Update: For information on the most recent
developments in the Main Street Lending Program (MSLP), see our July 31, 2020,
In an April 30, 2020, press release, the Federal Reserve announced changes to the previously announced Main Street Lending Program, including the following:
- creating a third facility, the Main Street Priority Loan Facility (MSPLF) under the program, with increased risk-sharing by lenders (15 percent rather than 5 percent) for more highly leveraged borrowers;
- lowering the minimum loan size for certain loans, including under the previously announced Main Street New Loan Facility (MSNLF), to $500,000; and
- expanding the scope of eligible borrowers by increasing the employee threshold from 10,000 to 15,000 and the revenues threshold from $2.5 billion to $5 billion.
The Main Street Lending Program is designed to provide support to small and medium-sized businesses and their employees across the United States during the current period of financial strain by supporting the provision of credit to those businesses. The availability of additional credit is intended to help businesses that were in sound financial condition before the COVID-19 pandemic maintain their operations and payroll until conditions normalize. Loans under the Main Street Lending Program are full-recourse loans and are not forgivable.
As of the date of the new press release, the MSPLF, MSNLF and the previously announced Main Street Expanded Loan Facility (MSELF) constitute the Main Street Lending Program (MSLP). Each facility is authorized outside the CARES Act, under section 13(3) of the Federal Reserve Act. Updated terms relating to eligible loans under each facility (as reflected in the updated term sheets and FAQ document accompanying the new press release) are summarized in the table.
Among the more notable changes are (1) that lenders may use their own methodology for determining adjusted EBITDA for the leverage requirement in determining maximum loan size, as further discussed in lender item No. 4 below and in the table; (2) the removal of the Secured Overnight Financing Rate (SOFR) as the required reference rate for eligible loans (replaced with LIBOR); (3) that the MSELF has been expanded to include upsized tranches in revolving credit facilities (so long as the upsized tranche is itself a term loan); and (4) that tax distributions were carved out of the required borrower certification regarding limitations on capital distributions.
In addition, the updated term sheets and FAQ document provide more detail on required borrower and lender assessments, certifications and covenants under the MSLP, including the information below.
- Lenders must assess each potential borrower’s financial condition at the time of application. Lenders will apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower. Lenders may require additional information and documentation in making this evaluation and will ultimately determine whether an eligible borrower is approved for an MSLP loan in light of these considerations. Businesses that otherwise meet the borrower-eligibility requirements may not be approved for a loan or may not receive the maximum allowable amount.
- A lender must not request that the borrower repay debt extended by the lender to the borrower, or pay interest on such outstanding obligations, until the eligible loan (or upsized tranche of the eligible loan) is repaid in full, unless the debt or interest payment is mandatory and due, or in the case of default and acceleration.
- A lender must not cancel or reduce any existing committed lines of credit to the borrower, except in an event of default.
- A lender must certify that the methodology used for calculating the borrower’s 2019 adjusted EBITDA for the leverage requirement (in determining maximum loan size) is the methodology it previously used for adjusting EBITDA when extending credit to the borrower or similarly situated borrowers on or before April 24, 2020 (or, under the MSELF, when originating or amending the underlying eligible loan on or before April 24, 2020).
- A borrower must refrain from repaying the principal balance of, or paying any interest on, any debt until the eligible loan is repaid in full, unless the debt or interest payment is mandatory and due. However, the borrower may, at the time of origination of an eligible loan under the MSPLF, refinance existing debt owed by the borrower to a lender that is not the eligible lender. Also, the Federal Reserve notes in its FAQ document that those covenants would not prohibit a borrower from (i) repaying a line of credit in accordance with its normal course of business usage for that line of credit; (ii) taking on and paying additional debt obligations required in the normal course of business and on standard terms, so long as that debt is secured by newly acquired property and, apart from any such security, is of equal or lower priority than the eligible loan; or (iii) refinancing maturing debt.
- A borrower must not seek to cancel or reduce any of its committed lines of credit with the eligible lender or any other lender.
- The borrower must 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.
- The borrower must follow certain compensation, stock repurchase and capital distribution restrictions that apply to direct loan programs under the CARES Act, except that an S corporation or other tax pass-through entity that is an eligible borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings. At this point, it is unclear whether certain other restrictions described in the CARES Act as applying to direct loan programs under the CARES Act would apply to loans under the MSLP, including restrictions relating to (i) offshoring and outsourcing employees and (ii) union-related activities.
- The borrower should make commercially reasonable efforts to maintain its payroll and retain its employees during the time the eligible loan is outstanding. Specifically, a borrower should undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources and the business need for labor. Borrowers that have already laid off or furloughed workers as a result of the disruptions from COVID-19 are eligible to apply for loans under the MSLP.
For a detailed breakdown of the program, please see the table.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.