Federal Reserve Board Expands $600 Billion Main Street Lending Program for Small and Medium-Sized Businesses
On April 30, 2020, the Federal Reserve Board ( the “Fed”) announced changes to the Main Street Lending Program originally announced on April 9, 2020 (see Blank Rome’s summary here), expanding the types of facilities and the eligibility of lenders and borrowers. After receiving more than 2,200 letters from individuals, businesses, and nonprofits following its initial announcement, the Fed expanded the Main Street program, allowing more types of lenders and businesses to participate; giving lenders more flexibility to evaluate, size, and structure their loans; and adding a new facility for high-leveraged Main Street loans.
Along with the two facilities announced earlier—the Main Street New Loan Facility (“MSNLF”) and the Main Street Expanded Loan Facility (“MSELF”)—the Fed added a third facility, the Main Street Priority Loan Facility (“MSPLF”). All three facilities are intended to stimulate lending to small and medium-sized businesses by establishing a Fed-sponsored special purpose vehicle (“SPV”) that will purchase 95 percent participation interests in MSNLF and MSELF loans and 85 percent participation interests in MSPLF loans. The Fed also expanded the scope of eligible borrowers by increasing the maximum number of employees from 10,000 to 15,000 and the maximum amount of 2019 annual revenue from $2.5 billion to $5 billion. It expanded the scope of eligible lenders to include U.S. branches or agencies of foreign banks, U.S. intermediate holding companies of foreign banking organizations, and U.S. subsidiaries of eligible lenders.
The Fed published updated “term sheets” for the Main Street programs as well as Frequently Asked Questions (“FAQ”) that provides more detail about the facilities. The term sheets and FAQ are available in the Fed’s press release announcing the changes (see here).
In terms of timing, the FAQ states that “a start date for the program will be announced soon,” and in the meantime “updates regarding the Program, including the official launch date and the time and date at which the Main Street SPV will begin purchasing participations in MSNLF Loans, MSPLF Loans and MSELF Upsized Tranches, will be made available on the Board’s Main Street page.” The Main Street page states that the Fed is currently working to create the infrastructure for the program and will post more information as it becomes available.1 The forthcoming information will include a form loan participation agreement, form of borrower and lender certifications, and other forms necessary to implement the program. The Fed will not provide form loan documents noting instead that eligible lenders will provide those documents but that the documents must reflect the terms of the program.
As we did in our earlier summary, we are setting forth below a comparison of the different Main Street facilities and a list of questions and issues that remain open.
COMPARISON OF MAIN STREET NEW LOAN, PRIORITY LOAN, AND EXPANDED LOAN FACILITIES
NEW LOAN FACILITY |
PRIORITY LOAN FACILITY | EXPANDED LOAN FACILITY | |
Eligible Borrowers |
|
Same |
Same |
Eligible Loans |
|
Same |
Existing underlying loan:
|
Minimum Loan Size |
$500,000 |
Same |
$10,000,000 upsized tranche |
Maximum Loan Size |
Lesser of:
|
Same except leverage test based on 6x 2019 adjusted EBITDA |
Upsized tranche the lesser of:
|
Collateral/Priority |
|
|
|
Maturity |
Four years |
Same |
Same for upsized tranche |
Amortization |
|
|
Upsized tranche:
|
Rate |
LIBOR (one or three month) + 300 bps |
Same |
Same for upsized tranche |
Prepayment |
Permitted without penalty |
Same |
Same for upsized tranche |
Forgiveness |
MSNLF loans are full recourse and may not be reduced by forgiveness |
Same |
Same |
Eligibility for other Facilities
|
|
|
|
Borrower Certifications and Covenants |
|
Same except the borrower may, at the time a MSPLF loan is made, refinance existing debt owed by the borrower to a lender that is not the Eligible Lender |
Same for upsized tranche |
Retaining Employees |
Although not included as a covenant, Eligible Borrowers “should” make commercially reasonable efforts to maintain its payroll and retain its employees while the Eligible Loan is outstanding |
Same |
Same |
Eligible Lenders |
|
Same |
Same plus the Eligible Lender for the upsized tranche must be one of the lenders that holds an interest in the underlying Eligible Loan on the date of upsizing |
Lender Certifications and Covenants |
|
Same |
Same for upsized tranche |
Assessment of Financial Condition |
Eligible Lender is expected to conduct an assessment of each potential borrower’s financial condition at the time of application |
Same |
Same |
Participation8 |
|
Same except 85 percent participation purchased by SPV at par |
|
Fees |
|
Same |
|
Termination of the Main Street Facility |
SPV will cease purchasing participations on September 30, 2020, unless extended; Fed will continue funding SPV after such date until SPV assets mature or are sold |
Same |
Same |
OPEN QUESTIONS AND ISSUES
Eligibility
- For businesses that are U.S. subsidiaries of foreign companies, are foreign employees and foreign revenues included for eligibility purposes?
