Update: For information on the most recent
developments in the Main Street Lending Program (MSLP), see our July 31, 2020,
On July 15, 2020, the Federal Reserve
updated guidance for the Main Street Lending Program (MSLP). That updated
guidance further modifies or clarifies certain requirements of the program,
following its launch on July 6.
The Federal Reserve established the MSLP to support lending to small and
medium-sized businesses that
were in sound financial condition before the onset of the COVID-19 pandemic
and that currently meet underwriting requirements applied by eligible
lenders in accordance with the program. Under the MSLP, the Federal Reserve
Bank of Boston (FRB Boston) has formed MS Facilities LLC as a special
purpose vehicle (Main Street SPV) to purchase up to $600 billion of
participations in eligible loans. McGuireWoods’ previous client alerts
June 18 and
July 6) summarize the term sheets, guidance and form documents issued and revised
by the Federal Reserve for the MSLP’s three existing facilities: the Main
Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility
(MSPLF) and the Main Street Expanded Loan Facility (MSELF).
FRB Boston fully opened the MSLP on July 6. That opening followed the
issuance of incremental updated guidance on June 20 and June 26 (summarized
in McGuireWoods’ July 6 client alert) and the opening of lender
registration on June 15 (summarized in the June 18 client alert). On July
8, FRB Boston began publishing a
list of lenders
accepting new business customers under the program. As of July 15, the Main
Street SPV held approximately $12 million of participations in eligible
Here are some key takeaways from the updated guidance:
- LIBOR floors are not permitted. Loans under the MSLP
must be adjustable-rate five-year term loans with an interest rate of
one-month or three-month LIBOR plus 3 percent. The updated guidance
expressly provides that interest-rate floors with respect to LIBOR are not
- Fees may be included in the principal. A lender may
charge certain fees to the borrower at the time an MSLP loan is originated.
Those fees can include facility-specific transaction and origination fees
(1 percent each for the MSNLF and the MSPLF; 0.75 percent each for the
MSELF), fees for services that are customary and necessary in the lender’s
underwriting of loans to similar borrowers, and, in the case of the MSELF,
customary consent fees. The updated guidance clarifies that a lender may
include those fees in the principal amount of the MSLP loan, so long as the
total loan amount (including those fees) does not exceed the maximum loan
size permitted for the borrower under the applicable MSLP facility.
- Updated PPP rules for borrower eligibility are adopted.
To be an eligible borrower under the MSLP, among other requirements a
business must not be an “Ineligible Business” as defined in certain
regulations adopted by the Small Business Administration under the Paycheck
Protection Program (PPP). The updated guidance notes that the Federal
Reserve has incorporated, for application to the borrower-eligibility
requirements under the MSLP, additional interim final rules published on
June 18 and June 26 relating to eligibility under the PPP. Under those
subsequent interim final rules, a PPP loan would not be approved if an
owner of 20 percent or more of the equity of the applicant is then
incarcerated, is then subject to pending felony criminal charges or had
been convicted of, pleaded guilty or nolo contendere to, or
commenced probation or parole for, any felony involving fraud, bribery,
embezzlement or a false statement in a loan application or an application
for federal financial assistance within the last five years or any other
felony within the last year.
- The mortgage-debt exception is clarified. Loans under
the MSPLF and the MSELF must be senior to or pari passu with, in
terms of priority and security, the borrower’s other loans or debt
instruments, other than certain excluded debt (defined in the guidance as
“Mortgage Debt”). Previous guidance defined “Mortgage Debt” as (1) debt
secured by real property and (2) limited-recourse equipment financing. The
updated guidance clarifies that debt secured by real property qualifies as
Mortgage Debt only if it is solely secured by real property. MSPLF
and MSELF loans funded or submitted to the MSLP lender portal in good faith
on or before July 17, 2020, that do not reflect that clarification are not
- The MSELF “purchase by” requirement is removed. To be
eligible for upsizing under the MSELF, an existing credit facility must
have been originated on or before April 24, 2020. An MSELF lender must hold
an interest in the underlying credit facility. Previous guidance required
the MSELF lender to have originated the facility or to have purchased an
interest in the facility before April 24, 2020. The updated guidance
removes that specific date with respect to purchases, meaning a lender that
purchased an interest in an eligible existing credit facility after that
date may make an MSELF loan.
- Relevant borrower financial records are clarified. To
be an eligible borrower under the MSLP, among other requirements a business
must have been established before March 13, 2020. The updated guidance
reiterates that a borrower must have a financial record upon which a
calculation of adjusted 2019 EBITDA can be made, but clarifies that a
business with no financial record of its own but with clear predecessors or
subsidiaries that can be referred to in calculating adjusted 2019 EBITDA
can use the financial records of those predecessors and subsidiaries. The
updated guidance also provides that if a borrower’s fiscal year 2019 does
not coincide with calendar year 2019, then the borrower may use its 2019
fiscal year unless otherwise required by the lender.
- Certain hedging activities are permitted. The updated
guidance clarifies that lenders and borrowers may hedge interest-rate risk
associated with MSLP loans. The updated guidance further provides that
lenders may hedge credit risk associated with a borrower’s industry but may
not engage in borrower-name-specific hedging of an MSLP loan.
Among other updates, the updated guidance also announces a waiver of
capital-distribution restrictions with respect to tribal businesses paying
dividends to tribal governments, clarifies the “tribal business concern”
definition, highlights information-security measures implemented in the
MSLP lender portal, clarifies that sole proprietorships are not eligible
borrowers, and consolidates existing guidance on the use of MSLP loan
proceeds (including that proceeds of an MSPLF loan may not be used to
refinance existing debt of the MSPLF lender or its affiliates).
The Main Street SPV may purchase participations in eligible loans until
Sept. 30, 2020.
Note: On July 17, 2020, as this client alert was being published, the
Federal Reserve released updated term sheets for two new facilities
under the MSLP to provide access to credit for nonprofit organizations.
McGuireWoods summarized the initial drafts of those term sheets in the
June 18 client alert and expects to publish a client alert covering the
updated draft term sheets in the coming days.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.