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Client Alert- Main Street Lending Program – Reboot

May 11, 2020
  • FisherBroyles News

Just days after our last Client Alert, the Board of Governors of the Federal Reserve (the “Federal Reserve”) issued an overhaul to the Main Street Lending Program (the “MSLP” or the “Program”), which not only rendered our last Client Alert on the matter somewhat moot, it basically prompted this update out of necessity so that we are providing you with accurate and up-to-date information.  The Federal Reserve and the U.S. Treasury Department (“Treasury”) received well in excess of 2,000 comment letters on the Program from the time they originally issued guidance creating the Program on April 9, 2020, and as such, have revised the Program significantly.  This Client Alert Update discusses the new features of the Program, which is now apparently going to be administered by the FRB Boston.

Then There Were Three

The “new” Program guidelines were issued in the form of a detailed FAQ released on the Federal Reserve’s MSLP page, which also includes newly issued term sheets for the three, up from two, loan types under the Program (the “Term Sheets”) (See Table at the end of this Client Alert):

  • Main Street New Loan Facility (“MSNLF”) – New Loans, secured or unsecured, from $500,000 up to $25MM (total leverage capped at four times adjusted EBITDA) – Lender retains 5% of the Loan, the Federal Reserve’s SPV , will purchase the other 95%, 4 year loan at the LIBOR +3%, repayment years 2-4, 33.33% each year;

 

  • Main Street Priority Loan Facility (“MSPLF”) – This is the new facility for Priority Loans, secured or unsecured, from $500,000 up to $25MM (total leverage capped at six times adjusted EBITDA)- Lender retains 15% of the Loan, the Federal Reserve’s SPV will purchase the other 85%, 4 year loan at the LIBOR +3%, repayment years 2-4, 15%, 15%, 70%; and

 

  • Main Street Expanded Loan Facility (“MSELF”) Expanded Loans from $1MM up to $200MM in aggregate facility size (total leverage capped at six times adjusted EBITDA) – Lender retains 5% of the Loan, and the Federal Reserve’s SPV will purchase the other 95%, 4 year loan at the LIBOR +3%, repayment years 2-4, 15%, 15%, 70%.

 

Eligible borrowers with up to 15,000 employees (originally 10,000) or up to $5 billion (originally $2.5 billion) in annual revenue are now eligible, except that such eligibility will now be calculated by aggregating the employees and 2019 revenues of the applying business with those of such business’s affiliated entities in accordance with the affiliation aggregation rules and tests set forth in 13 CFR 121.301(f) (1/1/2019 ed.).  This is the test under the SBA Act that has been the topic of much commentary in connection with its application to the Payroll Protection Program (“PPP”).[1]  Thankfully, a business that receives a loan through the SBA’s PPP can be an eligible borrower under the MSLP if it meets the “Eligible Borrower” criteria thereunder.

 

Updated Program Highlights

All three programs share common requirements around Eligible Lenders, Eligible Borrowers, required certifications by lenders and borrowers, and other key features, with a few differences as noted below.

     A. Borrower Eligibility. An “Eligible Borrower” must be a business meeting the new size parameters set out above, and the Program defines a “Business” as a U.S. business legal entity with significant operations in and a majority of its employees based in the United States.  The Business must have been formed prior to March 13, 2020 – and organized under the laws of the U.S., a U.S. state, the District of Columbia, any U.S. territories or possessions, or an Indian Tribal government. Almost any type of legal entity may be included, but a joint venture cannot have more than 49% participation by foreign business entities.  Borrowers must not have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act) and may qualify for only one of the MSLP loans.  The Business must not be an “Ineligible Business” listed in 13 CFR 120.110(b)-(j), (m)-(s).

 

     B. Borrower’s Financial Condition. An Eligible Borrower must have been in sound financial condition prior to the onset of the CoViD-19 pandemic. In order to qualify for any Program loan, any existing loan (or the underlying loan for MSELF) the borrower had with an Eligible Lender as of December 31, 2019 must have had an internal risk rating (based on the Eligible Lender’s risk rating system) that was equivalent to a “pass” in the Federal Financial Institutions Examination Council’s (“FFIEC”) supervisory rating system as of December 31, 2019.

