Main Street Lending Program Opens to Nonprofits, Multiborrower Loans

Federal Reserve Issues Incremental Guidance; Program Uptake Is Modest but Growing

September 22, 2020

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 (from May 1, May 29, June 12, June 18, July 6, 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 (NOELF).

Nonprofit facilities fully opened

On Sept. 4, 2020, FRB Boston announced 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 and 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.

  1. 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.

  2. 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.

  3. 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 employee:

    • 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.

  4. 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 transaction-specific details 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 $331.6 million.

  • Settled MSLP loans were made to eligible borrowers in 26 different U.S. states.

  • 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.

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