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As a result of the Coronavirus Aid, Relief & Economic Security (CARES) Act, the Federal Reserve has created the Main Street Lending Program (“Main Street” or “Program”) to provide up to $600 billion in financing for small and medium-sized businesses. The Program will operate three facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF). On May 27, the Federal Reserve Bank of Boston (FRB Boston), which is administering the Program on behalf of the Federal Reserve, released borrower and lender documents along with updated term sheets for each facility and a revised FAQ document for the Program. Please check the website of the FRB Boston for Program documents and FAQs. Main Street is expected to launch any day now.
Main Street is not a direct loan program from the Federal Reserve or the U.S. government, and loans under the Program will not be forgiven. Instead, the FRB Boston has set up a special purpose vehicle (SPV), funded in part by the U.S. Treasury, to purchase participations in loans originated by Eligible Lenders. An Eligible Borrower (described below) may obtain a qualifying loan from an Eligible Lender (described below), and the SPV will purchase a participation interest in the qualifying loan at par from the Eligible Lender. The participation by the SPV will be 95 percent in the case of the MSNLF and the MSELF, and 85 percent in the case of the MSPLF. The Eligible Lender that advances a loan under the Program is required to retain the remaining portion of the loan and the related risk (pro rata with the SPV’s participation interest) until the loan made under the Program matures or until neither the SPV nor a governmental assignee holds an interest in the loan, whichever comes first.
2. Who can make loans under the Program?
Generally, U.S. banks, savings associations, credit unions, and holding companies, including U.S. branches or subsidiaries of foreign banking organizations, can make loans under the Program. Nonbank financial institutions are not Eligible Lenders at this time, but the Federal Reserve may expand eligibility to them in the future.
Each Eligible Lender will use its own loan documentation, which should be substantially similar to the loan documentation it uses in the ordinary course of business, adjusted only as required by the Program. The Appendixes to the FAQ contain information on what must be included in the loan documentation.
3. Who can borrow under the Program?
The Program sets forth certain minimum criteria to be eligible to borrow under the Program. Each Eligible Lender will then apply their own underwriting standards to evaluate the financial condition of each business. Below is a list of some of the criteria to be an Eligible Borrower under the Program.
The main differences between the facilities are where they fit in with an Eligible Borrower’s existing debt, the allowed leverage of the Eligible Borrower, and the amount that may be borrowed.
The basic terms of the three facilities are as follows:*
Terms |
MSNLF |
MSPLF |
MSELF |
Term |
4 years |
4 years |
4 years |
Minimum Loan Size |
$500,000 |
$500,000 |
$10 million |
Maximum Loan Size |
Lesser of:
|
Lesser of:
|
Lesser of:
|
Required Retention by Eligible Lender |
5% |
15% |
5% of Upsized Tranche |
Principal Repayment (Year One Deferred for All) (Includes capitalized interest) |
1/3 at the end of year 2, year 3, and at maturity |
15% at the end of year 2 and year 3, 70% at maturity |
15% at the end of year 2 and year 3, 70% at maturity |
Rate |
LIBOR (1 month or 3 month) + 3% |
LIBOR (1 month or 3 month) + 3% |
LIBOR (1 month or 3 month) + 3% |
Fees***** |
1% to SPV; up to 1% to Eligible Lender |
1% to SPV; up to 1% to Eligible Lender |
0.75% to SPV; up to 0.75% to Eligible Lender |
Security |
Can be secured or unsecured, 1st or 2nd lien |
Must be secured if Eligible Borrower has other secured debt (other than Mortgage Debt) Can be unsecured if no secured debt other than Mortgage Debt at origination If secured, “Collateral Coverage Ratio” at origination must be at least 200% or not less than the aggregate “Collateral Coverage Ratio” of all other secured debt (other than Mortgage Debt) Does not need to share collateral with other secured debt, but if it does, must be senior or pari passu with such other debt Must contain lien covenant/negative pledge (with baskets/exceptions) consistent with what Eligible Lender uses in ordinary course with similarly situation borrowers |
Must be secured if Eligible Borrower has other secured debt (other than Mortgage Debt) Can be unsecured if no secured debt other than Mortgage Debt at origination Any collateral that secures the underlying loan must secure the upsized tranche on a pari passu basis (however, if the underlying facility includes a revolving tranche and a term tranche, the upsized tranche only needs to share collateral with the term tranche on a pari passu basis) Must contain lien covenant/negative pledge (with baskets/exceptions) consistent with what Eligible Lender uses in ordinary course with similarly situation borrowers |
Special Features/Requirements |
Cannot be contractually subordinated Eligible Borrower can incur additional debt after receiving |
Cannot be contractually subordinated Can be used to refinance existing debt owed to other lenders (not the Eligible Lender) |
Cannot be contractually subordinated Loan being upsized must have been originated on or before April 24, 2020 and have at least 18 months remaining before maturity (maturity may be extended at time of upsizing to satisfy 18-month requirement) |
*Please review specific features of the three facilities in the respective term sheets.
** Adjusted 2019 EBITDA must be calculated using a methodology the Eligible Lender previously required to be used for adjusting EBITDA when extending credit to the Eligible Borrower or to similarly situated borrowers on or before April 24, 2020 (must be a method used recently and if multiple methods used, must use most conservative).
*** Adjusted 2019 EBITDA must be calculated using the methodology the Eligible Lender previously required to be used for adjusting EBITDA when originating or amending the underlying loan on or before April 24, 2020 (must be a method used recently and if multiple methods used, must use most conservative).
**** Calculated as of the date of the loan application.
*****The SPV will pay the Eligible Lender 0.25% of the principal amount of its participation annually for servicing.
7. What role will the SPV have?
Initially, the SPV’s interest will be a participation (one that is transferable with, in most situations, the Eligible Lender’s consent). Under certain circumstances, the SPV will be able to elevate its interest from a participation to an assignment. However, it is not expected that the SPV will exercise such right as a matter of course, including if a loan is distressed or in workout, but will exercise it only where (i) the interests of the Eligible Lender and the SPV differ, or (ii) the loan is one of the larger loans in the SPV’s portfolio of participations.
Eligible Lenders will have the option to fund the Eligible Loan upfront and submit the required documents to sell a participation to the SPV no later than 14 days after the closing of the Eligible Loan. Alternatively, an Eligible Lender may extend an Eligible Loan but condition its funding on receiving a binding commitment from the SPV to purchase a participation. Once a binding commitment is received, the Eligible Lender would be required to fund the Eligible Loan within 3 business days and the SPV would fund the participation within 3 business days of receiving notice of such funding from the Eligible Lender.
While asset-based borrowers are not generally evaluated on the basis of EBITDA, it remains the key underwriting metric for the Program. The Federal Reserve and the Treasury Department will evaluate potentially adjusting eligibility requirements for asset-based borrowers.
All participations must be purchased by the SPV by September 30, 2020.
If you have any questions regarding the Main Street Lending Program, please reach out to Erin Simmons or Stephanie Block-Guedez.