Main Street Lending Program Expansion Announced

COVID-19 Update

On April 30, the Federal Reserve Board, after receiving more than 2,200 letters in response to a request for feedback on its Main Street Lending Program, announced an expansion of the scope of and eligibility for the program. A third loan option, the Main Street Priority Lending Facility, has been added, and the term sheets for the two existing programs have been modified to increase the number of eligible businesses.

Main Street New Loan Facility

The Main Street New Loan Facility (MSNLF) term sheet has been altered in significant ways. 

The category of eligible lenders has been expanded to include U.S. branches or agencies of foreign banks and U.S. intermediate holding companies of foreign banking organizations, as well as U.S. subsidiaries of any eligible lenders.

The maximum thresholds for eligible borrowers have been raised from 10,000 employees or $2.5 billion in 2019 annual revenues to 15,000 employees or $5 billion or less in 2019 annual revenues. However, three additional restrictions have been added: (1) an eligible borrower must have been established prior to March 13, 2020; (2) businesses that are ineligible for SBA loans under 13 CFR 120.110(b)-(j) and (m)-(s) are not eligible for the MSNLF (unless, as is the case with businesses deriving more than one-third of gross annual revenue from legal gambling activities, modified by regulations implementing the Paycheck Protection Program); (3) and businesses that have received specific support pursuant to the CARES Act are ineligible. 

As noted above, the minimum size of an eligible loan has been reduced from $1 million to $500,000. The adjustable rate was changed to LIBOR (one- or three-month) 300 basis points. There is an additional requirement of principal amortization of one-third at the end of the second year, one-third at the end of the third year and one-third at maturity at the end of the fourth year, as well as an additional requirement that the eligible loan not be contractually subordinated in terms of priority to any of the eligible borrower’s other loans or debt instruments. Further clarification in the Federal Reserve’s FAQs explains that an MSNLF loan must not be junior in priority in bankruptcy to the eligible borrower’s other unsecured loans or debt instruments. The sale of the portion of the loan to the special-purpose vehicle must be a “true sale.”

Eligible lenders must conduct an assessment of each borrower’s financial condition at the time of application, and if the borrower has any loans outstanding with that eligible lender, the borrower must have an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date.

“Attestations” are now “certifications and covenants” but largely remain substantively unchanged. The leverage condition for earnings before interest, taxes, depreciation and amortization (EBITDA) has shifted from a borrower attestation that it meets the leverage condition to a lender certification that it is using the same EBITDA methodology that it used in previous credit extensions to the eligible borrower or similarly situated borrowers on or before April 24, 2020. One attestation that has been removed entirely is the attestation from an eligible borrower that it requires financing due to the exigent circumstances presented by COVID-19. Eligible borrowers now must certify that they have a reasonable basis to believe that they have the ability to meet financial obligations for 90 days and do not expect to file for bankruptcy. Eligible lenders must collect these certifications and covenants from eligible borrowers at the time of origination and may rely on them.

Main Street Expanded Loan Facility

The changes made to the term sheet for the Main Street Expanded Loan Facility (MSELF) are the same as those described above for the MSNLF, with the following exceptions:

  • The existing loan must have a remaining maturity of at least 18 months, taking into account any adjustments made to the maturity of the loan after April 24, 2020, including at the time of the upsizing.
  • The minimum loan size has been raised from $1 million to $10 million.
  • The maximum loan size has been raised from the lesser of $150 million, 30% of the eligible borrower’s outstanding committed but undrawn bank debt, or an amount not more than six times the eligible borrower’s adjusted EBITDA from 2019 to the lesser of $200 million, 35% of the eligible borrower’s outstanding undrawn available debt that is pari passu in priority with the eligible loan and equivalent in secured status, or an amount not more than six times the eligible borrower’s adjusted EBITDA from 2019.
  • A new amortization requirement differs from the one described above for MSNLF, requiring payments of 15%, 15% and 70% at the end of the second, third and fourth years respectively.
  • The upsized tranche 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.
  • Eligible lenders must pay the special-purpose vehicle a transaction fee of 75 basis points of the principal amount of the upsized tranche of the eligible loan at the time of upsizing but may require eligible borrowers to pay this fee.
  • The origination fee has been reduced from 100 basis points to “up to 75 basis points.”

Main Street Priority Loan Facility

The term sheet for the Main Street Priority Loan Facility (MSPLF) mirrors the revised term sheet for the MSNLF discussed above, with the following exceptions:

  • The amortization requirement mirrors instead the MSELF amortization requirement, which requires 15% at the end of the second year, 15% at the end of the third year and a balloon payment of 70% at maturity at the end of the fourth year.
  • The special-purpose vehicle will purchase at par value only an 85% (rather than 95%) participation in the eligible loan, leaving the eligible lender with a 15% participation.
  • While the eligible borrower must still certify that it will not pay down other debts unless mandatory or due until the eligible loan has been repaid in full, the term sheet for the MSPLF clarifies that the eligible borrower may, at the time of origination of the eligible loan, refinance existing debt owed by the eligible borrower to a lender that is not the eligible lender.

While the new term sheets and FAQ have provided needed guidance, there are still a number of open issues. The biggest question is when the program will start, as a date still has not been announced. Also of great importance to lenders is the documentation to be used for originating the loans and selling them to the facilities. The FAQ states that documentation will be posted to the Federal Reserve website, but there is no target date for when it will be available. The FAQ also discusses whether nonprofits may be allowed to participate in the facilities. They are currently not eligible, but the Federal Reserve and the Treasury Department will evaluate whether the eligibility criteria may be modified to allow nonprofit organizations to participate. Manatt will continue to monitor developments to the Main Street Lending Facilities and in other COVID-19 relief programs. Our COVID-19 resources are available here.

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