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June 10, 2020 / Law Alert

UPDATE: Main Street Lending Program

On June 8, 2020, the Federal Reserve Board provided an additional update to the terms of the Main Street Lending Program that is intended to provide financing opportunities to small and medium–sized businesses. Treasury Sec. Steve Mnuchin initially announced the details of the program on April 9, 2020. Jerome Powell, chair of the Federal Reserve, anticipates that the program will be up and running soon. Secretary Mnuchin said, “The Main Street Business Lending Program will make a significant difference for the 40,000 medium-sized businesses that employ 35 million Americans.” The program supplements the relief efforts already available to certain businesses, such as the Paycheck Protection Program, Employee Retention Tax Credits and Economic Impact Payments for individuals, without increasing taxes on individuals.

The Main Street Business Lending Program creates two new loan facilities and expands a previously existing one. To implement this program, the treasury will lend $75 billion to a special purpose vehicle to be sponsored by the government (SPV) that will enable lenders to make up to $600 billion of new loans for small- to medium-sized businesses. Unlike the Paycheck Protection Program (PPP), the SPV will only purchase 95% participations in eligible loans from eligible lenders, thus leaving eligible lenders on the hook for 5% of each eligible loan.

Eligibility

Eligibility rules are the same for all three facilities. An “eligible lender” includes 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.”

“Eligible borrowers” are businesses formed prior to March 13, 2020 with up to 15,000 employees or up to $5 billion in 2019 annual revenues. In determining eligibility, a business must include the employees and annual revenues of its affiliates, as determined in accordance with 13 C.F.R. § 121.301(f) (note: that these are the same affiliation rules applicable to SBA loans). The application of the affiliation rules is a new requirement set forth in the April 30 FAQ released regarding the Main Street Lending Program. Additionally, an eligible borrower must be a business that is created or organized in the U.S. or under the laws of the U.S. with significant operations, and a majority of its employees based, in the U.S. Certain borrowers are automatically ineligible for the Main Street loan facilities if they are an ineligible business as defined in 13 C.F.R. § 120.110(b)-(j), (m)-(s). This list of ineligible businesses is the same as those ineligible for assistance under the SBA loan programs. Note that nonprofit organizations are currently ineligible, but the Federal Reserve Board has said it is working on a program to help those organizations. As further explained in the next section, borrowers that are otherwise eligible may be ineligible if there is a conflict of interest (e.g., if they are owned by a member of Congress).

In addition to these eligibility requirements, borrowers and lenders must both make certain attestations in order to participate in the Main Street Lending Programs. These required attestations vary slightly depending on the facility and are explained in more detail below.

Eligible borrowers that participate in the Main Street New Loan Facility, Main Street Priority Loan Facility, or the Main Street Expanded Loan Facility cannot also participate in another Main Street facility. Likewise, such borrowers cannot also participate in the Primary Market Corporate Credit Facility, which the Federal Reserve established on March 23, 2020 to support credit to employers through new bond and loan issuance. However, a borrower may apply for any Main Street loan if it has previously applied for a PPP loan or an Economic Injury Disaster Loan.

Main Street New Loan Facility (MSNLF)

Eligible loan

Under the MSNLF, an eligible loan is a secured or unsecured term loan made by an eligible lender(s) to an eligible borrower that was originated after April 24, 2020, provided that the loan has the following features:

  1. 5 year maturity;
  2. Principal payments deferred for two years and interest payments deferred for one year (unpaid interest will be capitalized);
  3. Adjustable rate of LIBOR (1 or 3 month) + 300 basis points;
    1. As of the week of May 25, 2020, 1-month LIBOR was about .17% and 3-month LIBOR was .37%.
  4. Principal amortization of 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year;
  5. Minimum loan size of $250,000;
  6. Maximum loan size that is the lesser of (i) $35 million or (ii) an amount that, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed four times the eligible borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA); 
  7. Is not, at the time of origination or at any time during the term of the eligible loan, contractually subordinated in terms of priority to any of the eligible borrower’s other loans or debt instruments; and
  8. No prepayment penalty.

