November 29, 2020

Volume X, Number 334

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Federal Reserve Announces Revised Terms of Main Street Lending Program

On April 30, 2020, the Federal Reserve Board (Federal Reserve) issued revised terms and conditions of its Main Street Lending Program (MSLP), which is expected to make approximately $600 billion in loans available for small and midsized businesses. The Federal Reserve’s announcement, including revised term sheets for the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF); a new term sheet for a third loan facility, the Main Street Priority Loan Facility (MSPLF); and an extensive set of frequently asked questions (FAQs) can be found here. Brief summaries of each of the facilities are set forth below; a more comprehensive discussion of the final program, including the FAQs, will be provided in a subsequent alert.

Note that the MSLP is not yet operational; the Federal Reserve is expected to announce the start date in the near future. Pending the program’s official launch, prospective borrowers are encouraged to contact their existing banks to confirm that they are Eligible Borrowers and that the banks will participate as lenders.

Key Changes to the MSLP

The final MSLP significantly expands the scope of and eligibility for the original program and makes many other changes to its terms, reflecting the more than 2,200 comment letters and other input received by the Federal Reserve. Among the key changes to the MSLP as originally proposed are the following:

  1. Creation of the MSPLF as a third loan option, allowing participation by more highly leveraged companies. The terms and conditions of the MSPLF are generally similar to those of the MSNLF, but will permit loans to businesses with higher debt burdens by increasing the permissible amount of leverage. However, lenders choosing to participate in this program will be required to retain a 15% share of MSPLF loans, significantly higher than the 5% loan retention required under the MSNLF.

  2. Adjustment to EBITDA for calculation of maximum leverage. The final term sheets permit lenders and borrowers to use, in lieu of the fixed EBITDA definition in the initial release, the definition of EBITDA that they had used in existing loan agreements.

  3. Reduction in minimum size of loans. The minimum loan size under the MSNLF (also applicable to the MSPLF) has been reduced from $1 million to $500,000.

  4. Increased size of Eligible Borrowers. Businesses with up to 15,000 employees or up to $5 billion in annual revenue are now eligible to borrow under the MSLP (increased from 10,000 employees and $2.5 billion in revenue).

  5. Partial relaxation of dividend prohibition. The program’s restrictions on dividends and other capital distributions will not apply to distributions made by a tax pass-through entity “to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.”

Summary of Final Terms and Conditions

The MSNLF, MSPLF, and MSELF all provide Eligible Borrowers with a four-year loan, where principal and interest payments are deferred for the first year (unpaid interest will be capitalized). Interest for all loans will be based on the adjustable rate of LIBOR (one- or three-month) plus 3%. Loans may be prepaid without penalty. These key terms are consistent with the previous versions of the MSNLF and MSELF term sheets, except that LIBOR has replaced SOFR as the reference rate.

Other material terms differ among the facilities and were revised with the issuance of the April 30, 2020 term sheets as described below.

MSNLF

Under the MSNLF, a single common special-purpose vehicle (Main Street SPV) will purchase 95% participations in new loans originated after April 24, 2020, from Eligible Lenders, and the Eligible Lenders will retain 5% of each loan. Loans are either secured or unsecured term loans with the following terms:

  • Amortization. Principal amortization of one-third will occur at the end of the second year, followed by one-third at the end of the third year and one-third at maturity at the end of the fourth year.

  • Minimum Loan. The minimum loan size is $500,000.

  • Maximum Loan. The maximum loan size is the lesser of (i) $25 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 EBITDA.

  • Debt Priority. The loan is not, at the time of origination or any time during the term of the loan, subordinated by contract in a manner that subordinates the loan to other company debt in bankruptcy. However, there is otherwise no prohibition against the MSNLF loan being actually or structurally subordinated to senior debt, or for that matter, any requirement that the loan be secured at all.

MSPLF

Under the MSPLF, the Main Street SPV will purchase 85% participations in new loans from Eligible Lenders, and Eligible Lenders will retain 15% of each loan. Loans are either secured or unsecured term loans with the following terms:

  • Amortization. Principal amortization of 15% will occur at the end of the second year, followed by 15% at the end of the third year and a balloon payment of 70% at maturity at the end of the fourth year.

