Federal Reserve Board Extends the Main Street Lending Program through December 31 and Provides Additional Guidance

Recently, the Federal Reserve Board (the Board) announced an extension of the Main Street Lending Program through December 31, thereby enabling the Main Street Lending Program facilities to continue to purchase participations in Eligible Loans^[1] beyond the initial September 30 deadline.

Additionally, the Board released supplemental information through an updated set of frequently asked questions (FAQs) to provide further guidance on a number of items. For instance, the FAQs (i) clarify the interplay between the compensation restrictions under Section 4004 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the restrictions on capital distributions under Section 4003(c)(3)(A)(ii) of the CARES Act, (ii) confirm that the acquiring or resulting entity of an Eligible Borrower (as defined in Section B below), that has been acquired or otherwise merged, is to assume all rights and obligations under a Main Street Lending Program loan, and (iii) address certain anticipated changes to the Main Street Lending Program to accommodate co-borrower arrangements. The full text of the FAQs can be found here: FAQs (PDF).

Overview

Effective as of July 7, the Main Street Lending Program became fully operational, with the Main Street Lending Program facilities accepting offers to purchase participation interests in Eligible Loans. The Main Street Lending Program comprises the Main Street Priority Loan Facility (MSPLF), the Main Street Expanded Loan Facility (MSELF), the Main Street New Loan Facility (MSNLF), the Nonprofit Organization Expanded Loan Facility (NOELF) and the Nonprofit Organization New Loan Facility (NONLF).^[2] Eligible Borrowers may participate in only one of the Main Street Lending Program facilities (including the NOELF and NONLF) and are expressly prohibited from participating in multiple programs, and such borrowers shall not have participated in the Primary Market Corporate Credit Facility or the Municipal Liquidity Facility or received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020. Eligible Borrowers participating in the Paycheck Protection Program and the Economic Injury Disaster Loan program are eligible for participation in the Main Street Lending Program (including the NOELF and NONLF).

Eligible Lenders^[3] may originate new term loans under the MSNLF, MSPLF or NONLF, or use the MSELF or NOELF to increase the size of existing loans. At the time of origination, Eligible Borrowers under the MSPLF may also refinance existing debt that is outstanding and owed by such borrower to a lender (other than the Eligible Lender or an affiliate of such Eligible Lender).

Using a single common special purpose vehicle (SPV), the Main Street Lending Program (including the NOELF and NONLF) will purchase up to $600 billion in Eligible Loans through December 31, unless the program is further extended by the Board and the Treasury Department. The Treasury Department will also make a $75 billion equity investment in the SPV with funds appropriated from the CARES Act.

The full text of the term sheets governing the Main Street Lending Program (including the NOELF and NONLF) can be found here: Term Sheet: Main Street New Loan Facility (PDF); Term Sheet: Main Street Priority Loan Facility (PDF); Term Sheet: Main Street Expanded Loan Facility (PDF); Term Sheet: Nonprofit Organization Expanded Loan Facility (PDF); and Term Sheet: Nonprofit Organization New Loan Facility (PDF).

Eligible Business

An Eligible Borrower for each of the MSPLF, MSNLF and MSELF is an eligible business established prior to March 13 that, together with its affiliated entities,^[4] either has 15,000 or fewer employees or had 2019 annual revenues of $5 billion or less. Each borrower must be a business created or organized in the United States or under the laws of the United States, a state, the District of Columbia, any of the territories and possessions of the United States, or an Indian tribal government,^[5] with significant operations^[6] in and a majority of its employees based in the United States. Notably, an Eligible Borrower may be a subsidiary of a foreign company if the borrower itself is created or organized in the United States or under the laws of the United States, and the borrower on a consolidated basis has significant operations in and a majority of its employees are based in the United States.

Restrictions on Compensation, Capital Distributions and Repurchases of Equity

The Main Street Lending Program requires that while an Eligible Loan is outstanding and for a one-year period thereafter, an Eligible Borrower is to comply with the compensation restrictions under Section 4004 of the CARES Act, as well as restrictions on capital distributions and repurchases of equity under Section 4003(c)(3)(A)(ii) of the CARES Act. We addressed these restrictions in our earlier alerts (here and here). The FAQs provide additional clarifications with respect to these restrictions.

