Update: For information on the most recent developments in the Main Street Lending Program (MSLP), see our November 25, 2020, alert.
Two significant developments occurred on June 15, 2020, with respect to the Main Street Lending Program (MSLP). First, the MSLP opened for lender registration. Second, the Federal Reserve released draft term sheets for two new facilities under the MSLP to provide access to credit for nonprofit organizations.
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. Under the MSLP, the Federal Reserve Bank of 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 (from May 1, May 29 and June 12) 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).
As of June 15, 2020, lenders can register for the MSLP with the Federal Reserve Bank of Boston using a lender portal. Registration is the first step for a lender to sell participations in eligible loans under the MSLP; a separate loan-submission function is expected to open at a later date. Detailed instructions are available. To register, a lender must submit required Lender Registration Certifications and Covenants (including as to its solvency and its eligibility under the MSLP) and wire instructions for the bank account into which the Main Street SPV will transfer the purchase price and other payments in respect of participations in eligible loans. A lender’s chief executive officer and chief financial officer are both required to provide information to successfully complete that lender’s registration.
Nonprofit organizations are not eligible under the MSLP’s three existing facilities. The Federal Reserve previously acknowledged that nonprofit organizations have unique needs to which those existing facilities are not well-suited. But the Federal Reserve also indicated that it was working to establish one or more suitable loan options for nonprofit organizations. On June 15, 2020, the Federal Reserve released draft term sheets for two new facilities under the MSLP: the Nonprofit Organization New Loan Facility (NONLF) and the Nonprofit Organization Expanded Loan Facility (NOELF).
As with the existing MSLP facilities, the proposed nonprofit facilities would support the provision of credit to small and medium-sized nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic.
Borrower eligibility requirements for the proposed NONLF and NOELF are modified from the other MSLP facilities to reflect the operational and accounting practices of nonprofit organizations. To be eligible under the proposed facilities, a nonprofit organization must have been established prior to, and have been in continuous operation since, Jan. 1, 2015, and it must be a tax-exempt organization under section 501(c)(3) or 501(c)(19) of the Internal Revenue Code. Other borrower eligibility requirements include the following:
- The organization has at least 50 employees.
- The organization meets at least one of the following two conditions: (1) it has 15,000 employees or fewer, or (2) it had 2019 annual revenues of $5 billion or less.
- The organization has an endowment of less than $3 billion.
- The organization has 2019 revenues from donations (proceeds from fundraising events, federated campaigns, gifts and funds from similar sources) that are less than 30 percent of its total 2019 revenues.
- The organization has a ratio of (i) adjusted 2019 earnings before interest, depreciation and amortization (calculated using a methodology the lender used when extending credit to the organization or to similarly situated borrowers on or before June 15, 2020), to (ii) unrestricted 2019 operating revenue, that is greater than or equal to 5 percent.
- The organization has a ratio (expressed as a number of days) of (i) liquid assets at the time of loan origination to (ii) average daily expenses over the previous year, that is greater than or equal to 90 days.
- At the time of loan origination, the organization has a ratio of (i) unrestricted cash and investments to (ii) existing outstanding and undrawn available debt, plus the amount of any loan under the proposed facility, plus the amount of any accelerated or advance payments from the Centers for Medicare & Medicaid Services, that is not greater than 65 percent.
- The organization is created or organized under U.S. laws, with significant operations in, and a majority of its employees based in, the United States.
- The organization does not also participate in any other MSLP facility or in the Federal Reserve’s Primary Market Corporate Credit Facility or Municipal Liquidity Facility.
- The organization has not received industry-specific support pursuant to the CARES Act.
Certain terms and requirements under the proposed NONLF and NOELF are the same as for the MSNLF, MSPLF and MSELF:
- Lenders are expected to conduct an assessment of a potential borrower’s financial condition at the time of the potential borrower’s application.
- Borrowers must certify as to their solvency and eligibility and must commit to certain restrictions on compensation, distributions and repayment of other debt.
- The loans will be term loans with a five-year maturity.
- The interest rate will be LIBOR (one- or three-month) plus 3 percent.
- Principal payments will be deferred for two years.
- Interest payments will be deferred for one year.
- Principal will amortize 15 percent at the end of each of the third and fourth years and 70 percent at maturity at the end of the fifth year.
- The loan documents must permit prepayment without penalty.
- The Main Street SPV will purchase a 95 percent participation in eligible loans.
The proposed NONLF is most comparable to the MSNLF. The minimum loan size under the proposed NONLF is $250,000 and the maximum loan size is the lesser of $35 million and the borrower’s average 2019 quarterly revenue. A loan under the proposed NONLF may be secured or unsecured, but it may not be contractually subordinated in terms of priority to any of a borrower’s other loans or debt instruments.
The proposed NOELF is most comparable to the MSELF. An eligible loan under the proposed NOELF is an upsize tranche of an existing credit facility that was originated on or before June 15, 2020, and that has a remaining maturity of at least 18 months. The minimum loan size under the proposed NOELF is $10 million and the maximum loan size is the lesser of $300 million and the borrower’s average 2019 quarterly revenue. An upsize tranche under the proposed NOELF may be secured or unsecured, but it must be senior to or pari passu with, in terms of priority and security, a borrower’s other loans or debt instruments (other than mortgage debt).
The Federal Reserve is seeking feedback on the proposed nonprofit facilities. Feedback may be submitted via email until June 22, 2020, and will be made available to the public.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.