Federal Reserve Expands the Main Street Lending Program

The Federal Reserve recently expanded its Main Street Lending Program (the “Program”) to three separate loan facilities:  the Main Street New Loan Facility, the Main Street Priority Loan Facility and the Main Street Expanded Loan Facility (each, a “MSLP Facility” and collectively, the “MSLP Facilities”).  The MSLP Facilities are aimed at providing up to $600 billion of additional liquidity to eligible mid-sized business enterprises. Unless extended, the Program is set to expire on September 30, 2020.

The following is a high-level summary of certain terms relating to the Program and each MSLP Facility as described in the Frequently Asked Questions (“FAQs”) issued by the Federal Reserve and Department of Treasury in connection with the Program.  The FAQs are applicable to any eligible secured or unsecured term loan originated after April 24, 2020.

1. Eligible Borrower. To be eligible under a MSLP Facility, a business must meet the following criteria:
   • The business must be in existence before March 13, 2020.
   • The business must not be in an “Ineligible Business” as described in the Small Business Association’s regulations concerning PPP loans.
   • The business must have 15,000 or fewer employees, or have 2019 annual revenues of $5 billion or less.
   • The business must be a U.S. business.
   • The business can only participate in one MSLP Facility, but may receive more than one loan under the same facility so long as the amount of all loans under such facility does not exceed the maximum loan amount.
   • The business must not have received specific support pursuant to the CARES Act.
   • The business must be able to make all of the required certifications.
2. Loan Amount. Pursuant to the term sheets issued for each MSLP Facility, the minimum and maximum loan amount varies by MSLP Facility as follows:

• • Main Street New Loan Facility:
    • Minimum Loan Amount: $250,000
    • Maximum Loan Amount: The lesser of (i) $35 million, or (ii) an amount that, when aggregated with an eligible borrower’s existing outstanding and undrawn available debt, does not exceed 4 times such eligible borrower’s adjusted EBITDA for fiscal year 2019.
  • Main Street Priority Loan Facility:
    • Minimum Loan Amount: $250,000
    • Maximum Loan Amount: The lesser of (i) $50 million, or (ii) an amount that, when aggregated with an eligible borrower’s existing outstanding and undrawn available debt, does not exceed 6 times such eligible borrower’s adjusted EBITDA for fiscal year 2019.
  • Main Street Expanded Loan Facility:
    • Minimum Loan Amount: $10,000,000
    • Maximum Loan Amount: The lesser of (i) $300 million, or (ii) an amount that, when aggregated with an eligible borrower’s existing outstanding and undrawn available debt, does not exceed 6 times such eligible borrower’s adjusted EBITDA for fiscal year 2019.

3. PPP Loan. A business that received a PPP loan remains eligible to receive a loan under a MSLP Facility.
4. Loan Term. With respect to each MSLP Facility, each eligible loan will have a maturity date of 5 years. This was increased from 4 years as originally proposed.
5. Interest Rate. A loan under any MSLP Facility shall have an interest rate of Libor (1 month or 3 month) plus 300 basis points.
6. Repayment Deferral. Principal payments due with respect to each MSLP Facility may be deferred for two years, and interest payments deferred for one year. Commencing in year three of the loan term, payments of principal and accrued interest shall be due and payable as follows: 15% at the end of year 3, 15% at the end of year four and a balloon payment of 70% upon maturity. Any loan under a MSLP Facility is full recourse to the applicable borrower and is not forgivable.
7. Collateral/Priority.
   • A loan under any of the MSFL Facilities may be secured or unsecured. However, if the underlying loan is secured, a loan under the Main Street Expanded Loan Facility must also be secured.
   • A loan under the Main Street New Loan Facility may not be contractually subordinated in terms of priority to the borrower’s other loans or debt instruments (which means that it may not be junior in priority in bankruptcy). Under both the Main Street Priority Loan Facility and the Main Street Expanded Loan Facility the loan must be senior or pari passu with, in terms of priority and security, the borrower’s other loans or debt instruments, other than mortgage debt.
8. Reserve Bank Participation. With respect to all MSLP Facilities, the Federal Reserve Bank of Boston (as the designated Reserve Bank), through a single common special purpose vehicle, will purchase 95% participation interests in eligible loans from eligible lenders. Eligible lenders will retain 5% of the risk associated with any new loans or upsize of existing facilities made to eligible businesses..
9. Required Certifications. Eligible borrowers are required to make the following certifications and covenants in connection with any MSLP Facility:

• • Eligible borrowers must refrain from repaying the principal balance of, or any interest accrued on, any existing indebtedness until the Program loan is repaid in full, unless such principal or interest payment is mandatory and due (i.e., no voluntary prepayments). The foregoing does not prevent an eligible borrower from refinancing existing debt owed by such borrower to a non-Program lender upon origination of any eligible MSLP Facility.
  • Eligible borrowers covenant not to seek to cancel or otherwise reduce any committed line of credit advanced by a Program lender or otherwise.
  • Each eligible borrower must certify that it has a reasonable basis to believe that, as of the loan origination date and after giving effect to the same, that such borrower has the ability to meet its financial obligations for at least 90 days therefrom, and does not expect to file for bankruptcy during such time period.
  • Each eligible borrower covenants that it will comply with all compensation, stock repurchase and capital distribution restrictions that apply to direct loan programs under the CARES Act, provided that an S corporation or other pass-through entity is permitted to make distributions to the extent reasonably required to cover its owner’s tax obligations in respect of such entity’s earnings.
  • Each eligible borrower must certify that it is eligible to participate in the applicable MSLP Facility, including in light of the conflicts of interest prohibitions contained in the CARES Act.
  • Each eligible borrower covenants and agrees to use commercially reasonable efforts to maintain its payroll levels and retain its employees during the term of the eligible loan.

In addition to the foregoing certifications, each eligible borrower is also required to demonstrate that it is unable to secure adequate credit accommodations from other banking intuitions outside of the Program. Per the FAQs, an acceptable basis for such certification may be that the amount, price or terms of other credit accommodations available to borrower are inadequate for such borrower’s needs during the current unusual and exigent circumstances.

In connection with the above, the Federal Reserve has released a form of borrower certifications and covenants for each MSLP Facility, each of which are linked here: Main Street New Loan Facility, Main Street Priority Loan Facility and Main Street Expanded Loan Facility.

10. Documentation. Required forms and agreements can be found on the Reserve Bank’s website, which includes a Program loan participation agreement, form of borrower and lender certifications, servicing agreements and related documentation. While the Federal Reserve is not providing form loan documents for use in connection with the MSLP Facilities, all loan documents must include the terms and conditions detailed in the loan document checklist attached as Appendix A to the FAQs.

We are continuing to monitor as additional guidance is released by the Federal Reserve and/or the Department of Treasury, and will provide new Alerts as appropriate.  Our attorneys are available to answer any questions with respect to the foregoing.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.