Update: For information on the most recent developments in the Main Street Lending Program (MSLP), see our November 25, 2020, alert.
On May 27, 2020, the Federal Reserve Bank of Boston released updated guidance and new documents for the Main Street Lending Program (MSLP).
The MSLP 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. Under the MSLP, the Federal Reserve has formed MS Facilities LLC as a special purpose vehicle (Main Street SPV) to purchase participations in eligible loans.
Three separate but related facilities comprise the MSLP: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF) and the Main Street Expanded Loan Facility (MSELF). The updated guidance and new documents do not expressly change the basic terms of those facilities, but they do expand on those terms and describe limitations and requirements not evident in previous guidance. The term sheets released by the Federal Reserve on April 30 are summarized in a May 1 McGuireWoods client alert and remain in effect.
The updated guidance and new documents offer additional details to potential borrowers and lenders about the MSLP and how it is expected to operate. Although a formal launch date for the MSLP has not been announced, the lack of changes to the terms of the program facilities and the issuance of updated guidance and new documents suggest that the MSLP will soon open for business.
Here are some key takeaways from the updated guidance and new documents.
- Funding a program loan can be contingent on a binding commitment from the Main Street SPV to purchase a participation. Lenders now have two options for funding program loans. A lender may extend a program loan and then seek to sell a participation to the Main Street SPV within 14 days after funding. A lender also may extend a program loan but make funding contingent on a binding commitment from the Main Street SPV to purchase a participation in the loan. Under that option, a lender would submit all required documentation to the Main Street SPV before funding. If that documentation is complete and consistent with all applicable program requirements, then the Main Street SPV would provide the lender with a binding commitment to purchase a participation in the loan after it is funded. The commitment letter would indicate that the lender is required to fund the loan within three business days of the commitment letter and that the Main Street SPV will purchase a participation within three business days after funding.
- A borrower must be “unable to secure adequate credit accommodations from other banking institutions.” The MSLP is a short-term emergency credit program authorized under section 13(3) of the Federal Reserve Act for “unusual or exigent circumstances.” Applicable regulations require the Federal Reserve to obtain evidence that a program participant is “unable to secure adequate credit accommodations from other banking institutions.” The form borrower certifications and covenants include a borrower certification to this effect. The updated FAQs provide that this does not mean that no credit from other sources is available to the borrower, but rather that the amount, price or terms of credit available from other sources are inadequate for the borrower’s needs during the unusual and exigent circumstances. A borrower is not required to demonstrate that other lenders have denied applications for credit or otherwise document that the amount, price or terms of credit available elsewhere are inadequate, but the form borrower certifications and covenants require a borrower to retain records containing the basis for the certification.
- Significant reporting will be required. Previous guidance indicated that the Main Street SPV would collect certain information about lenders, borrowers and loans under the MSLP to verify eligibility requirements and to support ongoing accounting and credit-risk-monitoring needs with respect to purchased loan participations. The updated guidance provides additional details. A borrower must provide certain financial information on an ongoing basis until the program loan matures. That information is described in appendix C to the updated FAQs and includes annual and, depending on the MSLP facility, quarterly reporting on assets, liabilities, income, EBITDA (and its components), expenses and expenditures, accounts receivable, accounts payable, collateral values and covenant defaults and cures. A lender may rely on self-reporting by a borrower.
- Consequences of material misrepresentations or breaches by a borrower can be severe. For all MSLP loans that are part of bilateral facilities, the loan documents must contain a mandatory-prepayment provision related to a material breach of the required borrower certifications regarding eligibility under the CARES Act, the Federal Reserve Act and related regulations. If the Federal Reserve determines that a borrower has materially breached, made a material misrepresentation with respect to, or otherwise failed to comply with those certifications in any material respect, then the Federal Reserve may notify the lender and the borrower will then be required to prepay the MSLP loan in full within two business days. (The updated guidance discusses a similar requirement for MSELF upsize tranches that are part of multi-lender facilities.) The form borrower certifications and covenants also include an acknowledgement that the Main Street SPV, the Federal Reserve or the Department of the Treasury may refer any knowing material misrepresentation by the borrower to relevant law-enforcement authorities for investigation and possible action in accordance with criminal and civil law. The borrower also indemnifies the lender, the Main Street SPV, the Federal Reserve and the Department of the Treasury for liabilities, claims, losses and expenses arising out of a material breach of any of the borrower’s representations, warranties, covenants or agreements in those certifications and covenants. A lender may rely on (and is not expected to independently verify) a borrower’s certifications and covenants, and a lender is not expected to actively monitor ongoing compliance with covenants required for borrowers under the MSLP. But if a lender becomes aware that a borrower has made a material misstatement or otherwise breached a covenant during the term of an MSLP loan, the lender should notify the Federal Reserve Bank of Boston.
