I.  Background

On July 15, 2020, the Federal Reserve Bank of Boston (the Federal Reserve) released a new version of the document “Frequently Asked Questions of the Main Street Lending Program” (the FAQ). The FAQ provides guidance in respect of the three loan facilities established under the Main Street Lending Program (the Program): the Main Street New Loan Facility (the New Loan Facility), the Main Street Expanded Loan Facility (the Expanded Loan Facility) and the Main Street Priority Loan Facility (the Priority Loan Facility) and was revised to provide further clarifications to the version of the FAQ that was issued on June 26, 2020 and to cover additional matters.

This client alert supplements our prior alerts published on June 9, 2020, June 2, 2020 and May 1, 2020, which are available here (June 9, 2020 client alert), here (June 2, 2020 client alert for borrowers), here (June 2, 2020 client alert for lenders) and here (May 1, 2020 client alert). A summary of the material terms of the three facilities can be found here, and for those companies trying to decide which facility is suitable for them, a simplified decision tree can be found here.

II.  Summary of Certain Changes to the FAQ

The revised FAQ, among other things:

  • Removes the “purchase by” requirement with respect to the Expanded Loan Facility, which potentially has significant implications for many companies with existing debt who might otherwise have been unable to obtain Main Street loans by enlarging the universe of potential lenders who could be the eligible lender under the Expanded Loan Facility (discussed in greater detail below);
  • Clarifies that LIBOR floors are prohibited;
  • Further clarifies which entities are “Ineligible Businesses” by, among other things, incorporating recent changes made by the Small Business Administration to its “Ineligible Business” definition in relation to the Paycheck Protection Program;
  • Clarifies that permitted fees may be included in the principal amount of Main Street loans;
  • Modifies the definition of “mortgage debt” to reflect that debt secured by real property qualifies as mortgage debt only if it is secured solely by real property. Qualifying as mortgage debt allows that debt to be free from the requirement that Main Street Loan made under the Priority Loan Facility or the Expanded Loan Facility must rank pari passu or senior in right of payment and security to all other debt of the borrower other than mortgage debt;
  • Clarifies that businesses established before March 13, 2020, that have no financial record of their own but have clear predecessors or subsidiaries that can be referenced to calculate adjusted 2019 EBITDA can use the financial records of such predecessors or subsidiaries;
  • Clarifies that eligible lenders and eligible borrowers may hedge interest rate risk related to a Main Street loan; and
  • Clarifies that eligible lenders may hedge credit risk associated with an eligible borrower’s industry but may not engage in borrower name-specific hedging of a Main Street loan.

III.  Implications Related to the Removal of the “purchase by” requirement with respect to the Expanded Loan Facility

On July 8, 2020, The New York Times published an article titled “Big Banks Aren’t Embracing Fed’s Main Street Loan Program” which discussed registration (or lack thereof) by banks and other eligible lending institutions in the Program. While thousands of financial institutions meet the requirements for being an “Eligible Lender” under the Program, approximately four hundred institutions had registered by that date, and not all of those institutions would be accepting loan applications from new customers. Consequently, it may be difficult for companies to obtain Main Street loans. The ability to obtain loans is further complicated for companies that have pre-existing loans whose lenders (i) are unwilling to consent to amendments to allow for an additional tranche of term loans to be incurred under their existing credit facility or a separate credit facility and/or (ii) unwilling or unable provide a Main Street loan under the Expanded Loan Facility or any other Program facility.

One limitation that was removed in the most recent FAQ was the requirement that for an eligible lender to make a Main Street loan under the Expanded Loan Facility, it must either have originally funded the underlying loan or purchased an interest in the underlying loan prior to April 24, 2020 (the Purchase Prior to 4/24/20 Requirement). The removal of the Purchase Prior to 4/24/20 Requirement is arguably the most significant one made to the revised FAQ because it enables companies with pre-existing loans from lenders unwilling or unable to make Main Street loans to revisit the Expanded Loan Facility. Set forth below are two examples of how companies might take advantage of the opportunities presented by this change in the FAQ.

