Federal Reserve Board Provides Guidance on Use of Cash Collateral Deposits and Delay Draw Balances and Clarity on Eligible Business Safe Harbor Provisions Under the Main Street Lending Program

On Aug. 24, the Federal Reserve Board (the Board) released supplemental information through an updated set of frequently asked questions (FAQs) for the Main Street Lending Program to provide further guidance on a number of items. For instance, the FAQs (i) address the “safe harbor” provisions for businesses that would otherwise be ineligible due to a small percentage of ownership interests (less than 5 percent) being held by the prospective lender, (ii) clarify the use of cash collateral deposits and delayed draw balances, and (iii) provide updates on the requisite financial information to be submitted to the SPV (as defined below). 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.^[1] 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 (PPP) 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 Dec. 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 Coronavirus Aid, Relief, and Economic Security 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 and Compliance; Five Percent ‘Safe Harbor’

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.

Moreover, certain of the Small Business Administration (SBA) exclusions of ineligible businesses from its Section 7(a) business loan programs will apply to the Main Street Lending Program, but only as such exclusions have been modified by the regulations implementing the PPP on or before April 24, as well as by those modifications provided in the regulations released by the SBA on June 18 and June 26 (each of which subsequent regulations amends the eligibility criteria for businesses whose owner(s) have been convicted of a felony or are subject to criminal charges as provided in the SBA’s interim final rule released on April 15).^[7]

Each prospective borrower is expected to review the list of Ineligible Businesses set forth in 13 CFR 120.110(b)-(j) and (m)-(s) and determine (based on reasonable good-faith diligence) whether its activities or ownership would cause it to be classified within one of the listed ineligible categories. Eligible Lenders are not required to adopt any special compliance procedures to verify that a prospective borrower is not an Ineligible Business, other than maintaining any preexisting compliance procedures (for example, compliance with regulations designed to prevent improper insider lending).

Under 13 CFR 120.110(o), prospective borrowers in which an Eligible Lender or an Associate^[8] thereof owns any equity interest would be prohibited from participating in the Main Street Lending Program. However, the FAQs clarify that the ownership by an Eligible Lender (together with the ownership of its corporate affiliates) of less than 5 percent of the total outstanding equity interests of an otherwise eligible borrower will not make such prospective borrower ineligible for the Main Street Lending Program. This “safe harbor” is applicable only to the Main Street Lending Program, not the PPP. While the FAQs specifically cite as an example where the “safe harbor” would be relevant (publicly traded borrowers whose shares are owned by a broker-dealer affiliate of an Eligible Lender for market-making purposes), the safe harbor would also seem to permit Eligible Lenders and their Associates to maintain a small equity interest in the form of equity kickers or co-investments.

Use of Cash Collateral Deposits and Delayed Draw Balances

The Main Street Lending Program facilities can be secured by both real estate collateral and non-real estate collateral. If the MSPLF or the MSELF is secured by the same collateral as any of the Eligible Borrower’s other Loans (including, if applicable, another tranche of the underlying credit facility) or Debt Instruments (other than mortgage debt),^[9] any lien securing the MSPLF or the MSELF is required to be senior to or pari passu with the lien(s) of the Eligible Borrower’s other Loans or Debt Instruments (other than mortgage debt). 

In general, the Board and the Treasury Department do not encourage the practice of requiring an Eligible Borrower to maintain cash balances (e.g., compensating balances, cash collateral or cash escrow accounts) at an Eligible Lender to serve as collateral or to pay off principal or interest on the Eligible Loans. Further, the Board requires that Eligible Lenders make every effort to minimize cash balances requirements and align their approach with the expected interest payment and principal amortization schedule specified for the Main Street Lending Program loans. However, as clarified by the FAQs, Eligible Lenders and Eligible Borrowers may agree to include these features at origination or during the life of an Eligible Loan if such terms are a normal component of the Eligible Lender’s underwriting practices for similarly situated borrowers and do not exceed 15 percent of the outstanding balance of the Eligible Loan. Notably, such cash balances should not be used to prepay principal or interest of the Eligible Loan, except at the option of the Eligible Borrower during the life of the Eligible Loan. 

