The Federal Reserve established the Main Street Lending Program (“Program”) to support lending to small and medium-sized businesses in response to the economic impact of the COVID-19 pandemic. The availability of additional credit is intended to help businesses that were in sound financial condition prior to the onset of the COVID-19 pandemic maintain their operations and payroll until economic activity normalizes. Further, the Federal Reserve designed the Program to support small and medium-sized businesses that were either unable to access the Paycheck Protection Program (“PPP”) or that require additional financial support after receiving a PPP loan. (Burns & Levinson’s most recent PPP Advisory can be found here.)
The Federal Reserve Bank of Boston (“FRB of Boston”) has created a special purpose vehicle (“SPV”) to purchase 95% of participations in loans originated under this program by eligible lenders. In total, the Main Street SPV will purchase up to $600 billion of participations in eligible loans, so potential borrowers should be aware that there is limited availability under the Program. To note, the Main Street SPV will stop purchasing loan participations on September 30, 2020, unless the Program is extended by the Federal Reserve Board and the Treasury Department. The FRB of Boston will continue to operate the SPV after such date until the Main Street SPV’s assets mature or are sold.
On July 6, the FRB of Boston announced that the Main Street Lending Program is now fully operational.
There are three different facilities, or options, available to potential borrowers under the Program, of which a borrower can only select one alternative:
(1) the Main Street New Loan Facility (“MSNLF”),
(2) the Main Street Priority Loan Facility (“MSPLF”), and
(3) the Main Street Expanded Loan Facility (“MSELF”).
For additional information on any topics described below, please see the Main Street Lending Program’s Frequently Asked Questions here. For additional information on the MSNLF, please see the Main Street New Loan Facility Term Sheet, the MSPLF, please see the Main Street Priority Loan Facility Term Sheet, and the MSELF, please see the Main Street Expanded Loan Facility Term Sheet.
Potential borrowers should independently evaluate each of these three options in light of their unique financial circumstances In addition, these Program loans are not subject to forgiveness, and will be accordingly managed by lenders as indebtedness, and thus borrowers should carefully consider the Program lender, its responsiveness and reputation, previous relationship with the borrower or management, and other related factors. This is especially relevant as each lender is expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application and apply their own underwriting standards in evaluating such condition and creditworthiness. The preliminary list of lenders who have elected to participate can be found here, which we expect will be updated over time as lenders join the Program.
Program Assessment Process. The general process a potential borrower would follow is to first confirm that it is eligible and then interact with and assess potential Program lenders as noted above. Borrower would then work with the lender to determine the appropriate Program loan based on the circumstances, qualifications, reporting, and affirmative and negative covenants and proceed with loan documentation. Borrowers with existing debt would need to review existing debt facilities to see if consents or modifications are required to ensure compliance with the Program requirements and existing debt documentation.
Borrower Eligibility. Eligible borrowers must generally meet the following minimum conditions. However, even if eligible thereunder, the loan is still subject to lender underwriting review as to borrower’s financial condition and related matters:
Certain companies may be prohibited from obtaining Program loans or may have difficulty becoming eligible based on the other eligibility criteria and exclusions including:
Loan Underwriting. The eligibility conditions described above and in the term sheets contains just the minimum requirements for the Program. As noted above, the loan and borrower’s financial condition must also pass muster under the lender’s internal underwriting standards. This should be factored in when assessing the lenders with whom the application will be submitted.
Can I use the Program to Refinance Existing Debt? While each of the Program’s three facilities are similar as described below, one of the extremely important distinctions, and key benefit that many potential borrowers will be interested in, is that under the MSPLF, borrowers can use the proceeds to refinance debt with existing lenders that are not providing the Program loan. The debt being refinanced may be a term or revolving loan, but the MSPLF Loan is a term loan only once provided.
Who will be Servicing the Program Loan? The Program lender will service each loan directly with the borrower in accordance with the loan documents unless and until the SPV elevates its interest and role which it cannot do absent certain circumstances, which include borrower and lender consent, mandatory payments being missed, or borrowing being involved in bankruptcy/insolvency proceedings. The Program lender will be expected to handle such servicing role in accordance with standards of care established in the agreements to be entered into between the SPV and the lender, which generally are intended for the lender to exercise the same duty of care in approaching such proceedings as it would exercise if it retained a beneficial interest in the entire loan.
