Main Street Lending Program – Updated as Of June 9, 2020
On April 9, 2020, consistent with the CARES Act, the Federal Reserve announced multiple programs supported by the U.S. Treasury which are intended to provide additional liquidity to U.S. businesses in light of the COVID-19 pandemic, including terms for new loans and the expansion of existing loans under the Main Street Lending Program (the “Program”). On April 30, 2020, the Federal Reserve announced an expansion of the scope of, and eligibility under, the Program. On June 8, 2020, the Federal Reserve announced a further expansion to allow more small and medium-sized businesses to be able to receive support under the Program, including revision to the terms originally published on April 9, 2020, for new loans and the expansion of existing loans under the Program. The Federal Reserve also announced on June 8, 2020, that it expects the Program to be open for lender registration soon and to be actively buying loans shortly afterwards.
The following is a summary of the principal terms of the Program as announced by the Federal Reserve to date. This summary supersedes and replaces prior summaries of the Program prepared by the firm.
General Summary of Facilities
The Program is designed to support small and medium-sized businesses that were in sound financial condition prior to the onset of the COVID-19 pandemic and were either unable to access the Paycheck Protection Program (“PPP”) or that require additional financing support after receiving PPP loan proceeds. Unlike PPP loans, financing under the Program is not forgivable; however, in the event of restructuring or workout, the Program SPV (defined below) may agree to reductions in interest, extended amortization schedules and maturities, and higher “priming” loans.
The Program is comprised of the Main Street New Loan Facility (“MSNLF”), Main Street Priority Loan Facility (“MSPLF”) and Main Street Expanded Loan Facility (“MSELF”). Each facility has the same eligible lender and eligible borrower criteria.
A special purpose vehicle (the “Program SPV”) has been established pursuant to the Program. The Program SPV will purchase up to $600 billion in participations in eligible loans made under the Program.
- MSNLF – The MSNLF provides for new loans to eligible borrowers of $250,000 to $35 million. The maximum size of a loan under the MSNLF cannot, when added to other outstanding and undrawn available debt, exceed 4 times 2019 EBITDA. The loans may not be contractually subordinated to any other outstanding loans.
- MSPLF – The MSPLF provides for new loans to eligible borrowers of $250,000 to $50 million. The maximum size of a loan under the MSPLF cannot, when added to other outstanding and undrawn available debt, exceed 6 times 2019 EBITDA. The loans must be senior to or pari passu with all other debt of borrower, other than mortgage debt.
- MSELF – The MSELF provides for increases to existing term loan or revolving credit facilities. The upsized tranche is a 5 year term loan from $10 million to $300 million. The maximum size may not, when added to existing outstanding and undrawn available debt, exceed 6 times 2019 EBITDA. The upsized tranche must be senior to or pari passu with all other loans, other than mortgage debt. To be eligible for “upsizing,” the existing term loan or revolving credit facility must:
- have been made by an eligible lender(s) to an eligible borrower;
- currently be held, at least in part, by an eligible lender;
- have been originated on or before April 24, 2020, and must have a remaining maturity of at least 18 months; and
- have (i) received an internal risk rating equivalent to a “pass” in the FFIEC’s supervisory rating system by the lender, as of December 31, 2019, or, (ii) if the existing loan was originated or purchased by the lender after December 31, 2019, the lender should use the internal risk rating given to that loan at origination or purchase (as applicable) to determine whether the loan satisfies said the “pass” criterion.
To obtain a loan under the Program, a borrower must submit an application and any other documentation required by its lender. Borrowers should contact its lender for more information on whether the lender plans to participate in the Program and to request more information on the application process.
Generally, to be eligible under the Program, a borrower must satisfy the following:
- it must have been formed prior to March 13, 2020 under U.S. laws. A borrower may be a subsidiary of a foreign company, provided that the borrower itself is created or organized in, or under the laws of, the U.S. However, a borrower that is a subsidiary of a foreign company must use the proceeds of a Program loan only for the benefit of the borrower, its consolidated U.S. subsidiaries, and other affiliates of the borrower that are U.S. businesses, but not for the borrower’s foreign parents, affiliates or subsidiaries.
