Federal Reserve Board Provides Additional Guidance on the Main Street Lending Program and Further Expands the Program to Provide Liquidity to Nonprofit Organizations

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] Thereafter, on July 15, the Federal Reserve Board (the Board) released supplemental information through an updated set of frequently asked questions (FAQs) to provide further guidance on a number of items, including use of Main Street Lending Program loan proceeds and clarification on what constitutes an ineligible business for purposes of determining whether a prospective borrower may qualify as an Eligible Borrower (as defined in Section B below). Additionally, the FAQs provide direction on certain requisite provisions to be included in documentation of Main Street Lending Program loans. For instance, the FAQs clarify that personal guarantees are not required, LIBOR floors are not permissible and the transaction fee will be based on the principal amount of the Main Street Lending Program loans (including capitalized interest) at the time of submission for sale of participation interests.

To assist prospective lenders, the FAQs also provide certain requisite Main Street Lending Program documentation templates (filled in for a Main Street New Loan Facility (MSNLF) loan in a bilateral facility), which can be found here: Example: Assignment Executed-in-Blank; Example: Co-Lender Agreement Transaction Specific Terms; Example: Borrower Certifications and Covenants; Example: fields that are auto-populated into the legal forms and agreements via the Main Street portal, and related instructions, which can be found here: Instructions for Lender Required Documentation.

In addition, on July 17, the Board expanded the Main Street Lending Program to include two new loan options: the Nonprofit Organization Expanded Loan Facility (NOELF) and the Nonprofit Organization New Loan Facility (NONLF), which provide support to a broad set of nonprofit organizations such as educational institutions, hospitals and social service organizations.^[2]

Overview

The Main Street Lending Program comprises the Main Street Priority Loan Facility (MSPLF), the Main Street Expanded Loan Facility (MSELF), the MSNLF, the NOELF and the NONLF. 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 they 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. However, 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 as the FAQs clarify, 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 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.

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 (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); Term Sheet: Nonprofit Organization New Loan Facility (PDF).

Eligible Business and Compliance

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.

Employees and revenues of an Eligible Borrower must be aggregated with the employees and revenues of its affiliated entities. In the determination of the size of a business, the calculation includes receipts and employees of the business whose size is at issue and those of all of its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit. Businesses may use either of the following methods to calculate 2019 annual revenues for purposes of determining eligibility: (1) annual “revenue” per its 2019 GAAP audited financial statements or (2) its and its affiliates’ annual receipts for fiscal year 2019, as reported to the Internal Revenue Service. If a potential borrower or its affiliate does not yet have audited financial statements or annual receipts for 2019, the borrower or its affiliate should use its most recent audited financial statements or annual receipts. Notably, as set forth in the FAQs, if an otherwise Eligible Borrower was established prior to March 13 but has no financial history sufficient to calculate its adjusted 2019 EBITDA or establish that it was in sound financial condition before the onset of the pandemic, it will not qualify for a Main Street Lending Program loan, unless it has clear predecessors or subsidies that can be referenced to calculate adjusted 2019 EBITDA.

Moreover, as set forth in the FAQs, 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) if 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).

Restriction on Use of Proceeds

The Main Street Lending Program is intended to help small and medium-sized companies that suffered losses from the COVID-19 pandemic maintain their operations and payroll until conditions normalize. As a result, 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. Further, the FAQs clarify that loan proceeds may not be used:

• For the benefit of an Eligible Borrower’s foreign parents, affiliates or subsidiaries.
  
  
• To refinance or accelerate payment of existing debt of Eligible Borrowers, except (A) at the time of origination of an MSPLF loan, to refinance existing debt owed to lenders that are not the Eligible Lender or affiliated with the Eligible Lender providing the MSPLF loan, or (B) for mandatory and due^[8] debt and interest payments after the origination of the Main Street Lending Program loans.

Additionally, as set forth in the FAQs, an Eligible Borrower may not use any funds (including the proceeds of a Main Street Lending Program loan) to pay dividends or for distributing capital, repurchasing equity or paying compensation over specified thresholds for the life of the Main Street Lending Program 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.

