Main Street Lending Program Program Overview As of July 9, 2020
The following information is provided as a courtesy based on available public information; however, it is not intended nor should it be used as a substitute for appropriate accounting and legal counsel specific to your individual situation. The Federal Reserve Bank may issue additional guidance that could change the process.
The U.S. Treasury and the Board of Governors of the Federal Reserve Board announced on April 10th the interim details of the $600 billion Main Street Lending Program which will provide financial support in the form of five year loans to businesses employing up to 15,000 employees or with revenues of less than $5.0 billion. This program is authorized by the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, and is complementary to the Paycheck Protection Program and other SBA loan programs under the Act.
Under the Main Street Lending Program, banks will be able to make loans to small and mid-sized businesses and have those loans financed by the Federal Reserve by selling 95% of the loans into the program. As part of the program, three facilities will be created that will purchase up to $600 billion of loans — the Main Street New Loan Facility or the Main Street Priority Loan facility, for the origination of new loans, and the Main Street Expanded Loan Facility, for the expansion of existing loans.
Under these facilities, the Federal Reserve Bank will commit to lend to a single common special purpose vehicle, or SPV, on a recourse basis. The Federal Reserve’s SPV will purchase 95% participations in loans (or upsized tranches of loans), while lenders will retain 5% of each loan (or upsized tranche of loan). The Department of the Treasury will make a $75 billion equity investment in the SPV in connection with both facilities.
Borrowers participating in the Main Street Lending Program may only participate in one facility — either the New Loan Facility, the Priority Loan Facility or the Expanded Loan Facility. Borrowers participating in either facility may not also participate in the Federal Reserve’s Primary Market Corporate Credit Facility, but they may participate in the SBA’s Paycheck Protection Program. Main Street loans are not eligible for forgiveness.
Most Recent Update
On June 8, 2020, the Federal Reserve expanded its Main Street Lending Program (the “Program”) by amending its terms in an effort to reach more small and medium-sized businesses. The changes to the Program include the following:
Lowering the minimum loan size for new loans and priority loans to $250,000 from $500,000;
Increasing the maximum loan size under all Program facilities: from $25 million to $35 million for the New Loan Facility; from $25 million to $50 million for the Priority Loan Facility; and from $200 million to $300 million for the Expanded Loan Facility;
Increasing all loan terms to five years from four years;
Extending the repayment period for all loans by deferring principal payments for two years, rather than one;
Changing the principal repayment schedule for each of the Program Facilities from 1/3 in each of the second, third and fourth years, to 15% in year three, 15% in year four, and 70% in year five; and
Raising the Federal Reserve’s participation to 95% for all loans.
Under each Program facility, the interest rate will remain at LIBOR + 3%, interest payments will continue to be deferred for one year, and eligible businesses must still have no more than 15,000 employees or 2019 annual revenues of no more than $5 billion.
The Federal Reserve expects to begin lender registration soon and to begin buying loans shortly afterwards. The Program will also accept loans that were originated under the previously announced terms, if funded before June 10, 2020. The terms of each of the facilities can be found at the following links: New Loan Facility, Priority Loan Facility, and Expanded Loan Facility. Please also refer to the attached “Summary of the Main Street Lending Program” for a simplified cheat sheet.
Who is an Eligible Lender?
Eligible lenders are:
U.S. insured depository institutions
U.S. bank holding companies
U.S. savings and loan holding companies
Who is an Eligible Borrower?
A U.S. business with up to 15,000 employees or up to $5.0 billion in 2019 annual revenues is eligible to participate if it has significant operations in and a majority of its employees based in the United States.
The Eligible Borrower must have been in sound financial condition prior to the onset of the COVID-19 pandemic. In order for an Eligible Borrower to receive a loan under any of the Program Facilities, any existing loan it had outstanding with the 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 FFIEC’s supervisory rating system as of that date.
What is an Eligible Loan?
Loans under the New Loan Facility, the Priority Loan Facility and upsized tranches under the Expanded Loan Facility must meet the following criteria:
Originated on or after April 8, 2020 (loans being upsized under the Expanded Loan Facility must have been originated prior to April 8, 2020);
5 year maturity;
Amortization of principal deferred for two years and interest deferred for one year;
Adjustable rate of LIBOR plus 300 basis points;
Minimum loan size of $250,000 for the New Loan and Priority Loan Facilities and $10 million for the Expanded Loan Facility;
Maximum loan size that is the lesser of
If participating in the New Loan Facility:
$35 million or
an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA)
If participating in the Priority Loan Facility:
$50 million or
an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA)
If participating in the Expanded Loan Facility:
30% of the borrower’s existing outstanding and committed but undrawn bank debt, or
an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA
Prepayment permitted without penalty.