Collateral. MSNLF loans, MSPLF loans, and MSELF upsized tranches may be secured or unsecured. Note that:
Additional Loan Terms. Each of the MSNLF, MSPLF, and MSELF loan facilities contain many of the same features such as:
The key differences among the three facilities concern the minimum/maximum loan sizes, reporting and priority requirements, as well as the ability of borrower to refinance debt using the MSPLF. The loan types also differ in how they interact with the eligible borrower’s existing outstanding debt, including with respect to the level of pre-pandemic indebtedness an eligible borrower may have incurred.
MSNLF. Under the facility, the Lender will extend a new five-year term loan to the Borrower ranging in size from $250,000 to $35 million. The maximum size of a loan made in with the MSNLF cannot, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, exceed four times the Eligible Borrower’s adjusted 2019 EBITDA. It is important to note that the portion of any outstanding PPP loan that has not yet been forgiven should be counted as outstanding debt for the purposes of the Program. An MSNLF Loan, at the time of origination or at any time during its term, may not be contractually subordinated in terms of priority to the Eligible Borrower’s other loans or debt instruments. Therefore, an MSNLF Loan may not be junior in priority in bankruptcy to the Eligible Borrower’s other unsecured loans or debt instruments. However, prohibitions on contractual subordination with respect to Program loans do not prevent the incurrence of obligations that have mandatory priority under the Bankruptcy Code or other insolvency laws. In any event, a Borrower may take on new secured or unsecured debt after receiving an MSNLF Loan, provided the new debt would not have higher contractual priority in bankruptcy than the MSNLF Loan.
MSPLF. Under this facility, the Lender will extend a new five-year term loan to the Borrowers ranging in size from $250,000 to $50 million. The maximum size of a loan made in connection with the MSPLF cannot, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, exceed six times the Eligible Borrower’s adjusted 2019 EBITDA. At the time of origination and at all times thereafter, the loan must be 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. However, Borrowers are permitted, at the time of origination of the loan, to refinance existing debt owed by the Eligible Borrower to a lender that is not the Eligible Lender.
MSELF. Under this facility, a Lender that has extended an existing term loan or revolving credit facility to a Borrower may increase (or “upsize”) that extension of credit, by adding a new increment (or “tranche”). The MSELF, or upsized tranche, is a five-year term loan ranging in size from $10 million to $300 million. The maximum size of a loan made in connection with the MSELF cannot, when added to the Borrower’s existing outstanding and undrawn available debt, exceed six times the Borrower’s adjusted 2019 EBITDA. To be eligible for “upsizing,” the existing term loan or revolving credit facility must have been originated on or before April 24, 2020, and must have a remaining maturity of at least 18 months. To ensure that the Borrower was in sound financial condition prior to the onset of the pandemic, the existing loan or revolving credit facility must have had a risk rating, based on the Lender’s internal rating system, equivalent to a “pass” in the FFIEC’s supervisory rating system as of December 31, 2019. With respect to priority and security, at the time of upsizing and at all times thereafter, the upsized tranche must be senior to or pari passu with the Borrower’s other loans or debt instruments, other than mortgage debt.
Limitations on Use of Proceeds. It is important to note that the CARES Act’s restrictions on compensation, stock repurchases, and capital distributions apply to loans made under the Program. Other than tax distributions, loans may not be used for the payment of dividends or making of capital distributions with respect to any of the borrower’s common stock while the loan is outstanding and for a period of 12 months thereafter. Moreover, borrowers are prohibited from repurchasing any of its equity securities (including those of its parent company) during the same period, except as required by existing contractual obligations. As of now, the Federal Reserve has not provided further guidance on these restrictions or on any other potential distribution exemptions. Depending on a borrower’s unique structure there may be other ordinary course distributions that would not be permitted under the existing guidelines.