- it must have significant operations in and a majority of employees based in the U.S. To make this determination, the borrower’s operations should be evaluated on a consolidated basis together with its subsidiaries, but not its parent companies or sister affiliates. For example, a borrower has significant operations in U.S. if, when consolidated with its subsidiaries, greater than 50% of its:
- assets are located in the U.S.;
- annual net income is generated in the U.S.;
- annual net operating revenues are generated in the U.S.; or
- annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) are generated in the U.S.
- it must have 15,000 or fewer employees or 2019 annual revenues of $5 billion or less. To make this calculation, the borrower’s should aggregate its employees (using the average of the total number of employees for each pay period for a trailing 12 month period) and revenues with that of its affiliated entities. To determine its 2019 annual revenues, the borrower may use its (and its affiliates’):
- annual “revenue” per its 2019 U.S. GAAP-based audited financial statements;
- annual receipts for the fiscal year 2019, as reported to the IRS;
- if the borrower does not yet have either of the foregoing for 2019, it may use its most recent audited financial statements or annual receipts.
- it must not have received direct support under section 4003(b)(1)-(3) of the CARES Act (air carriers and other businesses in distressed industries).
- it must be able to make all of the certifications and covenants under the Program.
- it may only participate in one of the facilities and it may not participate in the Primary Market Corporate Credit Facility (“PMCCF”), and it is subject to the following restrictions:
- if any affiliate of the borrower has participated in the PMCCF, the borrower may not borrow under any Program facility;
- if an affiliate has previously participated, or has a pending application to participate, in a Program facility, the borrower can only participate in the Program by using the same Program facility accessed by its affiliate; and
- in no case could the total participation of the borrower and any one or more of its affiliates in a single Program facility exceed the maximum loan size that the affiliated group is eligible to receive on a consolidated basis. As result, a borrower’s maximum loan size would be limited by its own leverage level, the leverage level of the affiliated group on a consolidated basis, and the size of any loan extended to other affiliates in the group.
- it must not be a business ineligible for borrowing under Small Business Administration (“SBA”) guidelines, as modified by the SBA for purposes of the PPP.
- it must be unable to secure adequate credit accommodations, which does not mean that no credit from other sources is available to the borrower; rather, the borrower may certify that it is unable to secure “adequate credit accommodations” because the amount, price, or terms of credit available from other sources are inadequate for the borrower’s needs during the current unusual and exigent circumstances. Borrowers are not required to demonstrate that applications for credit have been denied by other lenders or otherwise document that the amount, price, or terms of credit available elsewhere are inadequate.
- non-profit organizations are not currently eligible under the Program; however, the Federal Reserve announced on June 8, 2020, that it is working to establish one or more loan options that are suitable for non-profit organizations.
For purposes of determining of employees and revenues, the SBA affiliation rules generally apply.
An eligible lender is any U.S. federally insured depository institution, U.S. branch or agency of a foreign bank, U.S. bank or savings and loan holding company, U.S. intermediate holding company of a foreign banking organization or U.S. subsidiary of any of the foregoing. The Federal Reserve is considering expansion to allow non-financial institution lenders to originate loans under the Program.
The Program SPV will purchase participations in MSNLF loans, MSPLF loans and MSELF upsized tranches through September 30, 2020.
Interest will accrue on loans and upsized tranches under the Program at a per annum rate equal to 1 or 3 Month LIBOR plus 3.00%.
Payments of principal on loans and upsized tranches under the Program are deferred for two years, with unpaid interest capitalized. Thereafter, payments of principal on loan and upsized tranches under the Program are required as follows: principal amortization of 15% at end of year 3, 15% at end of year 4 and 70% at maturity. Payments of interest on loans and upsized tranches under the Program are deferred for one year. After the first year interest will be payable in accordance with the loan agreement for the Program loan or upsized tranche.
Prepayments are permitted without premium or penalty on loans and upsized tranches under the Program.