  • Minimum Loan. The minimum loan size is $500,000.

  • Maximum Loan. The maximum loan size is (i) $25 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.

  • Debt Priority. The 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.

MSELF

Under the MSELF, the Main Street SPV will purchase 95% participations in the upsized tranche of Eligible Loans from Eligible Lenders. Eligible Lenders will retain 5% of the upsized tranche of each Eligible Loan. The upsized tranches to be participated to the Main Street SPV are term loans that (i) increase an Eligible Borrower’s secured or unsecured term loan or a revolving credit facility that was originated on or 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) and (ii) have the following terms:

  • Amortization. Principal amortization of 15% occurs at the end of the second year, followed by 15% at the end of the third year and a balloon payment of 70% at maturity at the end of the fourth year.

  • Minimum Loan. The minimum loan size is $10 million.

  • Maximum Loan. The maximum loan size is the lesser of (i) $200 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.

  • Debt Priority. The 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.

Fees Associated with MSLP

  • Origination Fee: Eligible Lenders may charge Eligible Borrowers an origination fee of up to 100 basis points of the principal amount of the MSNLF or MSPLF loan, or up to 75 basis points of the principal amount of the upsized tranche under the MSELF.

  • Facility Fee: Eligible Lenders must pay the Main Street SPV a transaction fee of 100 basis points of the principal amount of the MSNLF or MSPLF loan, or 75 basis points of the principal amount of the upsized tranche under the MSELF. These fees may (and presumably will) be passed on to borrowers.

  • Servicing Fee: The Main Street SPV will pay an Eligible Lender 25 basis points of the principal amount of its participation per annum for loan servicing.

Borrower Eligibility Requirements

An Eligible Borrower under the MSNLF, the MSPLF, and the MSELF must satisfy the following baseline requirements:

  • It is a for-profit business, created or organized prior to March 13, 2020, under the laws of the United States or US jurisdictions, that has significant operations in and a majority of employees in the United States.

  • It is not an “ineligible business” as defined (with certain exceptions) under SBA regulations, as modified and clarified by recent SBA guidance. This excludes hedge funds and private equity firms, among others.

  • It has 15,000 employees or fewer or had 2019 annual revenue of $5 billion or less.

  • It is not a participant in the Federal Reserve’s Primary Market Corporate Credit Facility.

  • It has not received support pursuant to the CARES Act’s authority for direct Treasury loans to air carriers and businesses critical to maintaining national security.

Eligible Borrowers can obtain credit through only one of the three facilities, even if eligible for more than one. Eligible Borrowers do not automatically qualify for a loan, as Eligible Lenders will evaluate the financial condition and creditworthiness of a potential borrower at the time of the application, using their own underwriting standards.

While nonprofit organizations are not currently eligible to borrow under the MSLP, the Federal Reserve’s announcement indicates that it will evaluate changes to the program’s borrower eligibility criteria and loan eligibility metrics to allow such organizations to participate.

Restrictions and Commitments

Eligible Lenders and Eligible Borrowers must make the following covenants and commitments under each of the MSLP facilities:

  • Employee Retention. Eligible Borrowers must make commercially reasonable efforts to maintain their payroll and retain their employees during the term of the loan.

  • Financial Condition. Eligible Borrowers were in sound financial condition prior to the onset of the pandemic and have a reasonable basis to believe that they will meet their financial obligations for at least the next 90 days and do not expect to file for bankruptcy during that time period.

  • Debt. Eligible Lenders will not request that Eligible Borrowers repay debt extended by the Eligible Lenders to the Eligible Borrowers, or pay interest on such outstanding obligations, until the loan is repaid in full, unless the debt or interest payment is mandatory and due, or in the case of default and acceleration. Eligible Borrowers must not repay the principal balance of, or pay any interest on, any other debt until the loan is repaid in full, unless the debt or interest payment is mandatory and due. However, under the MSPLF, an Eligible Borrower may refinance existing debt owed by the Eligible Borrower to any lender that is not the MSPLF lender at the time of origination of the loan.

