[co-authors: Hazen Dempster, Kristopher Henman, Michael Karpen]*

On April 30, after processing more than 2,200 comment letters to its initial term sheets, the Federal Reserve Board announced new terms that expand the scope and eligibility for the Main Street Lending Program (the Program) and published a set of frequently asked questions (FAQs) that provide additional clarification to certain aspects of the Program. The Federal Reserve has not yet published details related to loan participation terms, credit administration or loan servicing and has not yet announced an official launch date for the Main Street Lending Program.

Under the new proposal, there will be now be three term loan facilities in the Main Street Lending Program: updated versions of the Main Street New Loan Facility and the Main Street Expanded Loan Facility and a new third facility referred to as the Main Street Priority Loan Facility. The basic terms of the three facilities are as follows:

For a full discussion of the Main Street Lending Program, see our in-depth analysis here. Key points from the April 30 announcement include:

• The Federal Reserve has made clear that the Program is likely to evolve over time and that it and the Treasury Department may adjust the Program terms and requirements from time to time.

• The eligibility criteria for all three facilities under the Main Street Lending Program have been expanded to include borrowers that have fewer than 15,000 employees (an increase from the 10,000 announced previously) or 2019 annual revenues of $5 billion or less (an increase from $2.5 billion). However, the Federal Reserve has indicated that employees should be counted in accordance with the Small Business Administration (SBA) rules applicable to the Paycheck Protection Program (PPP), and that for purposes of calculating the number of employees and annual revenues, a business must include all of its affiliates as determined in accordance with those rules. This requirement will exclude many private equity-owned businesses, though the increased size tests may allow for some to qualify even on such a combined basis.

• SBA rules regarding ineligible businesses as applied to the PPP have also been extended to the Main Street Lending Program, except for those related to teaching, counseling or indoctrinating religion or religious belief.

• As required by the CARES Act, eligible borrowers must be organized in the United States and must have significant operations and a majority of their employees based in the United States. The Federal Reserve has not provided any additional guidance on how these tests are to be measured, including whether affiliates must be included in determining if a majority of employees are in the United States.

• Borrowers must be for-profit business enterprises. The Federal Reserve has indicated that it is continuing to explore how it might expand the Program to include nonprofits.

• Adjusted EBITDA for purposes of the leverage caps applicable to the loans under the Program can be calculated in a manner consistent with the borrower’s other debt documents with the eligible lender or, except in the case of the Main Street Expanded Loan Facility, in other loan facilities made by the eligible lender with other similarly situated borrowers.

• Loans made under the Main Street Priority Loan Facility and the Main Street Expanded Loan Facility must be senior to or pari passu with, both in payment and security, all of the borrower’s other debt (other than mortgage debt). Absent further clarification from the Federal Reserve, this would seem to preclude participation by borrowers with an existing split-collateral structure (e.g., an ABL loan with priority over working capital assets and a term loan with priority over all other assets).

• In its FAQs, the Federal Reserve made clear that the eligibility requirements under the term sheets are only minimum requirements and that eligible lenders are expected to use their customary underwriting standards to evaluate the creditworthiness of a borrower. The fact that a company can meet the eligibility standard for a loan under the Program does not guarantee that it will receive a loan under the Program.

• Without limiting the broad expectation that lenders will underwrite loans under the Main Street Lending Program in accordance with their standard underwriting processes and criteria, the Federal Reserve has imposed a few specific rules applicable to all three facilities:

  • Borrowers must have been in sound financial condition prior to the onset of the COVID-19 pandemic.

  • If the lender had an existing loan with the borrower at December 31, 2019, it must have had a “pass” risk rating at that date.

  • The borrower must certify that is has a reasonable basis to believe that, as of the date of origination and after giving effect to the loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.

• The Federal Reserve has removed any formal certifications as to need or as to employee retention. It has, however, indicated that an eligible borrower that participates in the Program “should make commercially reasonable efforts to maintain its payroll and retain its employees” while the loan is outstanding.

• Eligible borrowers still must commit to follow the compensation, stock repurchase and capital distribution restrictions applicable to direct loans by the Treasury under the CARES Act, but the Federal Reserve has recognized an exception to allow S corporations and other tax pass-through entities .

• Eligible lenders must hold their share of loans made under the Program (and, in the case of the Main Street Expanded Loan Facility, the underlying loan that was the basis for the expanded loan) until the loan made under the Main Street Lending Program has matured or the Main Street special purpose vehicle (SPV) has sold its participation in full.

• Eligible lenders have been expanded to include the U.S. operations of foreign banking organizations and credit unions and to include subsidiaries of other eligible lenders. Nonbank lenders that are part of a bank holding company group may, therefore, be eligible. Other nonbank or direct non-U.S. lenders remain excluded from the Program.

* Troutman Sanders