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On April 30, 2020, the Federal Reserve released updated details with respect to the Main Street Lending Program (the “Program”) in response to input from market participants, industry groups and other stakeholders on the initial terms of the Program, which were announced on April 9. The initial terms of the Program were previously discussed in a Locke Lord QuickStudy, available at this link. The Federal Reserve has provided amended term sheets for the Main Street New Loan Facility (“MSNLF”) and the Main Street Expanded Loan Facility (“MSELF”) and has added a third facility option, the Main Street Priority Loan Facility (“MSPLF”). Eligible Borrowers (as defined below) may elect to participate in only one of the three facilities. Further, an Eligible Borrower that received funds under the Paycheck Protection Program (the “PPP”) may still participate in the Program. More information on the PPP can be found at this link. The Program is not yet operational; the Federal Reserve will provide further announcements as to a start date for the Program.
The following summarizes the principal changes to the MSNLF and MSELF and provides a summary of the key terms of the MSPLF, as set forth in the respective term sheets.
Eligible Lenders. Eligible Lenders have been expanded to include U.S. branches and agencies of foreign banks and U.S. intermediate holding companies of foreign banking organizations. Non-bank financial institutions, such as private debt funds, remain ineligible for purposes of the Program.
Eligible Borrowers. Eligible Borrowers are for-profit U.S.-organized businesses (including joint-ventures having no more than 49% participation by foreign business entities) established prior to March 13, 2020 and having significant operations in, and a majority of their employees based in, the United States. The business must have either (i) 15,000 employees or fewer, or (ii) $5 billion or less of 2019 annual revenues and must not be an ineligible business as defined by the Small Business Administration (the “SBA”).
To determine eligibility, a business must now aggregate its employees and revenues with those of its affiliates, using the SBA’s affiliation rules set forth at 13 CFR 121.301(f)(1/1/2019 ed.). These affiliation rules are similar to those used by the SBA in the execution of the PPP, with the notable exception that the waiver of affiliation rules, which applied for purposes of the PPP to businesses receiving financial assistance from SBICs, businesses in the restaurant and hospitality sector, and certain businesses operating as franchises, does not appear to apply for purposes of the Program. More information on the SBA’s affiliation rules applicable to the PPP can be found here. A business’ number of employees is determined by averaging all of its (and its affiliates’) full-time, part-time, seasonal and otherwise employed persons for each pay period over the 12 months prior to the origination or upsizing of the loan. A business’ 2019 revenues is determined using either the business’ (and its affiliates’) (i) annual “revenue” per its 2019 GAAP audited financial statements, or (ii) annual receipts for fiscal year 2019.
Eligible Loans. An Eligible Loan under either of the MSNLF or the MSPLF may be structured as a secured or unsecured term loan. An Eligible Loan under the MSELF is an upsized tranche of an existing credit facility and, as such, may be secured or unsecured, depending upon the terms of the underlying credit facility and the terms negotiated with respect to the upsized tranche. Additionally, an Eligible Loan under any of the three facilities must have the following terms:
1. 4-year maturity.
2. During the first year, principal and interest payments are deferred and unpaid interest is capitalized. After the first year, principal amortizes as follows:
(a) MSNLF: One-third of principal due at the end of each of years 2, 3 and 4 (at maturity).
(b) MSPLF and MSELF: 15% of principal due at the end of each of years 2 and 3 and the remaining 70% at maturity.
3. Adjustable interest rate based on LIBOR (1 or 3 month) + 300 basis points.
4. Prepayment permitted without penalty.
(a) MSNLF: Eligible Loan must not be contractually subordinated in right of payment to any of the Eligible Borrower’s other loans or debt instruments.
(b) MSPLF and MSELF: Eligible Loan must be 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.
6. Required Risk Rating: Any loans an Eligible Borrower had outstanding with the Eligible Lender as of December 31, 2019 (or, in the case of the MSELF, the underlying loan) must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system as of such date.
7. Minimum Loan Size:
(a) MSNLF and MSPLF: $500,000.
(b) MSELF: $10 million.
8. Maximum Loan Size:
(a) MSNLF: the lesser of (i) $25 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed four (4) times the Eligible Borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (“Adjusted EBITDA”).
