[co-authors: Matthew Roberts, Michael Karpen, Hazen Dempster]*

On Wednesday, May 27, the Federal Reserve Bank of Boston (Boston Fed) released additional information on the Main Street Lending Program (MSLP), which includes the form of the participation agreement governing the participation by the Federal Reserve’s special purpose vehicle, the form of servicing agreement to be entered into by the eligible lender making the loan, the certifications and covenants required for lenders and borrowers, and an updated set of Frequently Asked Questions (FAQs).

The official launch date has not yet been announced but the Boston Fed President stated on Sunday, May 24 that the facility should start to issue loans in the next two weeks.

Here are a few key highlights from the new and revised May 27 documents:

• Borrowers will need to certify that they are “unable to secure adequate credit accommodation from other banking institutions” as required under 12 CFR 201.4(d)(8) This does not require the borrower to attest that other credit is completely unavailable but, rather, that the amount, price, or terms of otherwise available credit are inadequate for the borrower’s needs given the current economic circumstances.

• United States subsidiaries of foreign parents are eligible to borrow under the MSLP. The Boston Fed clarified that as long as the borrower is created or organized in the United States or under the laws of the United States, it can be an eligible borrower under the MSLP even if its parent is a foreign company. To be an eligible borrower, the company (on a consolidated basis with its subsidiaries only) must have significant operations in and a majority of its employees based in the United States. The MSLP loan proceeds can only be used to benefit an eligible borrower, its consolidated United States subsidiaries, and other affiliates of the eligible borrower that are United States businesses.

• “Significant operations in the United States” was defined to mean that the eligible borrower on a consolidated basis with its subsidiaries has more than 50% of its operations in the United States. The Boston Fed also provided a non-exhaustive list of examples of different metrics to calculate whether the 50% threshold is met, any one of which could be used by the borrower, including:

  • Assets located in the United States

  • Annual net income generated in the United States

  • Annual net operating revenues generated in the United States, or

  • Annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) generated in the United States.

  So, while the Small Business Administration (SBA) affiliation rules govern the eligibility of a borrower for purposes of the 15,000 or fewer employee test and the $5 billion in revenue test, the GAAP consolidation rules govern the “significant operations in the United States” test.

• The Main Street Lending Program can accommodate split collateral facilities. The updated FAQs make clear that the Main Street Priority Loan Facility (MSPLF) does not need to share in all of the collateral that secures the eligible borrower’s other loans or debt instruments; however, they must be secured if the borrower has any other secured debt and the loan must have at least the same collateral coverage as the other secured debt of the borrower. These concepts are vaguely defined and will require further guidance.

  Loans made under the Main Street Extended Loan Facility (MSELF) must share pari passu in the collateral securing the underlying loan. For borrowers with an asset-based revolver and term loan, the MSELF “upsized tranche” needs to be pari passu with only the term loan tranche of the existing loan.

• The new FAQs from the Federal Reserve further clarify rules on double dipping. An affiliated group of companies can participate in only one MSLP. Affiliation for these purposes will be determined under the existing SBA affiliation rules. If more than one company of an affiliated group of companies participate in the same MSLP, the maximum loan limits in such program are calculated at both the affiliated group level and at the individual company level. So, if such companies were participating in either the MSNLF or the MSPLF, the maximum loans that those companies could receive would be $25 million in the aggregate. In addition, if any affiliate of the borrower has participated in the Primary Market Corporate Credit Facility, then the borrower cannot borrow under a Main Street facility.

• The Federal Reserve also made it clear that private equity companies cannot participate in the MSLP given they are an ineligible business under the SBA regulations. However, their portfolio companies may be eligible to participate if they independently meet the eligible borrower requirements.

• For the first time, the Boston Fed has provided the form of participation agreement that will govern the participation by the Federal Reserve SPV. The participation agreement includes voting rights for the SPV as a participant and delineates the circumstance in which the SPV can elevate its position to become a direct lender.

*Troutman Sanders