For information on the most recent developments in the Main Street
Lending Program (MSLP), see our
November 25, 2020, alert.
The Federal Reserve recently expanded access to the Main Street Lending
Program (MSLP) by fully opening the program to nonprofit organizations
(NPOs) and accepting submissions of multiborrower loans. The Federal
Reserve also issued incremental guidance to provide clarity on a number of issues.
The Federal Reserve established the MSLP to support lending to small and
medium-sized businesses and NPOs that were in sound financial condition
before the onset of the COVID-19 pandemic. Under the MSLP, the Federal
Reserve Bank of Boston (FRB Boston) 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
July 17 and
July 31) summarize the term sheets, guidance and form documents issued and revised
by the Federal Reserve for the MSLP.
The MSLP currently consists of five facilities: the Main Street New Loan
Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), the Main
Street Expanded Loan Facility (MSELF), the Nonprofit Organization New Loan
Facility (NONLF) and the Nonprofit Organization Expanded Loan Facility
Nonprofit facilities fully opened
On Sept. 4, 2020, FRB Boston
that the NONLF and NOELF were fully operational and that the Main Street
SPV is now accepting submissions of eligible loans to NPOs. McGuireWoods
previously summarized the NONLF and NOELF in client alerts from
June 18 and
July 31. FRB Boston also released incremental guidance reflecting that the NONLF
and NOELF are fully operational and clarifying the calculation of “total
compensation” for purposes of complying with compensation limits under the
restrictions that apply to direct loan programs under section
4003(c)(3)(A)(ii) of the Coronavirus Aid, Relief, and Economic Security Act
(CARES Act), which restrictions are incorporated into the MSLP.
Lenders can now submit multiborrower loans
On Sept. 21, 2020, FRB Boston announced technical updates to the MSLP
portal, through which lenders submit eligible loans for review and
purchases of participations by the Main Street SPV, supporting loan
structures involving multiple co-borrowers. Each borrower in a
multiborrower loan structure must meet the borrower eligibility
requirements, and each borrower must complete and submit the applicable
required borrower certifications and covenants. Incremental guidance issued
by FRB Boston provides additional technical details and examples for
completing and submitting MSLP legal documents and entering data into the
MSLP portal for multiborrower loans.
Federal Reserve issues incremental guidance
Since late July, FRB Boston has released additional incremental guidance
for the MSLP, updating the
FAQs for for-profit businesses,
FAQs for NPOs
instructions for lender required documentation. The basic terms of the five MSLP facilities remain largely unchanged, but
the updated guidance provides additional insight into those terms and
describes limitations and requirements not evident in the term sheets.
Below are some key takeaways from the updated guidance, in addition to the
updates noted above.
- Expectations for lender underwriting are clarified. The
updated guidance emphasizes that lender underwriting should look back to a
borrower’s pre-pandemic condition and forward to its post-pandemic
prospects at the time of application, while also taking into account the
payment-deferral features in MSLP loans. The updated guidance further
provides that federal supervisors will not criticize lenders for
originating MSLP loans in accordance with program requirements, including
when those loans are considered non-pass at the time of origination, so
long as those weaknesses stem from the pandemic and are expected to be
temporary or if those loans are part of a lender’s prudent risk-mitigation
strategy for an existing borrower.
- A safe harbor is created for limited lender ownership of borrower
equity interests. The updated guidance now specifies, for purposes of the borrower
eligibility requirements, that ownership by the eligible lender and its
affiliates of no more than 5 percent of the total outstanding equity
interests in the borrower will not cause the borrower to be ineligible.
- The application of direct-loan restrictions to loans between borrowers
and owners and employees is clarified. A borrower under the MSLP must commit to complying with the restrictions
that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the
CARES Act, which restrictions are incorporated into the MSLP. Those
restrictions include limits on capital distributions and compensation. The
updated guidance clarifies how those restrictions apply with respect to
loans between an MSLP borrower and an individual who is an owner or
- Any loan made by a borrower to an owner after origination of an MSLP loan
will be presumed to be a capital distribution unless the loan is “bona
fide” (as defined below) and either repaid according to its terms or the
lender (i.e., the MSLP borrower) exercises its rights as a creditor upon
default. Such a loan is bona fide if (1) it is a written instrument with a
stated interest rate and a stated maturity date; (2) it has terms that are
at least as favorable to the lender (i.e., the MSLP borrower) as prevailing
market terms for similar loans at the time of origination; (3) the lender
(i.e., the MSLP borrower) has a reasonable expectation of repayment; (4)
the debt is enforceable under state law; and (5) the lender (i.e., the MSLP
borrower) has remedies upon default.
