Federal Reserve Board Provides Additional Guidance for Main Street Lending Program

Addresses the Calculation of Total Compensation and Submission of Requisite Financial Information

Updated on July 7, 2020 

The Main Street Lending Program is now fully operational and ready to purchase participations in Eligible Loans. The lender registration portal may be found here.

On June 15, the Main Street Lending Program opened for lender registration. Our detailed discussion of lender registration and summary of required material terms for loans under each of the Main Street Lending Program facilities may be found here. Thereafter, on June 26, the Federal Reserve Board (the Board) released supplemental guidance through an updated set of Frequently Asked Questions (FAQs) to (i) clarify how to calculate total compensation to comply with the compensation restrictions that apply to loans under each of the Main Street Lending Program facilities and (ii) identify the requisite financial information to be submitted both at the time of origination of an Eligible Loan^[1] and at the time such loan is submitted for purchase under the Main Street Lending Program.

Overview

The Main Street Lending Program comprises the Main Street Priority Loan Facility (MSPLF), the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF). Eligible Borrowers^[2] may participate in only one of the three Main Street Lending Program facilities, are expressly prohibited from participating in multiple programs, and shall not have participated in the Primary Market Corporate Credit Facility or received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020. However, 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.

Eligible Lenders^[3] may originate new term loans under the MSPLF or MSNLF 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 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 (CARES Act).

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).

Calculation of Total Compensation

The Main Street Lending Program requires an Eligible Borrower to comply with the compensation restrictions under Section 4004 of the CARES Act while an Eligible Loan is outstanding and for a one-year period thereafter. Section 4004 of the CARES Act provides that officers or employees with total compensation over $425,000 in calendar year 2019 cannot receive total compensation in excess of what was received by the officer or employee in calendar year 2019, and if the officer or employee’s total compensation in calendar year 2019 was over $3 million, the officer or employee cannot receive total compensation greater than $3 million plus 50 percent of compensation in excess of $3 million received in calendar year 2019.^[4] In addition, severance pay or other benefits received upon termination of employment for each officer and employee identified above cannot exceed twice the total compensation received by the officer or employee in calendar year 2019. While “total compensation” is defined in the CARES Act (to include salary, bonuses, awards of stock and other financial benefits provided to the officer or employee), many questions have remained as to how to calculate “total compensation.”

Some of these questions were answered in the borrower certifications and covenants for the Main Street Lending Program published earlier this month. The full text of the borrower certifications and covenants can be found here: MSNLF Borrower Certifications and Covenants; MSELF Borrower Certifications and Covenants; MSPLF Borrower Certifications and Covenants. Those certifications made clear that the compensation restrictions apply not just to officers and employees with total compensation in excess of $425,000 (and $3 million) in 2019 but also to new hires and existing officers and employees whose compensation exceeds these limits in any “subsequent reference period.” For new hires, the subsequent reference period is the 12-month period starting from the end of the month in which the officer or employee commences employment if the officer’s or employee’s total compensation exceeds $425,000 during that period. For officers and employees whose total compensation first exceeds $425,000 during the 12-month period after 2019, the subsequent reference period is the 12-month period starting from the end of the month in which the officer’s or employee’s total compensation first exceeds $425,000 (or $3 million). The certifications further clarified that an “officer or employee” not only includes individuals who receive a W-2 from an Eligible Borrower but also pertains to partners in a partnership and members of limited liability companies and similar structures. Independent contractors are not included. Further, total compensation includes not just compensation and benefits provided by the Eligible Borrower but compensation and benefits provided by the Eligible Borrower’s affiliates as well.