For the Main Street New Loan Facility (MSNLF), loans may be secured or unsecured. However, the loans may not be contractually subordinated, at origination or during the term of the loan, to other loans or debt instruments of the Eligible Borrower. This means that a New Loan Facility loan may not be junior in priority in bankruptcy to an Eligible Borrower’s other unsecured loans or debt instruments. This provision does not prevent:
the issuance of a MSNLF loan that is a secured loan (including in a second lien or other capacity) to an Eligible Borrower, whether or not the Eligible Borrower has an outstanding secured loan of any lien position or maturity;
The issuance of an MSNLF loan that is an unsecured loan to an Eligible Borrower, regardless of the term or secured or unsecured status of the Eligible Borrower’s existing indebtedness; or
The Eligible 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.
For the Main Street Priority Loan Facility (MSPLF), loans may be secured or unsecured. However, the MSPLF loans must be senior or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than Mortgage Debt (the MSPLF Priority and Security Requirement). The following definitions apply for purposes of the MSPLF Priority and Security Requirement:
Loans and other Debt instruments - 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 - (1) debt secured by real property at the time of the MSPLF loan’s origination and (2) limited recourse equipment financings (including equipment capital or capital leasing and purchase money equipment loans) secured only by the acquired equipment. To comply with the MSPLF Priority and Security Requirement at the time of origination, Eligible Lenders and Eligible Borrowers must apply the following guidance:
Secured Loans -The MSPLF Loan must be secured, if at the time of origination, the Eligible Borrower has any other secured loans or debt instruments, other than Mortgage Debt.
Pari Passu or Senior in Priority - The MSPLF Loan must not be contractually subordinated in terms of priority to any of the Eligible Borrower’s other loans or debt instruments.
Pari Passu or Senior in Security - IfTheMSPLF Loan is secured, then the Collateral Coverage Ratio for the Loan at the time of its origination must be either (1) at least 200% or (2) not less than the aggregate Collateral Coverage Ratio for all of the Borrower’s other secured loans or debt instruments (other than mortgage debt)
Collateral Coverage Ratio – (1) the aggregate value of any relevant collateral security, including the pro rata value of any shared collateral divided by (2) the outstanding principal amount of the relevant debt.
If the MSPLF loan is secured by the same collateral as any of the Eligible 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 creditors upon such collateral.
Unsecured LoansThe MSPLF loan can be unsecured only if the Eligible Borrower does not have, as of the date of origination, any secured loans or debt instruments (other than mortgage debt), Unsecured MSPLF loans must not be contractually subordinated to any of the Eligible Borrower’s other unsecured loans or debt instruments.
For the Main Street Expanded Loan Facility (MSELF), upsized tranches must be, senior to or pari passu with, in terms of priority and security, the Eligible Borrowers other loans and debt instruments, other than mortgage debt.
How Will the SPV and Eligible Lenders Share the Risk?
The Federal Reserve’s SPV will purchase a 95% participations in loans (or upsized tranches of loans), while lenders will retain 5% of each loan (or upsized tranche of loan). The SPV and the lender will then share risk on a pari passu basis.
Under the Expanded Loan Facility, any collateral securing a loan, whether that collateral was pledged under the original terms or the upsizing, will secure the loan participation on a pro rata basis. If the original loan was unsecured, the upsized tranche is unsecured.
Are There Additional Loan Requirements?
Yes, in addition to certifications required by applicable statutes and regulations, lenders and borrowers will each be required to certify that the entity is eligible to participate in the New Loan Facility, Priority Loan Facility or Expanded Loan Facility, including in light of the conflicts of interest prohibition in Title IV of the CARES Act (regarding businesses controlled by Members of Congress, certain Executive Branch officials, or their families). Section 13(3) of the Federal Reserve Act applies to the loans, including requirements relating to loan collateralization, taxpayer protection and borrower solvency.