• The FAQs clarify the interplay between the compensation restrictions and the restrictions on capital distributions. Eligible Borrowers are subject to restrictions on capital distributions, generally prohibiting the Eligible Borrower from paying any dividends or making any distributions with respect to the Eligible Borrower’s common stock or equivalent interests in partnerships, limited liability companies (LLCs) or other entities until 12 months after an Eligible Loan is no longer outstanding. The FAQs clarify that compensatory grants of equity to employees, including an award in the form of a capital interest or profits interests granted in connection with the performance of services, are included in total compensation and are subject to the compensation restrictions, but are not subject to the restrictions of dividends or distributions.^[7] However, dividends or distributions that are paid with respect to the equity grants, i.e., with respect to the shares or partnership interests after they are granted, are not included in total compensation, but are treated the same as dividends and distributions to other equity owners. Restrictions on capital distributions prohibit the payment of dividends or distributions, except in the case of dividends to owners of an S corporation or distributions to owners of partnership or LLC interests, to the extent reasonably required to cover applicable tax obligations. Any such permitted dividends and distributions are subject to an annual reconciliation, with any surplus or deficiency, when compared to the actual tax liability, deducted from or added to tax distributions of the following year. In addition, equity interests that provide for mandatory or preferential payment of dividends or other distributions are subject to these restrictions unless both the equity interest and the obligation to pay dividends or distributions existed as of March 27.

• The FAQs confirm that the restrictions on compensation, capital distributions and repurchases of equity apply separately to each Eligible Borrower. Accordingly, if two affiliated entities separately borrow under the Main Street Lending Program, each entity must independently comply with these restrictions. In addition, the FAQs note that non-borrower affiliated entities also may be affected by the restrictions. For example, total compensation for purposes of the compensation restrictions includes compensation received from affiliates of the Eligible Borrower.
  
  
• The FAQs also clarify the application of the restrictions on capital distributions and repurchases for ownership interests held by employee stock ownership plans.

Assumption of Rights and Obligations by Successors

An Eligible Borrower must certify that it is eligible to participate in the Main Street Lending Program and agree to comply with certifications and covenants included in the requisite Borrower certifications and covenants. Specifically, an Eligible Borrower may not use any funds (including the proceeds of an Eligible Loan) to pay dividends or for distributing capital, repurchasing equity or paying compensation over specified thresholds for the life of the Eligible Loans plus one year, except for dividends and other capital distributions made by (i) an S corporation or other tax pass-through entity to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings or (ii) a tribal business to a tribal government owner. The full text of the certifications and covenants can be found here: MSNLF Borrower Certifications and Covenants; MSELF Borrower Certifications and Covenants; and MSPLF Borrower Certifications and Covenants.

The FAQs clarify that if an Eligible Borrower is acquired or otherwise merged into another entity, the acquiring or resulting entity will assume all the rights and obligations of the Eligible Borrower under a Main Street Lending Program loan. Eligible Borrowers should ensure that any such transaction complies with the underlying loan documents, and that all required consents or waivers have been obtained.

Co-Borrower Arrangements in Progress

Presently, the Main Street Lending Program is accepting Eligible Loan submissions with one or more guarantors, but only one borrower, as loans with co-borrowers are not eligible. However, as set forth in the FAQs, the Board is in the process of adjusting the Main Street Lending Program portal and its operational capabilities to accommodate co-borrower arrangements. Further, the Participation Agreement, Co-Lender Agreement, Assignment Executed-in-Blank, and Servicing Agreement have been updated to accommodate co-borrower loans, which can be found here: Participation Agreement Transaction Specific Terms (July 31, 2020); Participation Agreement Standard Terms and Conditions (July 31, 2020); Co-Lender Agreement Transaction Specific Terms (July 31, 2020); Co-Lender Agreement Standard Terms and Conditions (July 31, 2020); Assignment-in-Blank (July 31, 2020); and Servicing Agreement (July 31, 2020).

^[1] _{An Eligible Loan under the MSNLF or MSPLF is a secured or unsecured term loan made by an Eligible Lender to an Eligible Borrower that was originated after April 24. An Eligible Loan under the MSELF is a secured or unsecured term loan or revolving credit facility made by an Eligible Lender to an Eligible Borrower that was originated on or before April 24 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, including at the time of upsizing). Loans under the Main Street Lending Program must comply with all the terms and conditions set forth in the applicable term sheet. For a summary of certain requisite material terms for loans under each of the MSPLF, MSNLF and MSELF, please see Annex A.}

^[2] _{The NOELF and the NONLF provide support to a broad set of nonprofit organizations, such as educational institutions, hospitals and social service organizations. For purposes of this alert, reference to the Main Street Lending Program means each of the Main Street Lending Program facilities other than the NOELF and NONLF, unless otherwise indicated. For a more detailed discussion on the NOELF and NONLF, please see our prior alert, which may be found here, or the frequently asked questions for nonprofit organizations released by the Board on July 31, which can be found here: Nonprofit Organizations Frequently Asked Questions (PDF).}

^[3] _{An Eligible Lender under the Main Street Lending Program is 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. Multiple affiliated entities may register as Eligible Lenders under the same Main Street Lending Program facility. At this time, nonbank financial institutions are not considered Eligible Lenders for purposes of the Main Street Lending Program. However, the Board is considering options to expand the list of Eligible Lenders in the future.}