The FAQs provide further more-detailed guidance on how to calculate total compensation for purposes of the Main Street Lending Program facilities. Severance pay and other benefits paid in connection with a termination of employment are not included in the calculation. The FAQs also provide that total compensation is to be calculated in accordance with either Item 402(c) of Regulation S-K (Item 402(c)) or the federal tax rules (using the timing and valuation methodology, including the valuation of fringe benefits and bonuses, that apply for purposes of determining when amounts are treated as wages under Section 3401(a) of the Internal Revenue Code for income tax withholding or net earnings from self-employment under Section 1402(a) of the Internal Revenue Code, as applicable). The FAQs provide as follows:

• For an Eligible Borrower that is, or is a consolidated subsidiary of, a public company, total compensation must be calculated in accordance with Item 402(c).
  
  
• For an Eligible Borrower that is not a public company (or consolidated subsidiary of a public company), total compensation can be calculated in a manner consistent with the federal tax rules provided (i) if the borrower has gross revenues for the financial year ending in 2019 of less than or equal to $10 million or (ii) if the borrower has gross revenues for the financial year ending in 2019 of greater than $10 million, only for officers and employees who are not “Significant Deferred Compensation Recipients.”^[5] An Eligible Borrower with gross revenues for the financial year ending in 2019 of greater than $10 million must also calculate total compensation in accordance with Item 402(c) with respect to officers and employees who are Significant Deferred Compensation Recipients.

To assist Eligible Borrowers with determining whether they are required to use Item 402(c) to calculate total compensation or whether they can use the federal tax rules, the FAQs include a detailed flowchart, which may be found here: Total Compensation Flowchart. For an Eligible Borrower that has the ability to choose between using Item 402(c) or the federal tax rules, such borrower must choose which approach to use upon disbursement of the Eligible Loan and apply it for as long as such loan is outstanding and 12 months thereafter. Notwithstanding that requirement, if an Eligible Borrower uses the federal tax rules, it may be later required to switch to Item 402(c) if the Eligible Borrower later becomes a public company or for any officers or employees that become Significant Deferred Compensation Recipients. If an Eligible Borrower is required to switch to calculating compensation in accordance with Item 402(c), it must do so immediately and include in the officer’s or employee’s total compensation any deferred compensation that was granted but not paid in the 90-day period ending when the borrower becomes a public company or when the officer or employee becomes a Significant Deferred Compensation Recipient, as applicable. The end result is that for many Eligible Borrowers, total compensation will be calculated according to the methodology set out in Item 402(c).

Requisite Financial Information

• Eligible Loans originated after June 28: At the time an Eligible Lender submits an Eligible Loan to the SPV, such lender must provide the Eligible Borrower’s 2019 financial information (in the format in which the Eligible Borrower delivered it to the Eligible Lender) and certain financial data available as of the most recently ended fiscal quarter together with the other loan participation documentation. Specifically, an Eligible Lender is required to submit the Eligible Borrower’s 2019 revenues, 2019 adjusted EBITDA, total assets, current assets and current liabilities as of December 31, 2019, through the Main Street Lending Program portal. An Eligible Borrower has the corresponding obligation to provide an Eligible Lender with the requisite financial information at the time of origination of the Eligible Loan:
  
  
  • 2019 Financial Information: An Eligible Borrower must submit its 2019 financial records, specifically:
    
    
    • U.S. GAAP-Compliant Financial Records. If an Eligible Borrower is subject to U.S. GAAP reporting requirements or prepares financials in accordance with U.S. GAAP, such borrower is required to submit U.S. GAAP-compliant financial records to an Eligible Lender.
      
      
    • Audited or Reviewed Financial Statements. Audited financial statements are required to be submitted to an Eligible Lender only if an Eligible Borrower typically prepares audited financial statements; otherwise, such borrower is required to submit reviewed financial statements.^[6]
      
      
    • Consolidated Financial Statements. If an Eligible Borrower typically prepares financial statements that consolidate its subsidiaries, or an Eligible Lender requires consolidated financial statements as part of its underwriting practices, such borrower is required to submit consolidated financial statements to the Eligible Lender.
      
