Alert 06.02.20
The Main Street Lending Program: Additional Guidance for Lenders
Banks considering lending under the Main Street Lending Program should take note of additional guidance issued by the Federal Reserve Bank of Boston.
Alert
Alert
By Joel M. Simon, Matthew Oresman, Kenneth Suh, Russell DaSilva,
06.02.20
On May 27, 2020, the Federal Reserve Bank of Boston (Federal Reserve) issued additional guidance and forms of certifications and agreements in connection with the Main Street Lending Program (Program), which was authorized by the Board of Governors of the Federal Reserve System (Board) under Section 13(3) of the Federal Reserve Act. Unlike the Small Business Administration’s Paycheck Protection loans, the Program does not include a loan forgiveness feature.
Most notably, the document called “Frequently Asked Questions of the Main Street Lending Program” (FAQ) was substantially expanded to supplement the points raised in the initial draft of the FAQ issued on April 30, 2020 and to cover additional matters. The additional guidance provided by the Federal Reserve raises important considerations for both potential borrowers and lenders who may wish to participate in the Program. Please visit here for our lender client alert that focuses on important aspects of the Program that would be of particular interest to potential lenders and may also be of interest to potential borrowers.
The Program continues to comprise three loan facilities: the Main Street New Loan Facility (New Loan Facility), the Main Street Expanded Loan Facility (Expanded Loan Facility) and the Main Street Priority Loan Facility (the Priority Loan Facility and, together with the New Loan Facility and the Expanded Loan Facility, the Main Street Facilities and each individually, a Main Street Facility). The term sheets for each of the three loan facilities remain unchanged from the latest versions that were issued by the Federal Reserve on April 30, 2020, and all loans to be made under the Program are required to be term loans (including, in the case of the Expanded Loan Facility, if the underlying existing loan being “upsized” is a revolving loan). These term sheets for the New Loan Facility, Expanded Loan Facility and Priority Loan Facility are available on the Federal Reserve’s website. This client alert supplements our prior one published on May 1, 2020, which is available here.
II. Treatment of Affiliates
Eligible Borrower Conditions
15,000 or Fewer Employees & 2019 Annual Revenues of $5 Billion or Less—The employees and revenues of the Eligible Borrower must be aggregated with the employees and revenues of its affiliated entities. While private equity funds are not permitted to borrow under the Program, this method of calculation equally applies to portfolio companies of private equity funds, which are otherwise eligible.
Foreign Parent Company—An Eligible Borrower may be a subsidiary of a foreign company; provided that the Eligible Borrower itself is created or organized in the United States, and the Eligible Borrower on a consolidated basis has significant operations in and a majority of its employees based in the U.S. However, an Eligible Borrower that is a subsidiary of a foreign company must use the proceeds of a Main Street loan only for the benefit of the Eligible Borrower, its consolidated U.S. subsidiaries, and other affiliates of the Eligible Borrower that are U.S. businesses. In other words, no proceeds of a Main Street loan may be used for the benefit of an Eligible Borrower’s foreign parents, affiliates or subsidiaries.
Significant Operations in the U.S.—To determine whether an Eligible Borrower has “significant operations” in the U.S., the Eligible Borrower’s operations are evaluated on a consolidated basis together with its subsidiaries, but not its parent companies or sister affiliates. See Section III below for the safe harbors available for this requirement.
Access to Main Street Facility—An affiliated group of companies may participate in only one Main Street Facility. If an affiliate has previously participated, or has a pending application to participate, in a Main Street Facility, the Eligible Borrower can participate in the Program only by accessing the same Main Street Facility chosen by its affiliate. The affiliated group’s total participation in a single Main Street Facility may not exceed the maximum loan size that the affiliated group is eligible to receive on a consolidated basis, meaning that an Eligible Borrower’s maximum loan size would also be limited by (i) its own leverage level, (ii) the leverage level of the affiliated group on a consolidated basis, and (iii) the size of any loan extended to other affiliates in the group.
III. Safe Harbors for “Significant Operations in the United States” Condition
Although not intended to be an exhaustive list, an Eligible Borrower has significant operations in the U.S. if, when consolidated with its subsidiaries, greater than 50% of the Eligible Borrower’s (i) assets are located in the U.S.; (ii) annual net income is generated in the U.S.; (iii) annual net operating revenues are generated in the U.S.; or (iv) annual consolidated operating expenses (including interest expense and any other expenses associated with debt service) are generated in the U.S.
