Federal Reserve Board Further Expands Main Street Lending Program

Allows More Small and Medium-Sized Businesses Access to Funding and Provides Certain Additional and Corresponding Guidance

On May 27, the Federal Reserve Board (the Board) released comprehensive guidance on its Main Street Lending Program. Our detailed discussion and analysis of such guidance and of the Main Street Lending Program may be found here. Thereafter, on June 8, the Board released supplemental guidance on its Main Street Lending Program through a set of Frequently Asked Questions (FAQs) and took additional action to expand its Main Street Lending Program to enable additional small and medium-sized businesses to qualify for support. Among the changes, the Board lowered the minimum loan amount for the Main Street Priority Loan Facility (MSPLF) and the Main Street New Loan Facility (MSNLF) from $500,000 to $250,000, and increased the maximum loan size for all Main Street Lending Program facilities (with increases ranging from $25 million to $35 million for the MSNLF, $25 million to $50 million for the MSPLF, and $200 million to $300 million for the Main Street Expanded Loan Facility (MSELF)). Additionally, the Board has adjusted the principal repayment schedule to begin after two years, and increased the term for all Main Street Lending Program loans from four to five years. For a detailed summary of changes to the Main Street Lending Program, see Annex A hereto.

A. Overview

The Main Street Lending Program is comprised of the MSNLF, the MSPLF and the MSELF. Eligible Borrowers^[1] may participate in only one of the three Main Street Lending Program facilities and are expressly prohibited from participating in multiple programs and shall not have participated in the Primary Market Corporate Credit Facility (PMCCF) or received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020. However, Eligible Borrowers participating in the Paycheck Protection Program (PPP) and, as clarified by the FAQs, the Economic Injury Disaster Loan program, are eligible for participation in the Main Street Lending Program.

Eligible Lenders^[2] may originate new term loans under the MSNLF or MSPLF or use the MSELF to increase the size of existing loans. At the time of origination, Eligible Borrowers under the MSPLF may also refinance existing debt owed by such borrower to a lender that is not the Eligible Lender. Using a single common special purpose vehicle (SPV), the Main Street Lending Program will purchase up to $600 billion in Eligible Loans (as defined in Annex A) until Sept. 30 unless the program is extended by the Board and the Treasury Department. The Board will continue to fund the SPV beyond Sept. 30 until the SPV’s underlying assets mature or are sold. The Treasury Department will also make a $75 billion equity investment in the SPV with funds appropriated from the Coronavirus Aid, Relief, and Economic Security Act. The Federal Reserve Bank of Boston will be administering the Main Street Lending Program.

The Board has not yet disclosed the official launch date and the time and date when the SPV will begin purchasing participations in loans. However, the Board expects the Main Street Lending Program to be open for lender registration soon and to begin purchasing loans shortly thereafter. Notwithstanding the recent changes to the Main Street Lending Program, the Board intends to purchase 95 percent of each Eligible Loan that is submitted to the program, including loans that were originated under the previously announced terms, if funded before June 10. The form participation agreement and other legal forms previously released by the Board will be updated to reflect the expansion to the Main Street Lending Programs. Additional guidance on the Main Street Lending Program can be found here: Frequently Asked Questions (FAQs) (PDF). The full text of the term sheets governing the Main Street Lending Program 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).

B. Affiliate Participation

Previously, the Board had advised that although potential borrowers can seek more than one loan under a single Main Street Lending Program facility,^[3] an affiliated group of companies can participate in only one Main Street Lending Program facility and may not participate in both a Main Street Lending Program facility and the PMCCF. Additionally, if an affiliate has previously participated, or has a pending application to participate, in a Main Street Lending Program facility, a potential borrower can participate only in the same Main Street Lending Program facility accessed by its affiliate. Further, an affiliated group’s total participation in a single Main Street Lending Program facility may not exceed the maximum loan size that the affiliated group is eligible to receive on a consolidated basis. The FAQs, however, clarify that if a potential borrower is the only business in its affiliated group that has sought funding through the Main Street Lending Program, the debt and EBITDA of its affiliated group are not relevant to determining whether such business can qualify (except to the extent that the potential borrower’s subsidiaries are consolidated into its financial statements). Only when a potential borrower has an affiliate that previously borrowed (or has an application pending to borrow from a Main Street Lending Program facility) does the entire affiliated group’s debt and EBITDA become relevant to determining the potential borrower’s maximum loan size.

C. SPV Participation Interests

• True Participations and True Sale: Previously, the Board advised that the transfer of an undivided participation interest in a Main Street Lending Program loan is structured with the intent to: (a) meet the accounting definition of a participating interest; (b) qualify as a true sale under the Bankruptcy Code; and (c) meet the criteria for sale accounting outlined in ASC 860, Transfers and Servicing. The FAQs provide insight into certain material terms of the Main Street Lending Program that the Board finds consistent with a true sale determination. Specifically:
  
  
  • True Participations. The Board advises that the requisite documentation has been designed to incorporate characteristics of true participations under the Bankruptcy Code, including: (i) documentation of the parties’ (A) intent to sell an undivided participation interest in 95 percent of an Eligible Loan, and (B) complete and irrevocable transfer by the Eligible Lender of the rewards and risks of ownership of the participation interest, which cannot be put-back, voided or rescinded^[4]; (ii) the Eligible Lender will not guarantee repayment of the participation interest or any loan underlying the participation interest; (iii) amounts paid by the Eligible Borrower under an Eligible Loan (other than the Eligible Lender’s retained 5 percent beneficial interest) will be passed through to the SPV without being commingled with the Eligible Lender’s funds for any significant period of time^[5]; (iv) the participation interest and the underlying Main Street Lending Program loan will have the same maturity; (v) the Eligible Lender will provide reporting services to the SPV with respect to the participation interest and receive a servicing fee from the SPV; (vi) each Eligible Borrower must consent to the Eligible Lender’s sale of the participation interest in an Eligible Loan to the SPV; (vii) the Eligible Lender will agree to act on behalf of the SPV with respect to the SPV’s participation interest in the Eligible Loans; and (viii) documentation will provide elevation rights for the SPV, which establish circumstances under which the SPV can request the Eligible Lender to use best efforts or commercially reasonable efforts, as applicable, to effectuate a full assignment of the legal title to the portion of the Eligible Loan underlying the participation interest.
    