Personal Guarantee; Hedging Risks

The FAQs clarify that personal guarantees are not required under the Main Street Lending Program. However, an Eligible Lender may require a guarantee as appropriate under their underwriting practices. If provided, guarantees must be shared by the SPV and the Eligible Lender on a pari passu basis. Additionally, Eligible Lenders and Eligible Borrowers may hedge interest rate risk associated with the Main Street Lending Program loans. Eligible Lenders may also hedge credit risk associated with an Eligible Borrower’s industry, but may not engage in borrower name-specific hedging of a Main Street Lending Program loan.

Nonprofit Organizations Main Street Lending Program Loans

The NOELF and NONLF share many of the same features as the MSPLF, MSELF and MSNLF such as use of the same (i) Eligible Lender criteria, (ii) 5-year maturity, (iii) interest rate (adjustable rate of LIBOR (1 or 3 months) + 300 bps), (iv) principal and interest payment deferrals (1 year with unpaid interest capitalized) and (v) require prepayment without penalty. However, where EBITDA is the key underwriting metric required for the MSNLF, MSPLF and MSELF, the NOELF and NONLF rely on EBIDA.

An Eligible Borrower under each of the NOELF and NONLF is a tax-exempt nonprofit organization described in section 501(c)(3) or 501(c)(19) of the Internal Revenue Code; in continuous operation since Jan. 1, 2015; either has 15,000 or fewer employees or had 2019 annual revenues of $5 billion or less; and is not a type of business listed in 13 CFR 120.110(b)-(j) and (m)-(s). Further, an Eligible Borrower must have at least ten employees, have an endowment of less than $3 billion with total non-donation revenues equal to or greater than 60 percent of expenses for the period from 2017 through 2019, and satisfy several additional financial eligibility criteria.^[9] The loan size available under each of the NOELF and NONLF differ:

• NOELF: The maximum loan size for a loan under the NOELF is the lesser of (i) $300 million or (ii) the Eligible Borrower’s average 2019 quarterly revenue, with a minimum loan size of $10 million.
  
  
• NONLF: The maximum loan size for a loan under the NONLF is the lesser of (i) $35 million or (ii) the Eligible Borrower’s average 2019 quarterly revenue, with a minimum loan size of $250,000.

^[1] _{An Eligible Loan under the MSNLF and 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 FAQs were released prior to the Board’s publication of the term sheets governing the NOELF and NONLF. It is unclear whether the guidance provided by the FAQs is meant to address these new facilities. However, we expect that the Board will provide future clarification. 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.}

^[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] _{The FAQs clarify that, 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.}

^[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] _{Principal and interest payments are considered “mandatory and due” (i) with respect to debt that predates the Main Street Lending Program loan (A) on the future date upon which they were scheduled to be paid as of the date of origination of the Main Street Lending Program loan, or (B) upon the occurrence of an event that automatically triggers mandatory prepayments under the loan or credit agreement that the Eligible Borrower executed prior to the date of origination of the Main Street Lending Program loan, provided if such prepayments are triggered by the incurrence of new debt, they can be paid only (1) if such prepayments are de minimis, or (2) under the MSPLF at the time of origination of an MSPLF loan. Eligible Borrowers may continue to pay interest or principal payments on outstanding debt on (or after) the payment due date, provided that the payment due date was scheduled prior to the date of origination of the Main Street Lending Program loan. However, payments on such debt may not be made ahead of schedule during the life of the Main Street Lending Program loan, unless required by a mandatory prepayment clause as specifically permitted by clause (B); and (ii) with respect to future debt payments incurred by the Eligible Borrower in compliance with the terms and conditions of the Main Street Lending Program, on their scheduled dates or upon the occurrence of an event that automatically triggers mandatory prepayments.}

^[9] _{Such financial eligibility criteria include that (i) the 2019 operating margin ratio (adjusted 2019 EBIDA to unrestricted 2019 operating revenue) shall be equal to or greater than 2 percent, (ii) the current days’ cash on hand ratio (liquid assets at the time of loan origination to average daily expenses over the previous year) shall be equal to or greater than 60 days, and (iii) the current debt repayment capacity ratio (cash, investments and other resources to outstanding debt and certain other liabilities) shall be greater than 55 percent.}

^[10] _{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.}

^[11] _{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.}

^[12] _{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.}

^[13] _{For purposes of the MSPLF or MSELF loan priority and security requirement, (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.}

^[14] _{The FAQs clarify that 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.}