^[4] _{For purposes of the Main Street Lending Program, affiliation principles will be the same as the rules applicable to the SBA’s financial assistance programs set forth in 13 CFR 121.301(f). Generally, entities are considered affiliates of each other when one controls or has the power to control the other, or a third party controls or parties control the power to control both, with affiliation based on any of the following circumstances sufficient to establish affiliation with a business or concern under the Main Street Lending Program: (i) affiliation based on ownership; (ii) affiliation arising under stock options, convertible securities and agreements to merge; (iii) affiliation based on management and (iv) affiliation based on identity of interest. For a more detailed discussion on affiliation, please see our prior alert, which may be found here.}

^[5] _{Generally, to be eligible for the Main Street Lending Program, a tribal business concern wholly or partly owned by an Indian tribal government must be a separate and distinct legal entity organized or chartered by the tribe or federal or state authorities. An Eligible Lender must determine that the tribal business either does not have, or has effectively waived, sovereign immunity such that U.S. federal courts, in addition to any state court as may be agreed, may be among courts of competent jurisdiction for matters resulting from the Main Street Lending Program loan transaction. Such waiver must extend to the Borrower Certifications and Covenants, Assignment-in-Blank, and Co-Lender Agreement, as applicable. However, the FAQs clarify that tribal economic enterprises that do not have a separate legal personality from the related tribal government are eligible businesses if (i) the finances of the tribal economic enterprise are distinguishable from those of the related tribal government, (ii) the financial records of only the tribal economic enterprise, and not those of the tribal government, are used for the purpose of determining the Eligible Borrower’s EBITDA and outstanding debt, and other requirements under the Main Street Lending Program, (iii) recourse is available to the assets of the tribal economic enterprise in a manner that is customary for such lending by an Eligible Lender, (iv) the tribal economic enterprise either does not have, or has effectively waived, sovereign immunity, (v) the tribal economic enterprise meets all other criteria for being an Eligible Borrower and (vi) the principal executive officer and principal financial officer of the tribal economic enterprise are signatories to the requisite Borrower certifications and covenants.}

^[6] _{To determine whether an Eligible Borrower has significant operations in the United States, evaluation of its operations on a consolidated basis together with those of its subsidiaries (but not of its parent companies or sister affiliates) should be conducted. For example, an Eligible Borrower would have significant operations in the United States if, when consolidated with its subsidiaries, greater than 50 percent of the Eligible Borrower’s (i) assets are located in the United States or (ii) annual net income, annual net operating revenues or annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) are generated in the United States.}

^[7] _{Officers and employees, for purposes of the total compensation restrictions, include individuals who provide compensated services to a partnership or limited liability company that is taxed as a partnership.}

^[8] _{The Board recognizes that some aspects of an MSELF may be attractive to Eligible Borrowers seeking a loan below $10 million and will continue to evaluate whether the loan amounts allowed under the program should be adjusted.}

^[9] _{If an MSELF upsized tranche is part of a multi-lender facility, more than one lender may choose to upsize the existing facility to originate an MSELF upsized tranche, subject to the MSELF maximum loan size tests. Such MSELF upsized tranches should be separately submitted to the SPV for the sale of a participation interest.}

^[10] _{The FAQs clarify that an Eligible Lender of the MSELF may sell down part of its interest in the underlying loan before originating the MSELF upsized tranche.}

^[11] _{Notably, during the term of the Eligible Loan, Eligible Borrowers are not prohibited from (i) repaying a line of credit (including credit cards) in the normal course of business for usage of such credit line; (ii) taking on and paying additional debt obligations (such as inventory and equipment financing, provided such debt is secured by newly acquired property and is of equal or lower priority than the Main Street Lending Program loans and on standard terms and required in the normal course of business); and (iii) refinancing debt that is maturing no later than 90 days from the date of such refinancing.}

^[12] _{For purposes of the MSPLF or MSELF loan priority and security requirements, (i) “Loans or Debt Instruments” means debt for borrowed money and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, and all guarantees of the foregoing; and (ii) “Mortgage Debt” means debt secured only by real property at the time of origination of the MSPLF or MSELF loan.}

^[13] _{Eligible Lenders may charge certain fees to Eligible Borrowers at the time of origination and include such fees in the principal amount of the Eligible Loan, provided that the total Eligible Loan amount, including such fees, does not exceed the maximum loan size permitted for the Eligible Borrower under the relevant Main Street Lending Program facility.}

^[14] _{Transaction fee will be based on the principal amount (including capitalized deferred interest) of the Main Street Lending Program loan at the time a loan participation is submitted for sale to the SPV.}