Refinancing Existing Loans
- MSPLF – at the time of origination, the MSPLF loan can be used to refinance existing loans owed to other lenders. After origination and until the MSPLF loan is repaid in full, the borrower must refrain from repaying the principal balance of, or paying any interest on, any debt other than the MSPLF loan, unless the debt or interest payment is mandatory and due.
Loans and upsized tranches under the Program have a 5 year maturity.
Loans and upsized tranches under the Program may be secured or unsecured. An MSELF upsized tranche must be secured if the underlying loan secured and the collateral must secure the upsized tranche on a pro rata basis.
Priority and Security Requirement
An MSNLF loan may not be contractually subordinated in terms of priority to the borrower’s other loans or debt instruments; meaning, an MSNLF loan may not be junior in priority in bankruptcy to the borrower’s other unsecured loans or debt instruments. This provision does not prevent:
- an MSNLF loan that is a secured loan (including in a second lien or other capacity) to a borrower, whether or not the borrower has an outstanding secured loan of any lien position or maturity;
- an MSNLF loan that is an unsecured loan to a borrower, regardless of the term or secured or unsecured status of the borrower’s existing indebtedness;
- the borrower from taking on new secured or unsecured debt after receiving an MSNLF loan, provided the new debt would not have higher contractual priority in bankruptcy than the MSNLF loan; or
- the incurrence of obligations that have mandatory priority under the Bankruptcy Code or other insolvency laws that apply to entities generally.
The loan must be secured at the time of origination if the borrower has any other secured loans, “Loans or Debt Instruments”, other than “Mortgage Debt”.
- Pari Passu or Senior in Priority: The loan must not be contractually subordinated in terms of priority to any of the borrower’s other Loans or Debt Instruments.
- Pari Passu or Senior in Security:
- If loan is secured, then the “Collateral Coverage Ratio” for the loan at the time of its origination must be either (i) at least 200% or (ii) not less than the aggregate Collateral Coverage Ratio for all of the borrower’s other secured Loans or Debt Instruments (other than Mortgage Debt).
- If the loan is secured by the same collateral as any of the borrower’s other Loans or Debt Instruments (other than Mortgage Debt), the lien upon such collateral securing the MSPLF loan must be and remain senior to or pari passu with the lien(s) of the other creditor(s) upon such collateral. The MSPLF loan need not share in all of the collateral that secures the borrower’s other Loans or Debt Instruments.
The loan can be unsecured as of the time of origination only if the borrower does not have at such time any secured Loans or Debt Instruments (other than Mortgage Debt). Unsecured MSPLF loans must not be contractually subordinated in terms of priority to any of the borrower’s other unsecured Loans or Debt Instruments.
For the entire term of the MSPLF loan following origination, the MSPLF loan documentation must:
- ensure that the MSPLF loan does not become contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments; and
- contain a lien covenant or negative pledge that is of the type (and contains exceptions, limitations, carve-outs, baskets, materiality thresholds, and qualifiers) that are consistent with those used by the lender in its ordinary course lending to similarly situated borrowers.
The MSELF upsized tranche must be secured (on a pari passu basis) if, at the time of origination, the borrower has any other secured Loans or Debt Instruments, other than Mortgage Debt. The MSELF upsized tranche must be secured by the collateral (including, if applicable, any Mortgage Debt) securing any other tranche of the underlying credit facility on a pari passu basis. Lenders and borrowers may add new collateral to secure the loan (including the MSELF upsized tranche on a pari passu basis) at the time of upsizing. If the underlying credit facility includes both term loan tranche(s) and revolver tranche(s), the MSELF upsized tranche needs to share collateral on a pari passu basis with the term loan tranche(s) only. Secured MSELF upsized tranches must not be contractually subordinated in terms of priority to any of the borrower’s other Loans or Debt Instruments.
The MSELF upsized tranche can be unsecured only if the borrower does not have, as of the date of origination, any secured Loans or Debt Instruments (other than Mortgage Debt that does not secure any other tranche of the underlying credit facility). Unsecured MSELF upsized tranches must not be contractually subordinated in terms of priority to the Eligible borrower’s other unsecured Loans or Debt Instruments.