Example A (Syndicated Loan Facility):
Assume that a company has a $500 million syndicated term loan facility which allows for the incurrence of up to $50 million in incremental term loans under that facility, but none of the existing lenders are willing to increase their credit exposure to the company. The company approaches a new lender not in the facility to obtain a Main Street loan in the amount of $25 million as an incremental term loan under the existing syndicated term loan facility. With the elimination of the Purchase Prior to 4/24/20 Requirement, the new lender can fund the $25 million Main Street loan under the Expanded Loan Facility, as long as it also acquires an interest in the existing term loans under the facility that meets the minimum assignment threshold under the existing facility. The assignment and assumption of a portion of the existing syndicated term loans and the funding of the Main Street loan could both be conditioned on a commitment by the SPV to participate in the $25 million Main Street loan.

Example B (Bilateral Facility):
A more interesting scenario arises when a company has an existing loan facility with one lender. Assume that a company has a $10 million term loan facility with a lender which prohibits the incurrence of additional debt and that the existing lender is unwilling to amend its loan documents to permit the incurrence. The company approaches a new lender who is willing to extend a loan to the company in the amount of $10.5 million but not if the interest rate on its loan will be limited to LIBOR plus 3% per annum. With the elimination of the Purchase Prior to 4/24/20 Requirement, the new lender can take an assignment of the $10 million existing term loan from the existing lender and amend the bilateral facility to, among other things, permit the incurrence of a $10 million Main Street loan under the Expanded Loan Facility. The assignment and assumption of the existing loan, the related amendments and the funding of the Main Street loan could be conditioned on a commitment by the SPV to participate in the $10 million Main Street loan. After giving effect to the participation by the SPV in the Main Street loan, the new lender’s credit exposure will be 5% or $500,000 under the Main Street loan, which when added to its assumption of the existing $10 million term loan would result in it having total credit exposure to the company of $10.5 million.

Economically, the new lender would then be entitled to the rate of interest that was then applicable to the existing term loans (which presumably is higher than LIBOR plus 3% per annum) and could also obtain a customary consent fee in connection with the amendments necessary to allow for the Main Street loan (which will accrue interest at LIBOR plus 3% per annum) to be incurred under the existing term loan facility.

While the company could have had the new lender assume the existing $10 million term loan facility and fund $10.0 million in Main Street loans under the New Loan Facility or Priority Loan Facility depending on the company’s leverage, the new lender may prefer that all loans remain outstanding under the same facility so that it is not dragged along on votes not relating to “sacred rights” following an elevation by the SPV of its participation into an assignment. In addition, if the existing term loans are secured, the Main Street loan might have to be incurred under the Expanded Loan Facility instead of the Priority Loan Facility if the company is unable to satisfy the collateral coverage ratio test that is required under the Priority Loan Facility but not under the Expanded Loan Facility.

Other issues might exist for companies with existing loans held by non-cooperative lenders. For example, (i) an existing lender is supportive of a company obtaining a Main Street loan so long as it is able to reduce a portion of its existing credit exposure to the company or (ii) an existing syndicated loan facility might not provide for an incremental facility but a company only needs holders of a nominal amount of existing loans to consent with other consenting existing lenders to achieve the simple majority of holders necessary to approve the amendments necessary to allow for an incremental facility). However, solutions may be structured using permutations of the steps outlined under Examples A and/or B above.

By deleting the Purchase Prior to 4/24/20 Requirement, the Federal Reserve has removed an impediment to small and mid-sized businesses with pre-existing debt held by non-cooperative lenders or lenders of term loans that do not qualify as “Eligible Lenders” under the Program such as CLOs or CDOs (i.e., funds that issue collateralized loan obligations or collateralized debt obligations, respectively) or other alternative or direct lenders who can assign their loans to banks or other financial institutions that are able to qualify as “Eligible Lenders.” This change could allow companies previously shut out from the Expanded Loan Facility to access it now, thereby improving the ability of the Program to support companies adversely affected during this difficult period. 

For more information or questions on the Program, please reach out to a member of the Pillsbury team or contact us at MSLquestions@pillsburylaw.com.


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