Note that since the original terms for the MSNLF were issued on April 9, 2020, the treasury has updated the terms of the MSNLF. Notably, the minimum loan size decreased from $1 million to $250,000, which could make the program more appealing to smaller borrowers; however, for some borrowers, $250,000 may still be too big of a loan to obtain. The maximum loan size has also increased from $25 million to $35 million.

Additionally, the interest rate changed to LIBOR + 300 basis points from an adjustable rate of interest equal to the Secured Overnight Financing Rate (SOFR, which was about 0.01% when the program was announced) + 250 to 400 basis points. SOFR is intended to replace LIBOR, which has long been used to determine interest rates for loans. It is based on transactions in the treasury repurchase market, where investors offer banks overnight loans backed by their bond assets.

Further, the maturity for the MSNLF, as well as the other two facilities, increased from four to five years, and the principal payment deferment period increased from one year to two years.

Loan participations

The SPV will purchase a 95% participation in an eligible loan at par value, and the lender will retain 5% of the eligible loan. The SPV and the lender will share risk equally. The eligible lender must retain its 5% of the eligible loan until it matures or the SPV sells all of its participation, whichever comes first.

Facility fee

The lender will pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. The lender may require the borrower to pay this fee.

Loan origination and servicing

Borrowers will pay the lender an origination fee of 100 basis points of the principal amount of the MSNLF eligible loan.  The SPV will pay the lender 25 basis points of the principal amount of its participation in the eligible loan per annum for loan servicing.

Main Street Priority Loan Facility (MSPLF)

Note: the MSPLF was not included as an option in the initial release of the terms for the Main Street Lending Program.

Eligible loan

Under the MSPLF, an Eligible Loan is a secured or unsecured term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated on or after April 24, 2020, provided that the loan has the following features:

  1. 5 year maturity;
  2. Principal payments will be deferred for two years and interest payments will be deferred for one year (unpaid interest will be capitalized);
  3. Adjustable rate of LIBOR (1 or 3 month) + 300 basis points;
  4. Principal amortization of 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year;
  5.  Minimum loan size of $250,000;
  6. Maximum loan size that is the lesser of (i) $50 million or (ii) an amount that, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed six times the eligible borrower’s adjusted 2019 EBITDA;
  7. At the time of origination and at all times the eligible loan is outstanding, the eligible loan is senior to or pari passu with, in terms of priority and security, the eligible borrower’s other loans or debt instruments, other than mortgage debt; and
  8. No prepayment penalty.

In an effort to make the MSPLF a more attractive option for borrowers, the Federal Reserve Board decreased the MSPLF minimum loan size from $500,000 to $250,000 and increased the maximum loan size from $25 million to $50 million.

Loan participations

The SPV will purchase a 95% participation in an eligible loan at par value, and the lender will retain 5% of the eligible loan. The SPV and the lender will share risk equally. The eligible lender must retain its 5% of the eligible loan until it matures or the SPV sells all of its participation, whichever comes first. Note that this 95% participation in the MSPLF was originally 85% participation. This change to the participation level of the SPV should encourage more lenders to participate in the MSPLF because they now have less risk.

Facility fee

The lender will pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. The lender may require the borrower to pay this fee.

Loan Origination and Servicing

Borrowers will pay the lender an origination fee of 100 basis points of the principal amount of the MSNLF eligible loan.  The SPV will pay the lender 25 basis points of the principal amount of its participation in the dligible loan per annum for loan servicing.

Main Street Expanded Loan Facility (MSELF)

Eligible loan

Under the MSELF, an eligible loan is a term loan made by an dligible lender(s) to an eligible borrower that was originated before April 24, 2020, and that has a remaining maturity of at least 18 months (taking into account any adjustments made to the maturity of the loan after April 24, 2020, including at the time of upsizing), provided that the upsized tranche of the loan is a term loan that has all of the following features:

  1. 5 year maturity;
  2. Principal payments will be deferred for two years and interest payments will be deferred for one year (unpaid interest will be capitalized);
  3. Adjustable rate of LIBOR (1 or 3 month) + 300 basis points;
  4. Principal amortization of 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year;
  5. Minimum loan size of $10,000,000;
  6. Maximum loan size that is the lesser of (i) $300 million, (ii) 35% of the eligible borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the eligible loan and equivalent in secured status (i.e., secured or unsecured), or (iii) an amount that, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed six times the eligible borrower’s adjusted 2019 EBITDA;
  7. At the time of upsizing and at all times the upsized tranche is outstanding, the upsized tranche is senior to or pari passu with, in terms of priority and security, the eligible borrower’s other loans or debt instruments, other than mortgage debt; and
  8. No prepayment penalty.