A lender must attest that:
the proceeds of the loan (or upsized tranche of loan) will not be used to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower, including the pre-existing portion of the loan if participating in Expanded Loan Facility; and
it will not cancel or reduce any existing lines of credit outstanding to the borrower.
A borrower must commit to refrain from using the loan (or upsized tranche of loan) to repay other loan balances and commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the borrower has first repaid the loan in full. Additionally, a borrower must attest that:
it will not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender;
it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 pandemic, and that, using the loan (or upsized tranche of loan), it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan;
its existing outstanding and committed but undrawn debt does not exceed (a) four times its 2019 EBITDA under the New Loan Facility or (b) six times its 2019 EBITDA under the Priority Loan Facility and the Expanded Loan Facility, as applicable;
it will not pay dividends on its common stock or repurchase a listed equity security while the loan is outstanding unless pursuant to a contract in place prior to March 27, 2020; and
for the period until one year after the date the loan is no longer outstanding, any officer or employee with 2019 total compensation of over $425,000 cannot receive increased compensation for any 12-month period or receive severance pay or other termination benefits of more than twice his or her 2019 total compensation, and any officer or employee whose 2019 total compensation was more than $3,000,000 cannot receive compensation greater than $3,000,000 plus 50% of the amount by which his or her 2019 total compensation exceeded $3,000,000.
The restrictions on compensation, stock repurchases and capital distributions are required by Article IV of the CARES Act and apply to the Treasury’s direct lending program as well.
What Fees Are Associated with the Facilities?
For the New Loan Facility and Priority Loan Facility, the borrower shall pay the lender an origination fee of 100 basis points of the principal amount of the loan. For the Expanded Loan Facility, the borrower shall pay the lender an upsizing fee of 75 basis points of the principal amount of the loan.
A servicing fee that the SPV will pay the lender of 25 basis points per annum of the principal amount of its participation in the loan (or upsized tranche of loan).
Under the New Loan Facility and Priority Loan Facility, the lender shall pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. Under the Expanded Loan Facility, the lender shall pay the SPV a facility fee of 75 basis points of the principal amount of the participation purchased by the SPV. The lender may require the borrower to pay this fee.
When do the Facilities Terminate?
The SPV will cease purchasing participations in loans on September 30, 2020, unless the Federal Reserve Board and the Treasury Department extend the facilities. A participating Federal Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.
The Federal Reserve Bank of Boston published the necessary legal forms and agreements for borrowers and lenders to participate in the Main Street Lending Program (Program) on May 27, 2020. In addition, the Federal Reserve Bank of Boston published Frequently Asked Questions(FAQs) providing more information regarding eligibility and conditions of participation in the Program. While providing additional information and clarification for participation in the Program, the Federal Reserve has not announced when the Program will begin or when it will begin accepting applications.
The Program will operate through three facilities: the Main Street New Loan Facility (New Loan Facility), the Main Street Priority Loan Facility (Priority Loan Facility), and the Main Street Expanded Loan Facility (Expanded Loan Facility). In order to support businesses that were in sound financial condition before the onset of the COVID-19 pandemic, the Program will provide financial assistance in the form of four-year loans to businesses employing up to 15,000 employees or with revenues of up to $5 billion. The loans are not forgivable, but principal and interest payments on the loans will be deferred for one year.
Refinancing Existing Loans Under the Priority Loan Facility
Generally, proceeds from the Program may not be used to repay the principal balance of, or to pay any interest on, any debt, unless the debt or interest payment is mandatory and due. However, Priority Loan proceeds may be used at the time of origination to refinance existing debt owed by the borrower to a lender that is not the eligible lender under the Priority Loan Facility.
The Lender for an Upsized Tranche Under the Expanded Loan Facility Does Not Need to Be the Lender That Originated the Loan
Under the Expanded Loan Facility, the lender does not have to be the original lender that extended the loan underlying the upsized tranche. However, the lender must have purchased the interest in the underlying loan as of December 31, 2019, and the lender must have assigned an internal risk rating to the underlying loan equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system as of that date.
Determining “Significant Operations in the United States”
To be a borrower under the Program, the borrower must have “significant operations in the United States.” To determine if the borrower meets this criterium, the business’ operations should be evaluated on a consolidated basis together with its subsidiaries, but not its parent companies or affiliates. For example, an Eligible Borrower has significant operations in the United States if, when consolidated with its subsidiaries, greater than 50% of the Eligible Borrower’s:
assets are located in the United States;
annual net income is generated in the United States;
annual net operating revenues are generated in the United States; or
annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) are generated in the United States.
