Main Street Lending Program

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.

1. Structure of the Program

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 business was established prior to March 13, 2020.
• The business was created or organized in the U.S. (or under the laws of the U.S.) and has significant operations in, and a majority of its employees based in, the U.S.
• The business is a for-profit organization. Non-profits may be eligible in the future but are not currently eligible.
• The business, together with its affiliates, only participates in one of the Main Street facilities and does not participate in the Primary Market Corporate Credit Facility (PMCCF).
  • Note: Businesses that received support through the SBA Paycheck Protection Program (PPP) are eligible to receive a Main Street loan.
• The business has not received specific support pursuant to the Coronavirus Economic Stabilization act of 2020 (Subtitle A of Title IV of the CARES Act).
• The business is not an “Ineligible Business” according to Small Business Administration (SBA) regulations.
• The business meets at least one of the following two conditions: (a) has no more than 15,000 employees or (b) has 2019 annual revenues of no more than $5 billion.
  • Number of employees should be determined following the framework set forth in the SBA’s regulation at 13 CFR 121.106. The business will need to calculate the average total number of persons employed for each pay period over the prior 12 months, including all full-time, part-time, seasonal, or otherwise employed persons (but not volunteers or independent contractors). The business will also need to include those employed by its affiliates in accordance with the affiliation test set forth in 13 CFR 121.301(f) (1/1/2019 ed.).
  • Revenues may be determined one of two ways:
    • The business and its affiliates’ annual “revenue” per its 2019 GAAP audited financial statements.
    • The business and its affiliates’ annual receipts for the fiscal year 2019, as reported to the IRS, with “receipts” having the meaning used by the SBA in 13 CFR 121.104(a).
  • Most recent audited financial statements or annual receipts may be used if a borrower or one of its affiliates does not yet have audited financial statements or annual receipts for 2019.
• The business must be able to make all of the certifications and covenants required under the Program. See the term sheets for the three Main Street facilities and a summary below.

4. What are the terms of the Eligible Loans 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.

• MSNLF: New loans that may be unsecured or secured, first or second lien. Available to Eligible Borrowers with lower leverage ratios.

• MSPLF: New loans that may be unsecured if the Eligible Borrower has no secured debt other than mortgage debt, otherwise they must be secured and meet certain collateral coverage tests. If the loans share collateral with other debt, they must be senior to or pari passu with that debt. Available to Eligible Borrowers with higher leverage ratios. May be used to refinance existing debt with lenders other than the Eligible Lender.

• MSELF: Loans made as an increase (or “upsize”) to an Eligible Borrower’s existing credit facility. They may be unsecured if the Eligible Borrower has no secured debt other than mortgage debt, otherwise they must be secured. If the underlying loan is secured, the upsize tranche must be secured on a pari passu basis with the underlying loan (or the term tranche, if there is both a term tranche and a revolving tranche). Available to Eligible Borrowers with higher leverage ratios.

5. What are the terms of the Eligible Loans under the Program?

The basic terms of the three facilities are as follows:*

*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.

6. What are the other requirements and restrictions of Eligible Loans?

• If an Eligible Borrower has outstanding loans with the Eligible Lender as of December 31, 2019, such loans must have an internal risk rating equivalent to “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date.
• Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of application.
• In addition to other certifications required by statutes and regulations, the following certifications and covenants will be required from Eligible Borrowers:
  • The Eligible Borrower will be prohibited from prepaying principal and interest on any other debt until the Eligible Loan is repaid in full. This restriction does not include a refinancing permitted in connection with a MSPLF, repaying lines of credit in the normal course of business, taking on and repaying certain normal course debt, such as inventory or equipment financing, or refinancing maturing debt, but it does include a prepayment triggered by taking out the Eligible Loan if more than de minimus. The Eligible Borrower must commit to not seek to reduce or cancel any committed lines of credit.
  • The Eligible Borrower must certify that it is unable to secure “adequate credit accommodations from other banking institutions.” This does not necessarily mean that no credit is available but can mean that the amount, price, or terms of credit available are inadequate. Borrowers are not required to demonstrate that credit has been denied by other lenders or document the inadequacy of available credit.
  • The Eligible Borrower must have a reasonable basis to believe that, as of the date of origination of the Eligible Loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.
  • The Eligible Borrower must commit that it will follow compensation, stock repurchase, and capital distribution restrictions that apply under the CARES Act, except that an S corporation or other tax pass-through entity may make distributions reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
  • While the Eligible Loan is outstanding, each Eligible Borrower must make good-faith efforts to maintain payroll and retain employees, giving consideration to its capacities, the economic environment, available resources, and the business need for labor. However, Eligible Borrowers are still eligible to apply for Main Street loans if, as a result of COVID-19, they have already laid-off or furloughed workers.

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.

8. What about asset-based borrowers?

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.

9. How long will the Program be in effect?

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.