    
  • True Sale. The Board intends to structure the sale of a participation interest in a loan under the Main Street Lending Program as a true sale, specifically: (i) documentation will expressly reflect the intent of the parties to sell an undivided participation interest in 95 percent of an Eligible Loan; (ii) the economic substance of the transfer of the participation interest from the Eligible Lender to the SPV will be a sale as well as a complete and irrevocable transfer by each Eligible Lender of the rewards and risks of ownership of the participation interest without rights to be put-back, voided, or rescinded; (iii) any change in the value of the participation interest will not be for the benefit (or loss) of the Eligible Lender; and (iv) the Eligible Lender will receive the entire consideration for the participation interest representing at least the fair market value of the participation interest on the applicable closing date without any post-closing purchase price adjustment. Additionally, the Board will not assert in any proceeding that the sales of the participation interests are not true sales constituting true participations.

Notably, the Main Street Lending Program does require each Eligible Lender to retain its 5 percent of the Eligible Loan^[6] until maturity or neither the SPV nor a governmental assignee holds an interest in the loan in any capacity, whichever occurs first. However, the Board highlights that such Eligible Lender’s retained interest in the Eligible Loan will be pari passu with the SPV’s participation interest and will not provide credit support for the related participation interest.

• PIK Interest: The Board has advised that all accrued but uncapitalized payment-in-kind interest on the purchase amount of the Eligible Loan will be for the account of the SPV, regardless of when such interest accrued. The purchase price will be determined based upon the purchase amount of the participation interest as of the effective date of the participation agreement. The SPV will not be required to pay for the accrued but uncapitalized interest if such interest has not yet been added to the principal amount as of such effective date. 

^[1] _{An Eligible Borrower under the Main Street Lending Program is an eligible business established prior to March 13, that together with its affiliated entities, either has 15,000 employees or fewer, 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, with significant operations in and a majority of its employees based in the United States. To determine if an Eligible Borrower has significant operations in the United States, evaluation of its operations on a consolidated basis together with its subsidiaries (but not its parent companies or sister affiliates) should be conducted. 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 based in the United States. However, loan proceeds may only be used for the benefit of the Eligible Borrower, its consolidated U.S. subsidiaries, and other affiliates of the Eligible Borrower that are U.S. businesses. Nonprofit organizations remain ineligible under the Main Street Lending Program. However, the Board is working to establish a program soon for these organizations. For additional information related to the ineligible businesses and the affiliation rules, please see our prior alert, which may be found here.} 

^[2] _{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.} 

_{[3] Eligible Borrowers may receive more than one loan under a Main Street Lending Program facility. However, the sum of such loans may not exceed $35 million for the MSNLF, $50 million for the MSPLF and $300 million for the MSELF.} 

^[4] _{Notably, as set forth in the FAQs, neither the Eligible Lender nor any of its affiliates will have the (i) right or obligation to purchase, repurchase, acquire, or reacquire the participation interest or substitute other assets for the participation interest subsequent to a sale to the SPV, or (ii) the right of first refusal, last look or other similar right related to a purchase of the participation interest, or (iii) any obligation to pay any amount in connection with the participation interest’s loss of value once it has been sold to the SPV. Similarly, the SPV has no right to put the participation interest back to the Eligible Lender.} 

^[5] _{The participation agreement will further clarify that the Eligible Lender: (i) will hold any distributions that the Eligible Lender receives in respect of the participation interest for the account and sole benefit of the SPV; (ii) has no equitable or beneficial interest in such distributions, which are the property of the SPV; and (iii) is required to promptly deliver any distribution to the SPV.} 

^[6] _{Each Eligible Lender must also retain its interest in the underlying MSELF loan until maturity or neither the SPV nor a governmental assignee holds an interest in the loan in any capacity, whichever occurs first.} 

^[7] _{For purposes of the Main Street Lending Program, existing outstanding and undrawn available debt should be calculated as of the date of the loan application and includes all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, nonbank financial institution or private lender, as well as any publicly issued bonds or private placement facilities. It also includes all unused commitments under any loan facility, other than any undrawn commitment that (1) serves as a backup line for commercial paper issuance, (2) is used to finance receivables, (3) cannot be drawn without additional collateral or (4) is no longer available due to a change in circumstance. The FAQs clarify that the portion of any outstanding PPP loan that has not yet been forgiven is counted as outstanding debt for the purposes of the maximum loan size test.} 

^[8] _{If an MSELF upsized tranche is part of a multi-lender facility, the FAQs clarify that 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.} 

^[9] _{Previously, the Board had clarified that for purposes of MSPLF and MSELF 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 by real property at the time of origination of the MSPLF or MSELF loan. Further, the FAQs indicate that the definition “Mortgage Debt” has been expanded to include limited recourse equipment financings (including equipment capital or finance leasing and purchase money equipment loans) secured only by the acquired equipment.}