- Principal of participated loans cannot be reduced through loan forgiveness. Section 4003(d)(3) of the CARES Act prohibits the principal amount of an MSLP loan from being reduced through loan forgiveness. But in the event of a restructuring or workout, the Main Street SPV may agree to reductions in interest (including capitalized interest), extended amortization schedules and maturities, and higher-priority “priming” loans.
- Priority and security requirements have been refined. An MSLP loan may be secured or unsecured, but it may not be contractually subordinated in terms of priority to the borrower’s other loans or debt instruments. An MSPLF loan and an MSELF upsize tranche must be senior to, or pari passu with, in terms of priority and security, the borrower’s other loans or debt instruments (other than mortgage debt). An MSPLF loan or an MSELF upsize tranche may be unsecured only if the borrower does not have, as of the date of origination, any secured loans or debt instruments (other than mortgage debt). The collateral-coverage ratio for a secured MSPLF loan at the time of its origination must be at least 200 percent (or not less than the aggregate collateral-coverage ratio for all of the borrower’s other secured loans or debt instruments, other than mortgage debt). An MSELF upsize tranche must be secured by the collateral securing any other tranche of the underlying facility on a pari passu basis, but if the underlying facility includes both one or more term-loan tranches and one or more revolver tranches, then the MSELF upsize tranche needs to share collateral only with the underlying term-loan tranche(s).
- The Main Street SPV’s participation is more defined. The new documents include a form participation agreement and form administrative documents relating to participations. Those forms are modeled on similar documents customarily used in syndicated loan markets but include provisions specific to the MSLP and to the nature of the Main Street SPV. The Main Street SPV is generally permitted to sell its participation only with the contemporaneous consent of the lender and to elevate its participation to an assignment only with the contemporaneous consent of the lender, the borrower and other necessary parties. But the Main Street SPV may, without any such consent, sell or transfer its loan participation to a governmental assignee (other than to effect a securitization). In addition, the Main Street SPV may, without any such consent, sell or transfer its participation (or elevate its participation to an assignment) if the borrower fails to make a payment on the MSLP loan, if the borrower becomes the subject of bankruptcy or other insolvency proceedings, to prevent a violation of the CARES Act prohibition on loan forgiveness, or if required to do so by a statute or court. The updated FAQs note that the Federal Reserve does not expect the Main Street SPV to elevate its participation to an assignment except in situations where the economic interests of the lender and the Main Street SPV are misaligned or the loan amount is relatively large in comparison to other loans in the Main Street SPV’s portfolio of participations. Information regarding the loan documentation required to sell a loan participation to the Main Street SPV is expected to be made available on the Federal Reserve’s website.
- Lenders and borrowers have a clearer roadmap. The new documents include detailed instructions, checklists and forms for lenders to register under the MSLP and for completing required documentation for MSLP loans. Beyond those instructions, checklists and forms, a lender is expected to use its own loan documentation for MSLP loans, which should be substantially similar, including with respect to required covenants, to the loan documentation that the lender uses in its ordinary-course lending to similarly situated borrowers, adjusted only as appropriate to reflect the requirements of the MSLP.
- Future program changes are possible. In public testimony and comments about the MSLP, the Federal Reserve has emphasized that it expects the program to evolve over time. The updated guidance leaves open the possibility of future changes, including with respect to eligible lenders (including non-bank lenders), eligible borrowers (including nonprofits) and loan amounts. Legislators, governmental oversight bodies and industry groups have provided comments and criticism to the Federal Reserve and likely will continue to do so as the MSLP begins to operate.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.