      
  • Financial Data Available as of the Most Recent Quarter: An Eligible Borrower must also submit certain financial data for the most recent fiscal quarter that is available at the time of origination of the Eligible Loan. Table II of Appendix C to the FAQs includes a detailed list setting forth the items to be provided quarterly, which vary based on the Main Street Lending Program facility.^[7] The Eligible Lender must provide such financial data either (i) through the Main Street Lending Program portal at the time the other loan participation documentation is submitted or (ii) if such financial data is not yet available at that time, by updating the Credit Monitoring^[8] module of the Main Street Lending Program portal at a later date, not to exceed (x) 60 days after the submission of the other loan participation documentation or (y) 15 business days after the Credit Monitoring module becomes available, whichever is later.
    
    
• Eligible Loans originated on or before June 28: For Eligible Loans originated on or before June 28, an Eligible Borrower is required to provide an Eligible Lender with its 2019 financial records in the manner set forth above. In the event that the Eligible Lender collected additional financial data for the most recent quarter at the time of origination, to the extent such data aligns with the requirements in Table II of Appendix C to the FAQs, the Eligible Lender should also provide such information by either (i) submitting it (in the format in which the Eligible Borrower delivered it to the Eligible Lender) to the Main Street Lending Program through the Main Street Lending Program portal at the time the other loan participation documentation is submitted or (ii) if such financial data is not yet available at that time, updating the Credit Monitoring module at a later date, not to exceed (x) 60 days after the submission of the other loan participation documentation or (y) 15 business days after the Credit Monitoring module becomes available, whichever is later.

In addition to the above, Eligible Lenders may require other financial information as appropriate under their underwriting practices. All data collected by the Eligible Lender should be submitted to the Main Street Lending Program through the Main Street Lending Program portal (in the format in which the Eligible Borrower delivered it to the Eligible Lender) when the other loan participation documentation is submitted. Moreover, the FAQs specify that an Eligible Lender shall be permitted to rely on the financial records delivered by an Eligible Borrower to such Eligible Lender, and that an Eligible Lender assumes no obligation or liability with respect to the accuracy and completeness of the financial information provided or the failure to provide such information by an Eligible Borrower.

^[1] _{An Eligible Loan under the MSPLF and MSNLF is a secured or unsecured term loan made by an Eligible Lender to an Eligible Borrower that was originated after April 24, 2020. 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, 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). Loans under the Main Street Lending Program must comply with all the terms and conditions set forth in the applicable term sheet. For a list of required material terms for loans under each of the Main Street Lending Program facilities, please see our prior alert, which may be found here.}

^[2] _{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 be used only for the benefit of the Eligible Borrower, its consolidated U.S. subsidiaries and other affiliates of the Eligible Borrower that are U.S. businesses. While nonprofit organizations are not currently eligible under the program, the Board is working to establish one or more loan options that are suitable 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.}

^[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] _{Employees whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020, are not subject to these restrictions.}

^[5] _{The FAQs define a “Significant Deferred Compensation Recipient” as any officer or employee who, during any 12-month period beginning in January 2019 and until 12 months after the date on which the Eligible Loan is no longer outstanding, has total compensation that exceeds $425,000, out of which the fair value of deferred compensation granted to such individual exceeds 30 percent, determined in accordance with U.S. GAAP.}

^[6] _{If an Eligible Borrower typically prepares audited or reviewed financial statements and does not yet have audited or reviewed financial statements for 2019, the Eligible Borrower should use its most recent audited or reviewed financial statements. Additionally, Eligible Borrowers that do not typically prepare audited or reviewed financial statements should submit financial statements prepared for the purpose of filing taxes.}

^[7] _{For instance, under the MSELF, an Eligible Borrower would be required to submit its financial data with respect to tangible assets, depreciation expense, accounts receivable, accounts payable, collateral type and collateral value, among other items.}

^[8] _{The Credit Monitoring module is the portion of the Main Street Lending Program portal that is used by an Eligible Lender to upload financial information submitted by an Eligible Borrower on a quarterly and annual basis during the life of the Main Street Lending Program loan.}