Furthermore, the FAQs clarify that Eligible Lenders and Eligible Borrowers may agree to place a portion of the proceeds of an Eligible Loan in an account held at the Eligible Lender and delay draw on those funds until certain conditions (including funding pre-agreed activities or purchases by the Eligible Borrower or providing additional collateral that is not available at the time of origination of the Eligible Loan) related to the Eligible Borrower’s operations are met. Any delayed draw conditions must be substantially similar to a condition placed on similarly situated borrowers by the Eligible Lender in the course of its ordinary underwriting. In addition, Eligible Lenders may not use delayed draw balances for the purpose of ensuring funds are available for mandatory and due payments on other debt owed by the Eligible Borrower, except in the case of a permitted refinancing of existing debt under the MSPLF. In any case, any delayed draw conditions must be included in the loan agreement at origination of an Eligible Loan and must be fully transparent to the Eligible Borrower. 

Requisite Financial Information

The FAQs provide updates on the requisite financial information to be submitted by an Eligible Lender to the SPV in light of the bulk upload functionality now available in the Main Street Lending Program portal. Specifically, for loans submitted to the Main Street Lending Program portal on or after Sept. 4, an Eligible Lender must provide the financial data (as described below) at the time the other loan participation documentation is submitted.

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 Dec. 31, 2019, through the Main Street Lending Program portal. An Eligible Borrower has the corresponding obligation to provide an Eligible Lender with 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:
  
  
  • 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;^[10] and
    
    
  • 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 an 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,^[11] specifically:
  
  
  • For loans submitted to the Main Street Lending Program portal on or after Sept. 4: The Eligible Lender must provide such financial data at the time the other loan participation documentation is submitted; and
    
    
  • For loans submitted to the Main Street Lending Program portal before Sept. 4: 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, at a later day, not to exceed (x) 60 days after the submission of the other loan participation documentation, or (y) 15 business days after SPV indicating an alternative process to submit such financial data is 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 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, 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 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 our prior alert here.}

^[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, 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. In addition, the 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] _{Such Ineligible Businesses include financial businesses primarily engaged in lending or investments, or otherwise eligible businesses engaged in financing or factoring, including hedge funds, private equity funds, banks, finance companies, investment companies and other businesses whose stock in trade is money; passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds; loan packagers earning more than one-third of their gross annual revenue from packaging SBA loans; businesses in which the proposed lender or any of its affiliates owns an equity interest; and speculative businesses, including where loans are made for the sole purpose of purchasing and holding an item until the market price increases or engaging in a risky business for the chance of an unusually large profit (such as businesses involved in oil wildcatting; dealing in stocks, bonds, commodity futures and other financial instruments; mining gold or silver in other than established fields; and building homes for future sale (other than those homes under contract with an identified purchaser)). In addition, while the list of such exclusions includes casinos as Ineligible Businesses, guidance from the SBA released on April 24 has expressly made businesses receiving revenue from legal gaming activities eligible; thus, casinos would appear to likewise be eligible for the Main Street Lending Program. Faith-based organizations have similarly been determined by the SBA not to be per se ineligible. Additional factors concerning these types of Ineligible Businesses can be found in the SBA’s Standard Operating Procedures 50, found here.}

^[8] _{An Associate of a Lender, as defined in 13 CFR § 120.10, is (i) an officer, director, key employee, or holder of 20 percent or more of the value of the Lender’s stock or debt instruments, or an Agent (as defined in 13 CFR § 103.1) involved in the loan process; or (ii) any entity in which one or more individuals referred to in paragraph (i) of this definition or a Close Relative (as defined in 13 CFR § 109.20) of any such individual owns or controls at least 20 percent.}

^[9] _{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.}

^[10] _{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.}

^[11] _{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. 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.}