  • Lines of Credit. Eligible Lenders will not cancel or reduce any existing committed lines of credit to Eligible Borrowers, except in an event of default, and the Eligible Borrowers also will not seek to cancel or reduce any of their committed lines of credit with the Eligible Lenders or any other lender.

  • CARES Act Restrictions. Eligible Borrowers must comply with the CARES Act’s compensation, stock repurchase, and capital distribution restrictions, which apply for the life of the loan plus one year. However, if an Eligible Borrower is an S corporation or other tax pass-through entity, it may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.

  • Conflicts of Interest. Eligible Lenders and Eligible Borrowers will each be required to certify that the entity is eligible to participate in the facility, including taking into account conflict of interest prohibition for covered entities under the CARES Act.

  • EBITDA. Under the MSNLF and MSPLF, the methodology that the Eligible Lender uses to calculate the Eligible Borrower’s adjusted 2019 EBITDA for the facility’s leverage requirement must be 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. Under the MSELF, the Eligible Lender’s methodology must be the same methodology it previously used for adjusting EBITDA when originating or amending the loan on or before April 24, 2020.

Lender Eligibility Requirements

Eligible Lenders are US insured depository institutions (insured banks, savings associations, and credit unions), US branches or agencies of foreign banks, US bank and savings and loan holding companies, US intermediate holding companies of foreign banks, and any US subsidiaries of any of the foregoing. Nonbank lenders are not initially eligible to participate in the MSLP; however, the Federal Reserve is considering the expansion of the list of Eligible Lenders.

Lender Participation in the MSLP

The Federal Reserve’s release does not include the necessary documentation for Eligible Lenders to sell loan participations to the Main Street SPV. It is anticipated that these documents, as well as all other requisite guidance for lenders to participate in the MSLP, will be made available on or before the launch date for the program.

The detailed FAQs issued by the Federal Reserve in its release provide guidance for Eligible Lenders regarding loan underwriting, lenders’ ability to rely on Eligible Borrowers’ certifications, and regulatory capital treatment of retained portions of MSLP loans, among other matters. A detailed discussion of the requirements and procedures applicable to Eligible Lenders under the MSLP will be provided in a separate client alert.

© 2020 Jones Walker LLPNational Law Review, Volume X, Number 122
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Daniel H. Burd, Jones Walker, Banking Industry Lawyer, Financial Regulation Attorney
Partner

Daniel Burd is a partner in the firm's Banking & Financial Services Practice Group and practices from the firm's Washington, D.C. office. Mr. Burd's practice focuses on regulatory matters for financial institutions. He previously served as a staff attorney for the Federal Reserve Board ("FRB") Legal Division in Washington, D.C. 

Mr. Burd received his A.B. degree from Stanford University, his M.A. from the University of California, Los Angeles, and his J.D. degree from The University of Chicago Law School. He is a member of the District of...

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Curtis R. Hearn Securities Attorney Jones Walker Law Firm
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Curt Hearn is the practice group leader of the Corporate & Securities Practice Group. He handles mergers, acquisitions, and divestitures, as well as capital raising transactions for a variety of publicly traded and privately held companies. Mr. Hearn represents private equity and venture capital firms, and focuses his practice on companies in the energy, energy service, healthcare, transportation, logistics, and manufacturing sectors. 

Mr. Hearn has more than twenty years of experience representing large bank holding companies in Louisiana....

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Aimee Andrepont Decuir Corporate Attorney Jones Walker New Orleans, LA
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Aimee Andrepont Decuir is an associate in the Corporate Practice Group. Aimee’s practice focuses on drafting and negotiating commercial contracts, commercial lending and finance, mergers and acquisitions, and other transactional matters.


Aimee’s experience includes assisting clients with commercial contract preparation and negotiation, business entity formation, joint ventures, and financial transactions. Aimee also assists a range of clients with drafting business documents, asset sales, and other corporate transactions.

Prior to joining Jones Walker,...

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