 

    C. Lenders.  “Eligible Lenders,” have included any U.S. bank, savings and loan or credit union, and now include any U.S. branch or agency of a foreign bank, and a U.S. subsidiary of any foreign banking organization. In an Expanded Loan, the Eligible Lender must be one of the lenders that holds an interest in the underlying loan at the time of upsizing.  In a multi-lender facility, only the Eligible Lender for the Expanded Loan is required to meet these criteria, even if there are other non-eligible lenders in the existing facility.  Eligible Lenders are now expected to apply their own underwriting standards in evaluating the financial condition and creditworthiness of each borrower given the lender’s knowledge of the applicable industry and will ultimately determine whether an Eligible Borrower is approved for a Program loan in light of these considerations.

 

     D.  Tax Distributions. There is now an exception to the rule that no dividends or distributions will be permitted. Pass-through tax entities (such as partnerships and S corps, which includes most LLCs) may make tax distributions to the extent reasonably required to cover owners’ tax obligations resulting from the entity’s earnings.

 

     E.  Adjusted EBITDA – The Federal Reserved heeded the numerous comments on EBITDA, and now allows use of a negotiated “adjusted EBITDA” by Eligible Lenders and so each Eligible Lender can use the same methodology it previously used to calculate adjusted 2019 EBITDA when extending credit to Eligible Borrowers or “similarly situated borrowers” on or before April 24, 2020. One question, which is not directly addressed, is whether “affiliated” Borrowers will be aggregated for purposes of maximum loan size – in applying the dollar caps or multiples of 2019 adjusted EBITDA.

 

     F.  Clarification of “outstanding debt.”  Again, the Federal Reserve listened to the public and clarified that “existing outstanding and undrawn available debt” includes all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, non-bank financial institution, or private lender, as well as any publicly issued bonds or loans from private placement facilities. It also includes all unused commitments under any loan facility, excluding (i) any undrawn commitment that serves as a backup line for commercial paper issuance, (ii) any undrawn commitment that is used to finance receivables (including seasonal financing of inventory), (iii) any undrawn commitment that cannot be drawn without additional collateral, and (iv) any undrawn commitment that is no longer available due to change in circumstance. Existing outstanding and undrawn available debt should be calculated as of the date of the loan application.[2]

 

     G.  MSELF Changes. Eligible Loans for the Expanded Loan Facility now include existing revolving credit facilities in addition to existing term loans, even though the expansion loan must still be a term loan. Further, the Expanded Loan Facility allows Eligible Lenders to upsize a multi-lender facility in which other non-eligible lenders participated, which is critical for a Borrower’s existing loan facilities that include both eligible and non-eligible lenders.

 

     H.  Fees. The Program provides for lending fees, including: (i) a transaction fee that the Eligible Lender will pay (or may require the Eligible Borrower to pay) the SPV on loan principal (1% of principal for MSNLF and MSPLF and 0.75% for the MSELF); (ii) a loan origination fee, which the Eligible Borrower will pay the Eligible Lender (1% of principal for MSNLF and MSPLF and 0.75% for the MSELF); and (iii) a loan servicing fee, which the SPV will pay the Eligible Lender on the participation amount (0.25% of principal of the participation bought by SPV).

 

     I.  SPV Participations. The Federal Reserve’s new special purpose vehicle (“SPV”), which now will be run by FRB Boston, will purchase a 95% participation in eligible MSNLFs and MSELFs, but only an 85% participation in the new MSPLFs. In all cases the SPV and Eligible Lender will share risk on a pari passu basis. Each participation will be structured as a “true sale” and must be completed “expeditiously” after the Eligible Loan is originated. The SPV will cease purchasing loan participations on September 30, 2020, unless the Program is extended by the Federal Reserve and the Treasury. The FRB Boston will continue to operate the SPV after such date until such SPV’s assets mature or are sold.  In all loan types, Eligible Lenders must retain its 5% or 15% of the Eligible Loan until the loan matures or the SPV sells the participation, whichever comes first.

 

     J.  Borrower Certifications and Covenants. In addition to the certifications discussed in our original Client Alert, Eligible Borrowers will be required to make the following additional certifications and covenants related to (a) restrictions on compensation, stock repurchases, and capital distributions (b) prohibitions of government conflicts of interest and those related to bankruptcy:

 

            i. Paying Existing Debt.  Eligible Borrowers must commit to not pay any principal of, or any interest on, any other debt until the Eligible Loan (or upsized tranche for Expanded Loans) is repaid in full, unless the debt or interest payment is mandatory and due. However, for any Priority Loan, Eligible Borrowers may, at the time of originating a Priority Loan, refinance existing debt owed by the Borrower to another lender that is not the Eligible Lender. Eligible Borrowers must also commit not to seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender. However, the FAQ states that these covenants would not prohibit a Borrower from doing any of the following during the term of an Eligible Loan:

    • Repaying a line of credit in accordance with the Borrower’s normal course of business usage for such line of credit;
    • Taking on and paying additional debt obligations required in the normal course of business and on standard terms, including inventory and equipment financing, provided that such debt is secured by newly acquired property and, apart from such security, is of equal or lower priority to the Eligible Loan; or
    • Refinancing maturing debt.