A U.S. Company That Is a Subsidiary of a Foreign Company Can Qualify as a Borrower
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 based in the United States, a borrower may be a subsidiary of a foreign company. However, the borrower must use the proceeds of a Main Street loan only for the benefit of the borrower, its consolidated U.S. subsidiaries, and other affiliates of the borrower that are U.S. businesses. The proceeds of a Main Street loan may not be used for the benefit of the borrower’s foreign parents, affiliates or subsidiaries.
An Affiliated Group May Not Participate in Both the Main Street Program and the Primary Market Corporate Credit Facility (PMCCF)
An affiliated group of companies can participate in only one Main Street Program, and cannot participate in both a Main Street Program and the PMCCF. Therefore if any affiliate of the business has participated in the PMCCF, the business may not borrow under any Main Street Program.
An Affiliated Group of Companies Can Participate in Only One Main Street Program
If an affiliate has previously participated, or has a pending application to participate, in a Main Street Program, the business can only participate in the Main Street Program by using the same Main Street facility accessed by its affiliate. For example, if a borrower’s affiliate has participated in the New Loan Facility, then the borrower would only be able to participate in the New Loan Facility and would be prohibited from participating in either the Priority Loan Facility or Expanded Loan Facility.
However, the affiliated group’s total participation in a single facility may not exceed the maximum loan size that the affiliated group is eligible to receive on a consolidated basis. As a 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.
Private Equity Funds Are Not Eligible to Borrow Under the Program, but a Portfolio Company of a Private Equity Fund May Be Eligible
While private equity funds are an ineligible business pursuant to SBA regulation 13 CFR 120.110, a portfolio company of a private equity fund could be an eligible borrower if it meets the eligibility rules, including the affiliation test as applied to all businesses subject to outside ownership or control pursuant to 13 CFR 121.301(f). For example, assume Business X seeks to borrow under the Program. Business X has fewer than 15,000 employees and its 2019 annual revenues were below $5 billion. However,
Fund Y owns more than 50 percent of the voting equity of Business X and Businesses A, B, C, and D. As a result, Businesses A, B, C, D, X, and Fund Y are all affiliated entities. In order for Business X to be a borrower under the Program, it must meet one of the following two conditions: (a) the aggregate number of employees of Business X and its affiliated entities must be 15,000 or fewer; or (b) the aggregate 2019 annual revenues of Business X and its affiliated entities must be $5 billion or less.
Financial Companies Are Ineligible Businesses
To participate in the Program, a Business must not be an ineligible business as defined by the Small Business Administration at 13 CFR 120.110(b)-(j) and (m)-(s). 13 CFR 120.110(b) provides that financial businesses primarily engaged in the business of lending, such as banks and finance companies, are ineligible businesses and as such cannot participate in the Program.
Adjusted EBITDA With Respect to a Single Borrower or Similarly Situated Borrowers
The lender should require the borrower to calculate its 2019 Adjusted EBITDA by using the methodology that the lender has previously required for EBITDA adjustments when extending credit to the borrower, or, if the borrower is a new customer, the methodology used for similarly situated borrowers on or before April 24, 2020. Similarly situated borrowers are borrowers in similar industries with comparable risk and size characteristics.
If the lender has used multiple EBITDA methods for the borrower or similarly situated borrowers, the lender should choose the most conservative method it has employed. In all cases, the lender must use a single method recently applied before April 24, 2020. The lender may not “cherry pick” or apply adjustments used at different points in time or for a range of purposes. Additionally, the lender should document the rationale for its selection of an adjusted EBITDA methodology and its process for identifying similarly situated borrowers when it originates a New Loan or Priority Loan.
Demonstrating That a Borrower Is “Unable to Secure Adequate Credit Accommodations From Other Banking Institutions”
A borrower does not need to certify that no credit from other sources is available to the borrower. Instead, a 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 credit applications have been denied by other lenders or otherwise document that the amount, price, or terms of credit available elsewhere are inadequate.