IV. Treatment of Security for the Priority Loan Facility
For a loan to be made under the Priority Loan Facility that is to be secured, the new guidance introduces the concept of a Collateral Coverage Ratio (defined as (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) which at the time of origination of the Main Street loan must be either (i) at least 200% or (ii) not less than the aggregate Collateral Coverage Ratio for all of the Eligible Borrower’s other secured Loans or Debt Instruments (other than Mortgage Debt). (“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 debt secured by real property at the time of the origination of a loan under the Priority Loan Facility or the upsizing of a loan under the Expanded Loan Facility, as the case may be.) There is no requirement for this loan to share in all of the collateral that secures the Eligible Borrower’s other Loans or Debt Instruments.
V. Additional Guidelines
Additional Fees—Other than a one-time transaction fee for the account of the SPV and a one-time origination or upsizing fee for the account of the Eligible Lender, in each case, as set out in the applicable Main Street term sheet, additional fees are generally prohibited, except de minimis fees for services that are customary and necessary in the Eligible Lender’s underwriting of commercial and industrial loans to similar borrowers, such as appraisal and legal fees. The Eligible Lender should not charge a servicing fee to the Eligible Borrower as a servicing fee will be payable to the Eligible Lender by the SPV as provided in the applicable Main Street term sheet.
SPV’s Right to Sell / Right to Elevate—The SPV is generally permitted (i) to sell its participation only with the consent of the Eligible Lender, and (ii) to elevate its participation into an assignment only with the consent of the Eligible Borrower, the Eligible Lender and other relevant parties. While the Federal Reserve does not expect to transfer or elevate except in exceptional circumstances, there are enumerated exceptions to the consent requirements that permit transfers to related to government-affiliated entities, and permit elevation to an assignment in the case of payment defaults, bankruptcy and insolvency events, loan forgiveness, and statutory or court requirements.
Loan Documentation—An Eligible Lender is expected to use its own loan documentation in relation to loans made under the Program, which should be substantially similar to the loan documentation that the Eligible Lender uses in its ordinary course lending to similarly situated borrowers (modified to comply with the Program and to include the required certifications and covenants and forms of documents mandated by the Federal Reserve). (“Similarly situated borrowers” are borrowers in similar industries with comparable risk and size characteristics.) For example, the following provisions are required to be included in the loan documentation for each Program:
Expanded Loan Facility—If the underlying pre-existing loan was made by the Eligible Lender, that loan must have been originated on or before April 24, 2020 or, if purchased, the Eligible Lender must have purchased that loan by December 31, 2019.
New Lender—A loan under the New Loan Facility or the Priority Loan Facility may be made to an Eligible Borrower by an Eligible Lender with whom the Eligible Borrower has or does not have a pre-existing relationship. These loans may be made by a lender as long as it is an Eligible Lender that has registered to participate in the Program.
VI. Additional Documentation Provided by the Federal Reserve
In addition to the FAQ, the Federal Reserve published the following instructions and guidance or forms of agreements:
1. Borrower Certifications and Covenants - Instructions and Guidance
2. Form of Assignment and Assumption—This form is to be executed in blank. It will be used if the Main Street SPV exercises its right to elevate the participation to a direct holding of the Main Street loan.
3. Co-Lender Agreement—This agreement essentially converts a bilateral loan into a syndicated loan, with the Eligible Lender acting as “Administrative Agent.” It comes into play if the Main Street SPV exercises its right to elevate the participation to a direct holding of the Main Street loan.
VII. Implications
These additional instructions and guidelines and mandatory forms of certifications and agreements from the Federal Reserve will be informative for potential borrowers and lenders that are considering the various features of the Program to determine whether and to what extent they will participate in the Program. The additional guidance from the Federal Reserve, while clarifying some of the previously ambiguous aspects of the program, may come at the expense of potential borrowers’ and lenders’ ability to implement the program quickly or to best suit their respective needs, concerns and standard procedures. The Federal Reserve continues to evaluate a number of the Program features (including the minimum loan size of the Main Street Facilities), so we can expect further clarifications and adjustments as the Program rolls out and unexpected challenges are discovered.
For more information or questions on the Program, the new guidance and the documents issued by the Federal Reserve, or to discuss your company’s possible participation in the Program, please reach out to a member of the Pillsbury team or contact us at MSLquestions@pillsburylaw.com.
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