Alert 06.02.20
The Main Street Lending Program: Additional Guidance for Borrowers
Companies that may want to borrow under the Main Street Lending Program should take note of additional guidance recently 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 lenders and borrowers, who may wish to participate in the Program. Please visit here for our borrower client alert that focuses on important aspects of the Program that would be of particular interest to potential borrowers and may also be of interest to potential lenders.
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 (Priority Loan 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. Guidelines for Calculation of Adjusted EBITDA
New Loan Facility/Priority Loan Facility—The Eligible Borrower should use an adjusted EBITDA methodology that is based on a methodology that the Eligible Lender has previously required to be used to adjust EBITDA when extending credit to the Eligible Borrower or similarly situated borrowers on or before April 24, 2020.
Expanded Loan Facility—If the Eligible Borrower’s EBITDA was calculated or included in the loan documentation or internal risk analysis when originating the existing term loan or revolving credit facility that would underlie an Expanded Loan Facility Upsized Tranche, that calculation method should be used. If not, the Eligible Borrower should calculate its adjusted EBITDA using a methodology that the Eligible Lender has required to be used in other contexts for the Eligible Borrower or, if there is no such calculation, similarly situated borrowers.
Multiple EBITDA Adjustment Methods—If multiple EBITDA adjustment methods have previously been used by an Eligible Lender with respect to the Eligible Borrower or similarly situated borrowers (e.g., one for use within a credit agreement and another for internal risk management purposes), the most conservative method should be used for the Main Street loan. The Eligible Lender must, in each instance, select a single method used at a point in time in the recent past and before April 24, 2020 (i.e., no “cherry picking” or applying adjustments used at different points in time or for a range of purposes).
III. Guidelines for Security
New Loan Facility—The New Loan Facility does not specify priority requirements in respect of security.
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. We wonder whether the Federal Reserve actually intended a narrower scope for this definition, given that many secured credit facilities that include real property mortgages are not what the market normally considers to be “mortgage debt.”) 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.
Expanded Loan Facility—For an Upsized Tranche under the Expanded Loan Facility, the collateral security requirements are substantially the same as for loans under the Priority Loan Facility, except that (i) the Upsized Tranche must be secured by the collateral securing any other term loan tranche of the underlying credit facility on at least a pari passu basis and (ii) the Collateral Coverage Ratio concept is not applicable.
IV. Additional Guidelines
Commitment—An Eligible Lender is not required to commit and pre-fund a loan under the Program before the Main Street SPV (SPV) has committed to purchase its participation in that loan. An Eligible Lender may condition its funding of a loan under the Program on a binding commitment from the SPV to purchase the participation, in which case (i) the Eligible Lender is required to fund the loan within three business days of the date of the commitment letter entered into with the SPV and (ii) the SPV is required to purchase the participation in the loan not later than three business days after the Eligible Lender notifies the SPV that the Eligible Lender has funded the loan. Alternatively, the Eligible Lender may advance the loan first, and then seek to sell a participation in the loan to the SPV by submitting all the required documentation expeditiously and no later than 14 days after closing of that loan.
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 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.
Additional Fees—Other than a one-time origination or upsizing fee 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.
Reporting Obligations—An Eligible Lender has an obligation to forward to the SPV all written information and documents received by the Eligible Lender in its capacity as a lender under the Program within three business days of receipt. It also must notify the Federal Reserve if it becomes aware of any material misstatement or breach of covenant of the Eligible Borrower in connection with a loan under the Program notwithstanding that the Eligible Lender is not expected to independently verify the Eligible Borrower’s certifications or actively monitor its ongoing compliance with covenants.
Loan Documentation—An Eligible Lender is expected to use its own loan documentation in relation to Main Street loans, 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.)
Record-keeping—An Eligible Lender is required to document (i) the process for identifying similarly situated borrowers, (ii) the rationale for its selection of an adjusted EBITDA methodology, and (iii) all payments made to the Eligible Lender and all payments received from the SPV in respect of the participation.
Affiliated Eligible Lenders—Multiple affiliated lender entities may register as Eligible Lenders under the Program. U.S. branches or agencies of foreign banks, U.S. bank holding companies, U.S. savings and loan holdings companies, U.S. intermediate holding companies of foreign banking organizations, or any U.S. subsidiary of any of the foregoing are eligible to be Eligible Lenders.
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. Even where the underlying loan is part of a multi-lender facility, the Eligible Lender must, on its own, retain the full 5% of the Expanded Loan Facility Upsized Tranche and may not share its 5% retention with other lenders.
New Customers—Loans under the New Loan Facility and the Priority Loan Facility can be made to new customers of Eligible Lenders.
FinCEN Rule CDD—If the necessary FinCEN Rule CDD information was previously verified for an existing customer, this information does not need to be re-verified.
V. Requirements for Loan Documentation
The following provisions are required to be included in the loan documentation for each Program:
VI. Additional Documentation Provided by the Federal Reserve
The Federal Reserve also published the following documents:
1. Instructions for Lender Required Documentation
2. Lender Registration Certifications and Covenants—Instructions and Guidance
3. Lender Transaction Specific Certifications and Covenants—Instructions and Guidance
4. Borrower Certifications and Covenants—Instructions and Guidance
5. 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.
6. 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.
7. Participation Agreement
9. Lender Wire Instructions Direction
VII. Implications
These additional instructions and guidelines and mandatory forms of certifications and agreements from the Federal Reserve will be informative for potential lenders and borrowers 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 lenders’ and borrowers’ 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 respective loan facilities under the Program), 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 bank’s possible participation in the Program, please reach out to a member of the Pillsbury team or contact us at MSLquestions@pillsburylaw.com.
Pillsbury’s experienced, multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.