(b) MSPLF: the lesser of (i) $25 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed six (6) times the Eligible Borrower’s 2019 Adjusted EBITDA.
(c) MSELF: the lowest of (i) $200 million; (ii) 35% of the Eligible Borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the MSELF loan and equivalent in secured status; or (iii) an amount that, when added to the Eligible Borrower’s outstanding and undrawn available debt, does not exceed six (6) times the Eligible Borrower’s 2019 Adjusted EBITDA.
When calculating Adjusted EBITDA, the Eligible Lender must use (and certify that it has used) (i) for purposes of the MSNLF or the MSPLF, a methodology it previously used for Adjusted EBITDA when extending credit to the Eligible Borrower or similarly situated borrowers, on or before April 24, 2020, or (ii) for purposes of the MSELF, the methodology it previously used for Adjusted EBITDA when it originated or amended the underlying loan.
An Eligible Borrower’s existing outstanding and undrawn available debt is calculated as of the date of the loan application and includes all amounts borrowed under any loan facility and any publicly issued bonds or private placement facilities. It also includes all unused commitments under any loan facility, subject to exceptions for certain specialized facilities and commitments that either require the provision of additional collateral or are no longer available due to changes in circumstances.
Lenders Must Assess Financial Condition. The updated guidance specifies that Eligible Lenders are expected to conduct an assessment of each borrower’s financial condition at the time of its application. While a company may meet the Eligible Borrower criteria and qualify for a loan of a certain amount based upon the relevant leverage test, it may nonetheless not be approved for a loan, or may not receive its maximum allowable amount, given an Eligible Lender’s underwriting criteria.
Required Attestations. The updated term sheets include certain additional attestations required to be made by Eligible Lenders and Eligible Borrowers (in addition to those set forth in the initial term sheets) and have clarified certain of the original attestations. Importantly, the Federal Reserve has clarified that the dividend restrictions applicable to Main Street loans will not restrict an S corporation or other tax pass-through entity from making distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
An Eligible Borrower must now certify that it has a reasonable basis to believe that, as of the date of origination of the Eligible Loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.
Fees. Applicable fees for the MSNLF and the MSPLF include (i) a 1% origination fee payable by the Eligible Borrower to the Eligible Lender and (ii) a 1% facility fee payable by the Eligible Lender to the special purpose vehicle (the “SPV”) established by the Federal Reserve for purchasing participations in the Main Street loans, which the Eligible Lender may pass through to the Eligible Borrower. The updated term sheets reduce the corresponding facility and origination fees for the MSELF from 1% to 0.75%.
Loan Participations. Under the MSNLF and MSELF, the SPV will continue to purchase from Eligible Lenders a 95% participation in each Eligible Loan under the MSNLF and MSELF facilities at par value, while the Eligible Lender will hold 5% of the Eligible Loan. Under the MSPLF, the SPV will purchase an 85% participation in each Eligible Loan, while the Eligible Lender will hold 15% of the Eligible Loan. The SPV will pay an Eligible Lender a per annum servicing fee of 0.25% of the principal amount of its participation in each Eligible Loan. The SPV will fund such purchases and fees through recourse loans from the Federal Reserve and a $75 billion equity investment from the Department of the Treasury.
Certain Practical Implications of Revised Main Street Terms. While the updates to the Program are responsive to certain of the comments that the Federal Reserve received on the initial terms of the Program, they do not resolve all of the challenges raised by those initial terms. The revised terms may expand access to the Program for certain potential participants, while constricting access to others. The size increase for Eligible Borrowers, as well as the use of an Adjusted EBITDA concept for purposes of the leverage test, may allow certain additional entities to participate, but the application of affiliation rules will preclude certain companies, including many private equity and venture capital-backed businesses, from accessing the Program. In addition, while the dividends exception for tax distributions by pass-through entities will be helpful for a large number of businesses, the exception is narrow and does not appear to permit other types of required dividends, such as REIT distributions.
Links to the term sheets for each facility are as follows:
Locke Lord team members are closely following further developments with respect to the Program and expect to publish additional guidance as further information from the Federal Reserve and/or the Department of the Treasury becomes available.
Your regular Locke Lord contact and the authors of this article would be happy to help you navigate the CARES Act and associated guidance as they relate to or otherwise affect small and mid-sized businesses and their lenders.
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