- Nonprofit organizations are excluded although the Fed says it will evaluate the feasibility of adjusting borrower and loan eligibility criteria for such organizations.9
- Non-bank lenders continue to be excluded as Eligible Lenders.
- Will the Fed’s decision to publicly disclose the identities of Main Street borrowers, lenders, the amounts of loans, interest rates, and costs discourage businesses and lenders from participating?
Loans
- For expanded loans under MSELP, what inter-lender issues arise in upsizing multi-lender loans that include non-Eligible Lenders?
- If borrower received PPP loan subject to forgiveness, is it counted as debt for leverage test?
Participations
- What voting rights will the SPV have in connection with it 95 percent participation interest?
- What is the scope, form, and frequency of borrower and loan information that will be required to be reported to the SPV?
Further details of the Main Street Loan Programs, including an official launch date and forms of the participation agreement and certifications will be posted on the Main Street page. The FAQ directs borrowers to obtain application information from Eligible Lenders so it is not clear if the Fed will publish a form of application. These programs are complex and must be applied to the particular facts and circumstances for each lender and borrower.
We are available to assist our clients in assessing the applicability of these facilities to their particular facts and circumstances in all of their roles, whether as borrowers, lenders, or other interested parties.
© 2020 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.
1 During a hearing of the Senate Committee on Banking, Housing, and Urban Affairs on May 13, 2020, Federal Reserve Vice-Chairman of Supervision Randal Quarles commenting on the Main Street Lending program said, “It is important that we do the complicated technical work to ensure they can be rolled out effectively, as well as quickly. . . . I don’t think we’re looking at months, but it would be premature for me to say exactly how many weeks it would be before they’re operational.”
2 The Fed identifies Ineligible Businesses by reference to eligibility regulations of the Small Business Administration set forth in 13 C.F.R. §120.110(b)–(j) and (m)-(s) as those regulations are modified under the SBA’s Paycheck Protection Program (“PPP”) (see here).
3 The FAQ states that for purposes of determining the number of employees a business has or the amount of its 2019 revenue, “the employees and revenues of the Business must be aggregated with the employees and revenues of its affiliated entities.”
4 Subtitle A of Title IV of the CARES Act provides relief funding to airline businesses, companies that contract with airline businesses and businesses critical to national security.
5 For MSNLF and MSPLF (new loans), Eligible Lender must calculate adjusted 2019 EBITDA using same methodology used to extend credit to same or similarly situated borrower before April 24, 2020. For MSELF (upsized tranches), Eligible Lender must use the same methodology used when originating or amending the existing underlying loan.
6 Section 4003(c)(3)(A)(ii) of the CARES Act prohibits borrowers from (a) repurchasing equity securities of the borrower or any parent of the borrower that are listed on a national exchange and (b) paying dividends or other capital distributions with respect to the common stock of the borrower, in both cases for 12 months after the Main Street loan is no longer outstanding. It also limits compensation (including severance) of the borrower’s officers or employees whose 2019 total compensation exceeded $425,000.
7 Section 4019(b) of the CARES Act prohibits participation by (a) the President, the Vice President, the head of an Executive department, or a Member of Congress; (b) the spouse, child, son-in-law, or daughter-in-law of an individual described in clause (a); or (c) an entity in which an individual described in clause (a) or (b) holds a direct or indirect controlling interest.
8 Terms of the participation have not yet been announced. The FAQ states that such information will be made available on the Main Street page.
9 On May 12, 2020, members of the House of Representatives introduced H.R. 6800, the “Health and Economic Recovery Omnibus Emergency Solutions Act,” known as the HEROES Act. Sections 110604 and 110605 of the HEROES Act would amend Title IV of the CARES Act to require the Fed to make nonprofit organizations eligible for Main Street loans and to provide low-cost loan options for such organizations.
© 2020 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.