For the entire remaining term of the MSELF upsized tranche, the MSPLF loan documentation must:
- ensure that the MSELF upsized tranche does not become contractually subordinated in terms of priority to any of the borrower’s other Loans or Debt Instruments;
- ensure that the MSELF upsized tranche remains secured on a pari passu basis by the collateral securing the underlying credit facility; and
- contain a lien covenant or negative pledge that is of the type (and contains exceptions, limitations, carve-outs, baskets, materiality thresholds, and qualifiers) that are consistent with those used by the lender in its ordinary course of lending to similarly situated borrowers.
Transaction and Servicing Fees
- MSNLF and MSPLF – A 1.00% fee is paid by the lender to the Program SPV at the time of origination, which may be passed through to borrower. In addition, the lender may require the borrower to pay up to a 1.00% origination fee in the lender’s discretion.
- MSELF – A 0.75% fee is paid by the lender to Program SPV at the time of upsizing, which may be passed through to borrower. In addition, the lender may require the borrower to pay up to 0.75% origination fee in the lender’s discretion.
- All Program Facilities – Lenders are not permitted to charge borrowers any fees other than those set forth above, except de minimis fees for services that are customary and necessary in the lender’s underwriting of commercial and industrial loans to similar borrowers, such as appraisal and legal fees. Lenders may also charge customary consent fees if such fees are necessary to amend existing loan documentation in the context of upsizing a loan in connection with the MSELF. Lenders should not charge servicing fees to borrowers.
- Existing Debt. Under the MSNLF and MSELF, the borrower may not pay any principal and interest on any other debt until the MSNLF loan or MSELF upsized tranche is repaid in full, unless the payment is “mandatory and due”. In addition, the borrower may not cancel or reduce any of its committed lines of credit. Under the MSPLF, the same rules apply except that the borrower may, at the time of origination of the MSPLF loan, refinance existing debt owed to a lender that is an ineligible lender under the Program (i.e., a non-bank lender). These covenants do not prohibit a borrower from (1) repaying a line of credit in accordance with normal usage of such line of credit, (2) taking on additional debt in the ordinary course of business on standard terms, provided such debt is secured by newly acquired property and, apart from such security, is of equal or lower priority than the Program loan, or (3) refinancing maturing debt.
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 a Program loan; but borrowers may not pay interest or principal payments on such debt ahead of schedule during the life of the Program loan, unless required by a mandatory prepayment clause as specifically permitted above or below.
With respect to debt that predates the Program loan, principal and interest payments are “mandatory and due”:
- on the future date upon which they were scheduled to be paid as of the date of origination of the Program loan, or
- upon the occurrence of an event that automatically triggers mandatory prepayments under a contract for indebtedness that the borrower executed prior the date of origination of a Program loan, except that any such prepayments triggered by the incurrence of new debt can only be paid if such prepayments are de minimis, or under the MSPLF at the time of origination of an MSPLF loan.
With respect to future debt incurred by the borrower in compliance with the terms and conditions of the Program loan, principal and interest payments are “mandatory and due” on their scheduled dates or upon the occurrence of an event that automatically triggers mandatory prepayments.
- Compensation Restrictions. During the period financing under the Program is outstanding and for 1 year thereafter:
- officers or employees of the borrower earning more than $425,000 in 2019 may not receive a raise or severance benefits totaling more than twice their 2019 compensation
- officers or employees of the borrower earning more than $3 million in 2019 may not earn more than $3 million plus half the amount of their compensation in excess of $3 million
- Dividends, Distributions and Repurchases. During the period financing under the Program is outstanding and for 1 year thereafter, the borrower may not pay dividends, make other capital distributions or redeem or repurchase its capital stock or other equity interests. The foregoing does not prohibit redemptions or repurchases pursuant to contractual obligations in effect as of March 27, 2020 or distributions made by an S Corporation or other pass through entity to the extent required to cover its owners’ tax obligations in respect of the earnings of the entity.