Note: the interest rate for the MSELF changed in the same way as the MSNLF since the initial terms and conditions were released. Additionally, the minimum and maximum loan for the MSELF has increased since the initial terms were released in early April. The minimum loan size increased from $1 million to $10 million. The maximum loan size also increased to the lesser of: (i) $300 million (previously $150 million in the first term sheet and $200 million in the second term sheet); (ii) 35% of the eligible Borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the eligible loan and equivalent in secured status (previously only 30%); and (iii) an amount not exceeding six times adjusted 2019 EBITDA (remained the same).

Loan participations and security

The SPV will purchase at par value a 95% participation in the upsized tranche of the eligible loan, provided that it is upsized on or after April 24, 2020. The SPV and the eligible lender will share risk in the upsized tranche equally. The eligible lender must be one of the lenders that holds an interest in the underlying eligible loan at the date of upsizing. The eligible lender must retain its 5% portion of the upsized tranche of the eligible loan until the upsized tranche of the eligible loan matures or the SPV sells all of its 95% participation, whichever comes first. The eligible lender must also retain its interest in the underlying eligible loan until the underlying eligible loan matures, the upsized tranche of the eligible loan matures, or the SPV sells all of its 95% participation, whichever comes first. Any collateral securing the eligible loan (at the time of upsizing or on any subsequent date) must secure the upsized tranche on a pro rata basis. The sale of a participation in the upsized tranche of the eligible loan to the SPV will be structured as a “true sale” and must be completed expeditiously after the eligible loan’s upsizing.

Transaction fee

An eligible lender will pay the SPV a transaction fee of 75 basis points of the principal amount of the upsized tranche of the eligible loan at the time of upsizing. The eligible lender may require the eligible borrower to pay this fee. Note this is a new requirement that was not included in the initial term sheet for the MSELF dated April 9, 2020.

Loan upsizing and servicing

The borrower will pay the lender a fee of 100 basis points of the principal amount of the upsized tranche of the eligible loan at the time of upsizing.  The SPV will pay the lender 25 basis points of the principal amount of its participation in the upsized tranche of the eligible loan per annum for loan servicing.

Loan classification

The following is a new requirement that was not included in the initial term sheets for the Main Street Lending Program. For all three facilities, if the eligible borrower had other loans outstanding with the eligible lender as of Dec. 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date. Per the May 27, 2020 FAQ released regarding the Main Street Lending Program, the eligible lender is responsible for determining whether the borrower’s existing loans satisfy this requirement.

Assessment of financial condition

For all three facilities, eligible lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application. Like the loan classification requirement, this is a new obligation that was not included in the initial term sheets. This could slow down the application process and may deter some borrowers from even applying. This obligation also creates more work for eligible lenders, which may also deter such lenders from participating in the program, especially if it means underwriting for new clients.

Required attestations

The required attestations are essentially the same under all three facilities. In addition to certifications required by applicable statutes and regulations, lenders will have to make the following attestations with respect to each eligible loan:

  • The eligible lender must commit that it will not request that the eligible borrower repay debt extended by the eligible lender to the eligible borrower, or pay interest on such outstanding obligations, until the eligible loan (or upsized tranche) is repaid in full, unless the debt or interest payment is mandatory and due, or in the case of default and acceleration.
    • Principal and interest payments are “mandatory and due:”
      • on the future date upon which they were scheduled to be paid as of the date of origination of the Main Street loan, or
      • upon the occurrence of an event that automatically triggers mandatory prepayments under a contract for indebtedness that the eligible borrower executed prior to the date of origination of the Main Street loan, except that any such prepayments triggered by the incurrence of new debt can only be paid: if such prepayments are de minimis, or under the MSPLF at the time of origination of an MSPLF Loan.
  • The eligible lender must commit that it will not cancel or reduce any existing committed lines of credit to the eligible borrower, except in an event of default.
  • The eligible lender must certify that the methodology used for calculating the eligible borrower’s adjusted 2019 EBITDA for the leverage requirement discussed above is the methodology it has previously used for adjusting EBITDA when extending credit to the eligible borrower or similarly situated borrowers on or before April 24, 2020.
  • The eligible lender must certify that it is eligible to participate in the facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.

Borrowers also have to make a number of certifications at loan closing. In addition to certifications required by applicable statutes and regulations, a borrower will have to attest to the following with respect to an eligible loan:

  • The borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the eligible loan is repaid in full, unless the debt or interest payment is mandatory and due.
    • For the MSPLF, the eligible borrower may, at the time of origination of the eligible  loan, refinance existing debt owed by the eligible borrower to a lender that is not the eligible lender.
  • The borrower will not cancel or reduce any of its committed lines of credit, including indebtedness with the lender providing the eligible loan or any other lender.
  • The borrower must certify that it has a reasonable basis to believe that, as of the date of origination of the eligible loan and after giving effect to such 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 borrower meets the EBITDA leverage condition required for eligible loans.
    • For Main Street New Loan Facilities, this means the maximum loan amount, when added to the borrower’s existing outstanding and committed but undrawn debt, will not exceed four times the eligible borrower’s adjusted 2019 EBITDA.
    • For Main Street Priority Loan Facilities and Main Street Expanded Loan Facilities, this means the maximum loan amount, when added to the borrower’s existing outstanding and committed but undrawn debt, will not exceed six times the eligible borrower’s adjusted 2019 EBITDA.
  • The borrower will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under Section 4003(c)(3)(A)(ii) of the CARES Act (except that an S corporation or other tax pass-through entity that is an eligible borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings), which provides that the borrower must agree that:
    • While the loan is outstanding and for one year thereafter, it will not repurchase any of its equity securities that are listed on a national securities exchange (or those of any parent company of the borrower) while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of the CARES Act (March 27, 2020);
    • While the loan is outstanding and for one year thereafter, the borrower will not pay dividends or make other capital distributions with respect to its common stock; and
    • The borrower will comply with the limitations on compensation set forth in section 4004 of the CARES Act.  That means:
      • No officer or employee of the borrower whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020)—
        • (A) will receive from the borrower total compensation which exceeds his or her 2019 total compensation; or
        • (B) will receive from the borrower severance pay or other benefits upon termination of employment which exceed twice the maximum total 2019 compensation received by the officer or employee; AND
  • No officer or employee of the borrower whose total compensation exceeded $3,000,000 in calendar year 2019 may receive during any 12 consecutive months of the loan period total compensation in excess of the sum of:
    • (A) $3,000,000; plus
    • (B) 50% of the excess over $3,000,000 of the total compensation received by the officer or employee from the borrower in calendar year 2019.
  • Under the CARES Act, “total compensation” includes salary, bonuses, awards of stock and other financial benefits.
  • The borrower is eligible to participate in the facility, including the conflict of interest prohibition in Section 4019(b) of the CARES Act.
    • Treasury has announced that companies in which the president of the U.S., the vice president, the head of an executive department, or a member of Congress (or members of their families) hold at least 20% interest are not eligible for a Main Street loan.

While no longer listed as a certification or attestation, borrowers under all three facilities should make commercially reasonable efforts to maintain payroll and retain employees during the time the Eligible Loan is outstanding.

Termination

For all Main Street facilities, the SPV will stop purchasing participations in Eligible Loans on September 30, 2020, unless the programs are extended by the board and the Treasury Department. After that date, the Federal Reserve Bank will continue to fund the SPV until the SPV’s underlying assets mature or are sold. 

For more information contact Jack BeelerJack Meadows or any member of Porter Wright's Banking & Finance Group.

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