 

           ii.  Keeping Employees and Jobs.  Each Eligible Borrower that participates in the Facility should make commercially reasonable efforts to maintain its payroll and retain its employees during the time the Eligible Loan (or upsized tranche) is outstanding, specifically, an Eligible Borrower should undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor. Borrowers that have already laid-off or furloughed workers as a result of the disruptions from CoViD-19 are eligible to apply for Main Street loans.

 

[1] See the FAQ, E.1.(3).

[2] See the FAQ, G.2.

 

For additional information, please contact any of the following: Paul Economon, Partner paul.economon@fisherbroyles.com or Kevin Gluntz, Partner kevin.gluntz@fisherbroyles.com, with any questions or more specific situations.  Appreciation and credits are made to our paralegal, Adam Gluntz, for his help with this Alert.

 

About FisherBroyles, LLP

Founded in 2002, FisherBroyles, LLP is the first and world’s largest distributed law firm partnership. The Next Generation Law Firm® has grown to hundreds of partners in 23 offices globally. The FisherBroyles’ efficient and cost-effective Law Firm 2.0® model leverages talent and technology instead of unnecessary overhead that does not add value to our clients, all without sacrificing BigLaw quality. Visit our website at www.fisherbroyles.com to learn more about our firm’s unique approach and how we can best meet your legal needs.

These materials have been prepared for informational purposes only, are not legal advice, and under rules applicable to the professional conduct of attorneys in various jurisdictions may be considered advertising materials. This information is not intended to create an attorney-client or similar relationship. Whether you need legal services and which lawyer you select are important decisions that should not be based on these materials alone.

© 2020 FisherBroyles LLP

 

Main Street Lending Program Loans – Compared
  MNSLF MPSLF MSELF
Minimum Loan Size $500,000 $500,000 $10,000,000
Maximum Loan Size Lesser of $25M or 4x 2019 adjusted EBITDA. Lesser of $25M or 6x 2019 adjusted EBITDA. Lesser of $200M, 35% of outstanding and undrawn available debt, or 6x 2019 adjusted EBITDA.
Lender Retention 5% 15% 5%
Security on Collateral Optional for Lender. Optional for Lender. Any collateral for original loan must secure the upsized tranche on pro rata basis.
Term 4 years 4 years 4 years
Principal Payment Schedule (1st year deferred and in each other case, plus all accrued but unpaid interest to date) – Prepayment allowed Years 2-4: Years 2-4: Years 2-4:
33.33% each year. 15%, 15% and 70%. 15%, 15% and 70%.
Interest Rate LIBOR plus 3.0% LIBOR plus 3.0% LIBOR plus 3.0%
Transaction Fee 1.0% of loan 1.0% of loan 0.75% of upsized tranche
Loan Fees 1.0% of Eligible Loan, paid by Borrower to Lender. 1.0% of Eligible Loan, paid by Borrower to Lender. 0.75% of upsized tranche – paid by Borrower to Lender.
SPV will pay Lender 0.25% of the participation amount, for loan servicing. SPV will pay Lender 0.25% of the participation amount, for loan servicing. SPV will pay Lender 0.25% of the participation amount, for loan servicing.
Loan Ranking Eligible Loan is not, at any time, contractually subordinated in terms of priority to any of Eligible Borrower’s other loans or debt instruments. Eligible Loan is senior to or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt. The upsized tranche is senior to or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt.

© 2020 FisherBroyles LLP

About FisherBroyles, LLP

Founded in 2002, FisherBroyles, LLP is the first and world’s largest distributed law firm partnership. It has grown to over 240 people in 22 offices nationwide. The FisherBroyles’ efficient and cost-effective Law Firm 2.0® model leverages talent and technology instead of unnecessary overhead that does not add value to our clients, all without sacrificing BigLaw quality. Visit our website at www.fisherbroyles.com to learn more about our firm’s unique approach and how we can best meet your legal needs.

© 2020 FisherBroyles LLP