- Maintaining Payroll and Retention of Employees. Borrowers must make commercially reasonable efforts to retain employees during the term of the financing under the Program. Commercially reasonable efforts mean good faith efforts, given capacity, economic environment, available resources and the business need for labor.
- Conflicts of Interest. Lenders and borrowers must certify that no “Covered Individual” owns, controls, or holds 20% or more (by vote or value) of any class of equity ownership interest in the business.
The Federal Reserve has published Program forms and agreements for use in connection with participations under the Program; however, each lender should use its own loan documentation in relation to all underlying loans (see below for a link to such forms and agreements). The Federal Reserve has also issued FAQs in connection with the Program on June 8, 2020 (the “Main Street FAQs”) (see below for a link to the Main Street FAQs). Appendix A of the Main Street FAQs contains a checklist of the items that must be reflected in the loan documentation in order for the Program SPV to purchase a participation in a Program loan. Appendix B of the Main Street FAQs includes certain model covenants that lenders can elect to reference when drafting their loan documentation in order to satisfy the Appendix A requirements. Appendix C of the Main Street FAQs includes a list of the financial information that lenders must require borrowers to provide on an ongoing basis until the Program loans mature.
This summary is not intended to be exhaustive and further details and clarifications on the Program are still to come.
For the MSNLF term sheet, click here (https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200608a1.pdf),
for the MSPLF term sheet click here (https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200608a2.pdf),
for the MSELF term sheet click here (https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200608a3.pdf),
for the Interested parties should also check the Main Street FAQs and Program Forms regularly (https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-program/information-for-lenders/docs.aspx).
If you have any questions regarding the Program or your potential eligibility, please contact a Baird Holm LLP attorney.
 The portion of any outstanding PPP loan that has not yet been forgiven is counted as outstanding debt for purposes of the maximum loan size test for any Program loan.
 Refer to Section H.10. of the Main Street FAQs (as defined herein, with a link to the Main Street FAQs provided below) for instruction on how a borrower should prepare financial records and determine inputs to its 2019 adjusted EBITDA calculation. The methodology used by the lender in regard to all loans and upsized tranches under the Program to calculate adjusted 2019 EBITDA must be the methodology it has previously used for adjusting EBITDA when extending credit to the eligible borrower or similarly situated borrowers on or before April 24, 2020.
 See below regarding Lender Eligibility and Borrower Eligibility.
 The lender may extend the maturity of an existing loan or revolving credit facility at the time of upsizing in order for the underlying instrument to satisfy the 18-month remaining maturity requirement.
 The borrower should count as employees all full-time, part-time, seasonal, or otherwise employed persons, excluding volunteers and independent contractors.
 As noted above, businesses that have received PPP loans are eligible for loans under the Program.
 If a borrower is the only business in its affiliated group that has sought funding through the Program, its affiliated group’s debt and EBITDA are not relevant to determining whether the borrower can qualify, except to the extent that the borrower’s subsidiaries are consolidated into its financial statement. If the borrower has an affiliate(s) that has previously borrowed or has an application pending to borrow a Program facility, then the entire affiliated group’s debt and EBITDA are relevant to determining the borrower’s maximum loan size.
 Ineligible businesses include financial businesses engaged primarily in lending, most passive real estate investment companies, life insurance companies, and private clubs and businesses, among others. See 13 CFR 120.110(b)-(j), (m)-(s) for the complete list.
 “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.
 “Mortgage Debt” means (i) debt secured by real property at the time of the MSPLF loan’s origination; and (ii) limited recourse equipment financings (including equipment capital or finance leasing and purchase money equipment loans) secured only by the acquired equipment.
 “Collateral Coverage Ratio” means (i) the aggregate value of any relevant collateral security, including the pro rata value of any shared collateral, divided by (ii) the outstanding aggregate principal amount of the relevant debt.
 “Covered Individuals” include the President, the Vice President, the head of any Executive Department, any Member of Congress, and certain immediate family members of the foregoing.