On April 9, the Federal Reserve announced the general terms of the Main Street Lending Program provided for in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and published a term sheet for each of the Main Street Expanded Loan Facility (“MSELF-Expanded”) and the Main Street New Loan Facility (“MSNLF-New”).  Comments by market participants are to be submitted to the Federal Reserve and the Treasury online through April 16.  Neither the Federal Reserve nor the Treasury has indicated the date by which it will respond to comments, publish initial regulations, or provide other guidance with respect to MSELF-Expanded or MSNLF-New.

Program Funding

A special purpose vehicle (“SPV”) will be created by the Federal Reserve and the Department of the Treasury will invest $75 billion in the SPV.  The SPV will make available up to an aggregate of $600 billion in financing for eligible borrowers under MSELF-Expanded and MSNLF-New.  The SPV will purchase a 95% interest in an existing loan facility that is increased under MSELF-Expanded or new term loan funded under MSNLF-New originated by a United States insured financial institution (including banks, savings associations, and bank and savings association holding companies) and the originating lender will retain a 5% interest.  The SPV will not purchase participations after September 30, 2020.

Commencement Date

The commencement date for purchases of participations has not been announced.

Lender Compensation

1. Under MSNLF-New, the SPV will pay the selling lender a fee of 100 bps on the principal amount purchased by the SPV.  The selling lender may require the borrower to pay the fee.
2. Under MSELF-Expanded, the SPV will pay the selling lender a fee of 100 bps on the principal amount of the upsized tranche purchased by the SPV.
   On both facilities the SPV will pay the selling lender an annual servicing fee equal to 25 bps.

Eligible Lenders

A lender must be a United States insured bank, savings association, or bank or savings association holding company.  These terms are not defined by reference to any law or regulation, so the ultimate scope of eligible lenders may depend on the final regulations.  For both MSELF-Expanded and MSNLF-New, a lender must attest that the proceeds of the upsized or new term loan will not be used to repay or refinance an existing loan or line of credit to the eligible borrower.  A lender must also attest to the no conflicts of interest provisions of the CARES Act (generally, no control relationship between lender and borrower).

Eligible Borrower

1. Must be organized under the laws of the United States or one of the states.
2. Cannot have more than 10,000 employees or more than $2.5 billion in 2019 annual revenue.
3. Must have “significant operations,” and a majority of its employees, based in the U.S.
4. Can participate in only one of the two Main Street Loan Facilities and cannot participate in the Primary Market Corporate Credit Facility (a separate bridge credit facility program of the Federal Reserve for investment grade borrowers).
5. Must not be in bankruptcy.  The April 9 Federal Reserve press release also indicates that the borrower must have been in “good financial standing before the [COVID-19] crisis.”

Main Street Expanded Loan Facility

Loan Terms

1. The term loan facility to be expanded must be a term loan originated by an eligible lender to an eligible borrower made prior to April 8, 2020.
2. Maximum principal amount of the expanded facility cannot exceed the lesser of (a) $150 million, (b) 30% of borrower’s existing outstanding and committed but undrawn bank credit facilities, and (c) an amount, when added to the amount of the borrower’s existing outstanding and committed but undrawn credit facilities, does not exceed six times the borrower’s 2019 EBITDA.
3. Minimum principal amount of the increase is $1 million.
4. An upsize of an existing term loan.
5. Maturity of four years.
6. Payment of principal and interest deferred during first year.
7. Interest must accrue at the adjustable Secured Overnight Financing Rate (“SOFR”) plus 250 – 400 bps.
8. Prepayments are permitted without penalty.
9. Collateral under existing loan or added for the upsized facility secures the upsized facility pro rata.

“Attestations”

In addition to the attestation described under “Eligible Lender”, the lender and borrower must make the following attestations.  (The term sheet does not say what is meant by “attestation”, but the requirements appear to be structured as both representations and covenants.)

1. Borrower must “commit to refrain” from using proceeds of the upsized facility to (a) repay other loans, or (b) repay debt that is pari passu or subordinate to the upsized facility, except mandatory prepayments, prior to repayment of the upsized facility.
2. Borrower must attest that it needs the upsized facility as a result of COVID-19 and that it will “make reasonable efforts” to maintain its payroll and its employees at the pre-COVID-19 level until it has repaid the upsized facility.
3. Borrower must attest that it meets the maximum loan to six times EBITDA requirement.
4. Borrower must attest that until twelve months after the loan is repaid, it will not (a) pay dividends or make other distributions on its “common stock,” (b) repurchase any publicly traded equity interest, (c) increase compensation to any employee whose aggregate compensation exceeds $425,000, or offer such employee a severance package that is greater than twice the aggregate annual compensation, or (d) pay any employee or officer who was paid more than $3 million in 2019 an amount greater than the sum of $3 million, plus 50% of the difference between the amount paid to such employee or officer in 2019, minus $3 million.
5. Borrower must attest to the no conflicts of interest provisions of the CARES Act.
6. Borrower must attest that it is eligible to participate in MSELF-Expanded.
7. Borrower must attest that it will not seek to cancel or reduce lines of credit with the MSELF-Expanded or other lender.
8. Lender must attest that it will not cancel or reduce an existing line of credit to the borrower. 

