly situated borrowers–modified to reflect the requirements of the applicable Main Street Program facility–should follow. Borrowers should be aware that lenders will be required to certify that loan documentation and certain elements of diligence are consistent with lender’s practices in its ordinary course of lending to similarly situated borrowers. While materiality thresholds, exceptions, baskets, and other limitations on covenants are permitted in documentation, the onus remains on lenders to document and potentially defend the that documentation is consistent with their ordinary course lending to similarly situated borrowers.
Further, lenders must certify that documentation is consistent with Main Street Program requirements, including mandatory repayment on certain defaults and breaches, cross-acceleration consistent with program requirements, financial reporting, and other specific program requirements. We expect the Main Street SPVs to take seriously their monitoring responsibility to ensure against loose underwriting or loan terms where the Federal Reserve and taxpayer dollars backstop 95 percent of each Main Street Program loan.
Finally, with documentation negotiated to agreed form, borrowers should expect to deliver in advance of origination their required “covenants and certifications” documentation (generally, certifying to eligibility and agreeing to comply with Main Street Program requirements like dividend and compensation restrictions, among others), as well as certain financial and other required diligence information. In addition, lenders will have the option–which we expect many to exercise–to condition their funding on submission to and approval by the Main Street SPV of the various certifications and documents for the Main Street SPV to provide a binding commitment to purchase the 95 percent participation in lender’s loan. Lenders electing for “pre-approval” of their participation will, some period of time after submission, receive a binding commitment from the Main Street SPV and be required to thereafter fund within three business days. Subject to payment of lender fees and expenses, and other typical funding conditions for similarly situated borrowers, funds should at this time be made available to borrowers with a substantially concurrent participation purchase by the Main Street SPV of their 95 percent participation in the loan.
Lender Eligibility and Process–Brief Summary
In contrast to the requirements to establish borrower eligibility, the technical certifications and covenants for lenders are far simpler and clearer cut. As with the borrower’s eligibility certifications and covenants, the documentation to establish lender eligibility is facility-specific but largely consistent between the facilities. Lender-required eligibility certifications generally include the following:
- Lender is an “Eligible Lender,” defined to be 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 any of the foregoing
- Certification of lender’s CEO and CFO that lender is not subject to the CARES Act’s Section 4019(c) “Conflict of Interest Prohibition,” applicable where the certain specific high-ranking government officials (e.g., President of the United States, Vice President of the United States, head of an Executive department, member of Congress, or immediate family members of the foregoing) own 20 percent or more of the vote or value of any class of equity interest of lender
- Lender is not “insolvent,” generally defined as being in bankruptcy or generally failing to pay undisputed debts as they became due during the 90 days preceding the date of borrowing.
The more potentially challenging piece for lenders, to the extent otherwise eligible, relates to the Main Street Program construct that each participating eligible lender provide their own forms of loan documentation. Such forms of loan documentations are to be substantially similar to lender’s ordinary course lending agreements for similarly situated borrowers, adjusted to reflect program requirements.
Federal Reserve FAQs provide some additional guidance that “similarly situated borrowers” are borrowers in similar industries with comparable risk and size characteristics, as well as noting that lenders should document their process for identifying similarly situated borrower at origination of Main Street Program loans. How this relatively vague guidance will be applied by lenders competing for borrowers to lend to for fees and participations remains to be seen. As noted about, we expect the Main Street SPVs to take seriously their role in monitoring documentation terms to avoid moral hazard where loans are participated 95 percent through Federal Reserve and taxpayer dollars.
Further requirements on lenders include holding their retained 5 percent participation for the term of the loan (unless the Main Street SPV ceases to hold the loan), servicing the loan on specified terms, collecting and providing annual borrower financial information to the Main Street SPV, and monitoring for defaults or other breaches, among other requirements. In the event of any distress of the borrower (whether resulting in default, acceleration, bankruptcy, or otherwise), lenders are required to exercise care in proceedings as if lender owned the entirety of the loan (and not merely a 5 percent retained stub). Although the Main Street SPV maintains the right to elevate its participation to a full assignment, and thereafter participate directly in any proceedings regarding a distressed borrower, guidance from the Federal Reserve suggests that it would rarely exercise this option and only to the extent where the economic interests of lender and the Main Street SPV are misaligned or, in the case of relatively large loans, within the entire Main Street Program portfolio.
Undoubtedly, these are unusual and exigent times for Americans and American businesses due to COVID-19 and as a result of the ways the pandemic has rippled through all of our personal and professional lives. The loss of life and sickness experienced by some has been heartbreaking, and the impact of the pandemic on businesses has been profound and may well be long-lasting.
The Main Street Program reflects one effort of many to provide support to businesses facing hardship in these challenging times. As we’ve discussed the Main Street Program with our clients in the over three months prior to launch, we at Lowenstein have seen a full spectrum of responses–from the highly interested and qualified to the highly interested but disqualified (often due to affiliation analysis), to still others whose perspective is that for their businesses the program’s various restrictions make borrowing untenable. Many others will likely fall somewhere in the middle—not lining up this week or next to borrow, but, where their financial situation permits, waiting for others to trailblaze and highlight initial issues raised by taking the program from concept to operational status. Wherever our clients fall on this spectrum, we at Lowenstein remain ready to assist and are hopeful that, for some, the Main Street Program can be part of the solution to enduring and ultimately thriving in the times of pandemic.
Appendix I: Simplified Borrower and Lender Eligibility Requirements and General Program Terms
 The Federal Reserve Board is currently receiving public comments on term sheets for nonprofit versions of a new loan facility and expanded loan facility intended to make Main Street funds available to nonprofits.
 LIBOR may be at one- or three-month rates.