Lenders Should Use Their Own Loan Documentation
A lender should use its own loan documentation used in its ordinary course lending to similarly situated borrowers, adjusted only as appropriate to reflect the requirements of the Program. Appendix A contains a checklist of the items that must be reflected in the loan documentation in order for the Main Street SPV to purchase a participation in a loan. Appendix B 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 includes a list of the financial information that lenders must require borrowers to provide on an ongoing basis until the loans mature.
Accounting for the Transfer of an Undivided Participation Interest to the Main Street SPV
The transfer of an undivided participation interest in a New Loan, Priority Loan, or Expanded Upsized Tranche is structured with the intent to (a) meet the accounting definition of a participating interest; (b) qualify as a true sale under the Bankruptcy Code; and (c) meet the criteria for sale accounting outlined in ASC 860, Transfers and Servicing.
For an Expanded Upsized Tranche, the lender must find that the Upsized Tranche is a separate and distinct unit of account for accounting purposes. The lender must consider the following factors:
the characteristics of the Expanded Upsized Tranche compared to the characteristics of the existing term loan or revolving credit facility (e.g., maturity date, amortization schedule, collateral requirement, payment date, and interest rate); and
how the lender operationalizes the Expanded Upsized Tranche, including whether scheduled principal and interest payments are commingled with payments on the existing term loan or revolving credit facility, whether the payments made by the borrower clearly indicate which loan the payment is intended to settle, and whether the lender separately maintains detailed record-keeping.
The Main Street SPV’s Role if a Borrower Enters Distress
Once a borrower misses a payment on a Program loan (beyond the grace period), or the borrower or lender enters into bankruptcy or other insolvency proceedings, the Main Street SPV will have the option to elevate its participation to an assignment to be in privity with the eligible borrower. However, the Federal Reserve does not expect the Main Street SPV to use this right as a matter of course. Rather, the Federal Reserve would expect eligible lenders to follow market-standard workout processes and to exercise the standard of care set out in the Loan Participation Agreement (i.e., to exercise the same duty of care in approaching such proceedings as it would exercise if it retained a beneficial interest in the entire loan). In general, the Federal Reserve expects that the Main Street SPV generally would not expect to elevate and assign except in situations where (i) the economic interests of the eligible lender and the Main Street SPV are misaligned, or (ii) the loan amount is relatively large in comparison to other loans in the Main Street SPV’s portfolio of participations.
Main Street Lending Program for Nonprofit Organizations
The NONLF and NOELF, as proposed, would be available to a 501(c)(3) tax-exempt nonprofit organization or a 501(c)(19) tax-exempt veterans’ organization that:
Has been in continuous operation since January 1, 2015;
Has 15,000 employees or fewer, or
Had 2019 annual revenues of $5 billion or less;
Has at least 50 employees;
Has an endowment of less than $3 billion;
Has 2019 revenues from donations (including proceeds from fundraising, federated campaigns, gifts and similar funds) that are less than 30% of 2019 total revenues;
Has a ratio of 2019 Adjusted EBIDA to unrestricted 2019 operating revenue of at least 5%;
Has liquid assets to cover at least 90 days of average daily expenses;
Has at the time of loan origination, a ratio of unrestricted cash and investments to existing outstanding and undrawn available debt, plus any NONLF/NOELF loan, plus CMS accelerated and advance payments, that is greater than 65%;
Is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States; and
Did not participate in any other Main Street lending facility, the Primary Market Corporate Credit Facility, or the Municipal Liquidity Facility, and has not received specific support under Title IV of the CARES Act.
These initial proposed requirements are subject to change following the public feedback and comment period.
The general terms and conditions of the NONLF and NOELF, as proposed, are set forth in the table below:
Freedom Bank’s Position
We have applied and been accepted as an Eligible Lender in the Main Street Lending Program by the Federal Reserve Bank of Boston effective June 26, 2020. The program has not officially begun to accept loan participations, but we are working hard to understand the program requirements and the process for consummating a new loan and participation to the Federal Reserve.
We plan to work primarily with existing clients where a Main Street Lending Program loan can serve as an effective bridge from PPP funds to more long-term resources to help restore a company’s level of business activity or reinvent the business model to be successful in the post-COVID economy. We are accepting applications for new clients located in the Washington DC MSA where we can become the company’s lead bank and principal lender and depositor.
For more information about the program or explore whether the program is a good fit for your situation, please contact your Relationship Manager or our President and CEO, Joe Thomas, at firstname.lastname@example.org or 703-667-4161.
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