Main Street New Loan Facility

Loan Terms

1. An unsecured term loan originated by an eligible lender for an eligible borrower after April 8, 2020.
2. Maximum principal amount of lesser of (a) $25 million, and (b) an amount, when added to the amount of the borrower’s existing outstanding and committed but undrawn credit facilities, does not exceed four times the borrower’s 2019 EBITDA.
3. Minimum principal amount of $1 million.
4. Maturity of four years.
5. Payment of principal and interest deferred during first year.
6. Interest must accrue at the adjustable Secured Overnight Financing Rate (“SOFR”) plus 250 – 400 bps.
7. Prepayments are permitted without penalty.

“Attestations”

In addition to the attestation described under “Eligible Lender”, the lender and borrower must make the following attestations.  (The term sheet does not say what is meant by “attestation”, but the requirements appear to be structured as both representations and covenants.)

1. Borrower must “commit to refrain” from using proceeds of the new facility to (a) repay other loans, or (b) repay debt that is pari passu or subordinate to the new facility, except mandatory prepayments, prior to repayment of the new facility.
2. Borrower must attest that it needs the new facility as a result of COVID-19 and that it will “make reasonable efforts” to maintain its payroll and its employees at the pre-COVID-19 level until it has repaid the new facility. 
3. Borrower must attest that it meets the maximum loan to four times EBITDA requirement.
4. Borrower must attest that until twelve months after the loan is repaid, it will not (a) pay dividends or make other distributions on its “common stock,” (b) repurchase any publicly traded equity interest, (c) increase compensation to any employee whose aggregate compensation exceeds $425,000, or offer such employee a severance package that is greater than twice the aggregate annual compensation, or (d) pay any employee or officer who was paid more than $3 million in 2019 an amount greater than the sum of $3 million, plus 50% of the difference between the amount paid to such employee or officer in 2019, minus $3 million.
5. Borrower must attest to the no conflicts of interest provisions of the CARES Act.
6. Borrower must attest that it is eligible to participate in MSNLF-New.
7. Borrower must attest that it will not seek to cancel or reduce lines of credit with the MSNLF-New or other lender.
8. Lender must attest that it will not cancel or reduce an existing line of credit to the borrower.

Issues

The MSELF-Expanded and MSNLF-New term sheets are very general as to terms of the programs.  Some issues include:

1. We assume that the participation between the selling lender and the SPV will be made pursuant to a standard form promulgated by the Fed with limited, if any, ability to modify the terms.  FASB has provided standards for the terms of loan participations and whether the participation is a true sale for accounting purposes.  The form of participation agreement (and related agreements) should be reviewed by the selling lender’s internal accounting and compliance teams (and also its outside auditors) to confirm the accounting treatment of the participation agreement and that the participation will be treated as a true sale.
2. The term sheets do not address if the selling lender can participate the remaining 5% to a third party or if it must retain the 5% while the participation is outstanding.
3. Some credit agreements restrict the types of entities that can be both an assignee and a participant of an existing lender.  The SPV may not qualify as an eligible participant.
4. Insured banks and savings and loans should consider if there is any advantage to having their respective holding company be the lender under MSNLF-New or MSELF-Expanded.
5. The usury and similar laws of Texas and other states may limit the ability of the selling lender to collect fees that the term sheet says can be passed on to the borrower.
6. As noted, the attestations to be provided by the selling lender could create liability for matters not within the lender’s knowledge or control.  Loan proceeds and other money in the possession of a borrower are fungible.  What due diligence must a lender do to confirm the use of proceeds?  How is a lender to monitor the use of fungible dollars?  Assuming the lender relies on representations and covenants of the borrower, is the lender liable for any failure of the borrower to comply with the use of proceeds?  Will the attestation be included in the participation?
7. Must the term loans be single advance or will multiple draws be permitted?
8. Pricing must be based on SOFR.  For MSELF-Expanded, how will this work if the existing loans are priced using another reference rate?  Is the selling lender equipped to monitor SOFR?
9. The borrower and lender are to refrain from terminating an existing line of credit.  What if the existing line of credit is tied to a borrowing base, or otherwise automatically reduces?  What if an event of default occurs?  Must existing facilities be extended?  Can a revolving line of credit be repaid?
10. Eligible lender are only banks, savings and loans, and their holding companies.  This excludes many lenders from the programs.
11. Can interest be paid in kind and on what terms?
12. Under MSELF-Expanded, if the existing term loan is subject to an intercreditor agreement with other parties secured by the same collateral, can consents be obtained?
13. How are non-eligible lenders in a syndicated facility treated?
14. Are maintaining payroll and employees different?  Does maintaining payroll mean benefit cuts are not permitted?
15. Eligible borrowers must be organized under the laws of the United States or one of the states.  What if the borrower is owned by a foreign entity or person?
16. How are the loan size baskets calculated?  How is EBITDA calculated?
17. Distributions by the borrower with respect to its equity are restricted.  Will a borrower be able to make distributions to its equity holder to pay taxes or pursuant to shared expenses agreement?
18. Negotiating and documenting expanded tranches can take time and requires consents.