The Federal Reserve anticipates accepting applications under the Main Street Lending Programs in June and has implied recently that the rollout is imminent. On May 27, 2020, the Federal Reserve Bank of Boston (FRBB) clarified the requirements and necessary legal forms and agreements for its Main Street Lending Program, as it gets ready to implement the program. These clarifications and forms will facilitate the process for banks to begin taking applications.

FRBB also provided instructions for completing the required forms and updated the Frequently Asked Questions (FAQS) originally issued on April 30, 2020. The Term Sheets for the Main Street New Loan Facility (MSNFL), Main Street Priority Loan Facility (MSPLF) and Main Street Expanded Loan Facility (MSELF) remain unchanged as of April 30, 2020. An overview of the Main Street Lending Program can be accessed here.

In a previous article, we discussed the features of this Program as announced on April 30. This article focuses on the clarifications just announced by FRBB.

Direct lending to businesses is somewhat new to the Federal Reserve. Therefore, it is relying on and adopting many of the SBA guidelines under the CARES Act’s Paycheck Protection Program, such as the affiliation rules, the rules on ineligible types of businesses, the rules on the counting of employees for eligibility purposes and certain definitions. This should bring more clarity to the process, rather than having the FRBB create its own set of rules from start.

U.S. businesses that received loans under the PPP or under the emergency injury disaster relief program administered by the SBA are eligible to apply for a loan under the Main Street Lending program.

Updated FAQS

The revised FAQs clarify and provide numerous updates regarding eligibility, loan terms and program requirements. Some highlights relating to eligibility include:

• An Eligible Borrower must have “significant operations in the United States” when evaluated on a consolidated basis with its subsidiaries, but not when evaluated with its parent or sister affiliates. “Significant Operations“ include, when consolidated with its subsidiaries, 50% of the Eligible Borrower’s (i) assets being located in the US, (ii) generating net income and/or revenues in the US, and (iii) incurring consolidated operating expenses.
• An Eligible Borrower must be created or organized in the United States, but may be a subsidiary of a foreign company so long as the Eligible Borrower has “Significant Operations” in the US and uses the loan proceeds strictly for its own operations and those of its U.S. subsidiaries and affiliates.
• An affiliated group of companies can participate in only one MSELF facility and cannot participate in both the MSLP and the Primary Market Corporate Credit Facility program.
• Private Equity funds are not eligible to participate in the MSELF.
• To satisfy the requirement that a borrower use commercially reasonable efforts to maintain payroll and retain employees, it should undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor. Borrowers that have already laid off or furloughed workers as a result of the disruptions from COVID-19 are eligible to apply for Main Street loans.
• Eligible Lenders shall require that Eligible Borrowers adjust 2019 EBITDA by using the methodology that the Eligible Lender has previously required for EBITDA adjustments when extending credit to the Eligible Borrower or, if the Eligible Borrower is a new customer, similarly situated borrowers on or before April 24, 2020.

Other Indebtedness of Borrower

Other indebtedness is allowed, but only if certain requirements are met.

• The loan cannot be contractually subordinated to other indebtedness of the Borrower. For MSNLF unsecured loans, the Loan cannot be junior in priority in bankruptcy to any unsecured debt existing at the time of loan origination.
• A MSNLF loan can be junior to existing secured debt.
• A MSPLF loan and a MSELF loan can be unsecured only if the Borrower does not have as of the date of origination any other secured loans, excluding mortgage debt. If there is other secured debt, the MSPLF must be secured. The collateral must be senior or of the same priority as the lien of any other indebtedness on the same collateral.
• For secured MSPLF loans, either (1) the aggregate value of collateral for the loan must be at least either twice the outstanding aggregate principal amount of the loan, or (2) the ratio of the aggregate value of collateral for the loan to the outstanding aggregate principal amount of the loan must be at least equal to the ratio of the aggregate value of collateral for all other secured debt to the outstanding aggregate principal amount of all other secured debt.
• MSELF loans, which are loans that are added to an existing credit facility with another lender, or what is called “an upsized tranche”, must be secured to the same extent as the underlying loan being upsized.
• The underlying loan must have been in place on April 24, 2020 and must have at least 18 months remaining before maturity. If there is less than 18 months remaining, a lender can extend the maturity of the underlying loan at the time of the MSELF loan to comply with this 18-month requirement.
• To comply with the requirement that loan proceeds of a MSNLF loan or MSELF loan not be used to prepay other indebtedness, if a Borrower has an existing debt arrangement that requires prepayment of more than a de minimis amount upon the incurrence of new debt, the Borrower cannot receive an MSNLF loan or an MSELF loan unless such requirement is waived or reduced to a de minimis amount by the relevant creditor.

Borrower Documents

There is no uniform credit agreement and each Eligible Lender is expected to rely upon its own forms. However, Eligible Lenders will need to supplement and incorporate into existing loan documents the necessary borrower and lender covenants set forth on the FRBB’s website.

Borrower Certifications

Among other certifications, an Eligible Borrower under any of the MSLP facilities must certify that it is an eligible business, and as of the date of the application, has (i) 15,000 or fewer employees or (ii) had 2019 revenues of $5 billion or less.

Eligible Borrowers under the MSNLF and MSPLF must certify that all amounts owing under a MSLP facility will become immediately due and payable if an Eligible Borrower breaches the Borrower Certification and Covenants. Mandatory Prepayment under the MSELF Program is predicated on discovering that the Eligible Borrower knowingly made a material misrepresentation or material breach of a covenant.