- Any loan made by a borrower to an owner before origination of an MSLP
loan will be presumed to be a capital distribution if the loan is forgiven
or discharged, in whole or in part, or if the lender (i.e., the MSLP
borrower) does not exercise its rights as a creditor.
- An MSLP borrower’s repayment of a loan made to it by an owner would not
be considered a capital distribution if the loan is bona fide and the
repayment is made when mandatory and due. In addition, an MSLP borrower
may, at the time of origination of an MSPLF loan, use the proceeds of that
loan to prepay existing debt that is outstanding and owed to lenders other
than the MSLP lender (including repayment of a loan from an owner who is
not the MSLP lender).
- For purposes of the limits on compensation under the direct-loan
restrictions, an MSLP borrower must determine whether a loan made to an
employee of the borrower, or whole or partial forgiveness or discharge of
any such loan, would be considered as compensation to that employee
according to applicable rules for calculating compensation.
- A transaction that circumvents or evades the direct-loan restrictions
will be viewed as a violation of those restrictions.
- Use of cash balances and delayed-draw balances are permitted but
limited. The updated guidance provides that lenders and borrowers may agree to
include cash-collateral deposits, compensating balances, cash reserve
accounts or cash escrow accounts at origination or during the life of an
MSLP loan as part of the loan terms, subject to certain limits.
- The Federal Reserve does not encourage requiring a borrower to maintain
cash balances that are restricted to serving as collateral or for paying
principal or interest on an MSLP loan when mandatory and due. But the
updated guidance notes that lenders and borrowers can agree to include
those features at origination or during the life of an MSLP loan as part of
the loan terms if those terms are a normal component of the lender’s
underwriting practices for similarly situated borrowers and do not exceed
15 percent of the outstanding balance of the MSLP loan.
- MSLP lenders and borrowers also may agree to place a portion of the
proceeds of an MSLP loan in an account held with the lender to delay draw
on those funds until certain conditions related to the borrower’s
operations are met. Those conditions can include, for example, requirements
that the borrower provide documentation or other evidence that loan
proceeds are being used to fund pre-agreed activities or purchases by the
borrower, or that the borrower pledge additional collateral to secure the
MSLP loan that is not available at origination. Any such restriction must
be substantially similar to a condition placed on similarly situated
borrowers by the lender in the course of its ordinary underwriting. MSLP
lenders may not use those features to ensure funds are available for
mandatory and due payments on a borrower’s other debt, except in the case
of a permitted refinancing of existing debt under the MSPLF. All such
conditions must be included in the loan agreement at origination and must
be fully transparent to the borrower.
MSLP uptake is modest but growing
FRB Boston fully opened the MSLP to for-profit businesses on July 6, 2020.
As of Sept. 16, 2020, the Main Street SPV held approximately $1.445 billion
of participations in eligible loans, or approximately 0.24 percent of the
current maximum size of the MSLP.
On Sept. 8, 2020, the Federal Reserve released
for MSLP loans settled with the Main Street SPV through Aug. 31, 2020. Of
note, those disclosures reflect the following:
- Thirty-nine lenders made and settled 118 eligible loans in an aggregate
principal amount of approximately $1.129 billion (for approximately $1.072
billion in purchased participations).
- Half of all settled MSLP loans (59 of 118) were made by a single lender.
The aggregate principal amount of those settled loans was approximately
- Settled MSLP loans were made to eligible borrowers in 26 different U.S.
- Settled MSLP loans were concentrated in the MSNLF (58 settled loans, in
an aggregate principal amount of approximately $306.2 million) and the
MSPLF (58 settled loans, in an aggregate principal amount of approximately
$740.7 million). Just two loans under the MSELF had been settled, in an
aggregate principal amount of $82.1 million.
- The average and median principal amounts of all settled MSLP loans were
approximately $9.57 million and $4.11 million, respectively. The average
and median principal amounts of all settled MSNLF loans were approximately
$5.28 million and $2.75 million, respectively, with a range of $265,000 to
$35 million. The average and median principal amounts of all settled MSPLF
loans were approximately $12.77 million and $5.88 million, respectively,
with a range of $518,000 to $50 million. The principal amounts of the two
settled MSELF loans were $71.05 million and $11 million.
- On average, the Main Street SPV purchased participations in eligible
loans within 12 days after origination, with a range of 3 to 34 days and a
median of 9.50 days.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.