LEGALcurrents®

The Federal Reserve announced several changes to the Main Street Lending Program on April 30, 2020 and issued additional guidance in the form of FAQs.  In addition to the Main Street New Loan Facility and the Main Street Expanded Loan Facility, which the Federal Reserve originally created on April 9, 2020, the Federal Reserve also created the Main Street Priority Loan Facility. Loans under these facilities remain unforgivable.  

I. Distinctions Between the Main Street Lending Facilities

The Federal Reserve provided the following chart (the “Distinction Chart”), which we modified in part, to show the distinctions among the various lending facilities:

 

New Loans

Priority Loans

Expanded Loans

Term

4 years

4 years

4 years

Minimum Loan Size

$500,000

$500,000

$10,000,000

Maximum Loan Size[1]

Lesser of $25M, or 4x 2019 adjusted EBITDA

Lesser of $25M, or 6x 2019 adjusted EBITDA

Lesser of $200M, 35% of outstanding and undrawn available debt, or 6x 2019 adjusted EBITDA

Risk Retention (by the Eligible Lender)

5%

15%

5%

Payment (year one deferred for all)

Years 2-4: 33.33% each year

Years 2-4: 15%, 15%, 70%

Years 2-4: 15%, 15%, 70%

Rate

LIBOR + 3%

LIBOR + 3%

LIBOR + 3%

Origination Fee (as a percentage of the principal or upsized tranche)

1%

1%

0.75%

Transaction Fee (as a percentage of the principal or upsized tranche)

1%

1%

0.75%

Eligible Loans

An Eligible Loan is a secured or unsecured term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated after April 24, 2020

An Eligible Loan is a secured or unsecured term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated after April 24, 2020

An Eligible Loan is a secured or unsecured term loan or revolving credit facility made by an Eligible Lender(s) to an Eligible Borrower that was originated on or before April 24, 2020, and that has a remaining maturity of at least 18 months (taking into account any adjustments made to the maturity of the loan after April 24, 2020, including at the time of upsizing)

Additionally, the Priority Loan is the only loan that permits a borrower, at the time of origination of the loan, to refinance existing debt owed to a lender that is not the Eligible Lender. 

II. Main Street Lending Program - Summary of the Terms and Conditions

  1. An “Eligible Borrower”:
    1. Must be a business established prior to March 13, 2020;
    2. Can have up to 15,000 employees or up to $5 billion in 2019 annual revenues;
    3. Must be a business created or organized in the U.S. or under the laws of the U.S. with significant operations in and a majority of its employees based in the U.S.; and
    4. May not participate in another Main Street Loan Facility (or any other loan pursuant to a similar program set up under Title IV of the CARES Act) or the Primary Market Corporate Credit Facility.
      1. Businesses that have participated in the Paycheck Protection Program (“PPP”) are eligible.
    5. Is not an “Ineligible Business” as defined under the PPP.2
  2. An “Eligible Lender” is a U.S. federally insured depository institution (including a bank, savings association, or credit union), a U.S. branch or agency of a foreign bank, a U.S. bank holding company, a U.S. savings and loan holding company, a U.S. intermediate holding company of a foreign banking organization, or a U.S. subsidiary of any of the foregoing.
  3. Terms:
    1. Loan Term: 4-years;
    2. Interest Rate: A rate equal to the LIBOR (1 or 3-month rate) plus 3%;
    3. Payments: Principal and interest payments are deferred for one year (unpaid interest will be capitalized);
    4. Security: The loans may be secured or unsecured;
    5. Priority: The loan cannot be subordinate to any other loan (except, in some cases, to mortgage debt);
    6. Financial Condition of Loans with Eligible Lender: All outstanding loans with the Eligible Lender as of December 31, 2019 (if any), must have an internal risk rating equivalent to a “pass;” according to the Federal Financial Institutions Examination Council’s supervisory rating system;
    7. Employee Retention: A borrower must make commercially reasonable efforts to maintain its payroll and retain its employees while the loan is outstanding; and
    8. Other Terms: For the minimum loan size, the maximum loan size, payment amortization, origination fee, and transaction fee, see the Distinction Chart above.
  4. Borrower’s Attestations:
    1. The borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt, unless such debt or interest payment is mandatory and due, until the loan is repaid in full (except that with a Priority Loan, a borrower is permitted to refinance at the time of the origination of the loan);
    2. The borrower must commit that it will not seek to cancel or reduce any of its lines of credit with any lender;
    3. The borrower must certify that it has a reasonable basis to believe that it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period;
    4. The borrower must commit that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act, except that an S corporation or other tax pass-through entity that is an Eligible Borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings:
      1. Section 4003(c)(3)(A)(ii) provides that a business is subject to the following restrictions and prohibitions while the loan is outstanding and for 12 months thereafter:
        1. If it is a company listed on a national securities exchange, the business may not buy back any of its equity (or that of a parent company) unless an existing agreement requires it;
        2. The business may not make any dividends or distributions on common stock (i.e. not preferred stock);
        3. No officer or employee whose compensation exceeded $425,000 in 2019 may receive compensation exceeding his or her 2019 compensation, and no severance for such officer or employee may exceed twice the maximum compensation received in 2019–the law is silent about increasing the salary of an employee with compensation below $425,000 in 2019 to above that during the restriction period; and
        4. No officer or employee whose compensation exceeded $3,000,000 in 2019 may receive compensation exceeding the sum of $3,000,000 and 50% of the excess over $3,000,000 that he or she received in 2019. By way of example, if an officer received $4,000,000 in compensation in 2019, they will only be eligible to receive $3,500,000 during the restriction period; and
    5. The borrower must certify that it is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act. 

If you have additional questions or want to discuss this new guidance, please reach out to a member of our Corporate practice group for assistance.

Thomas A. Anderson
Emily R.L. Cohen
Thomas H. Tierney

[1] EBITDA will be calculated by an Eligible Lender consistent with such Eligible Lender’s past practices on or before April 24, 2020.

[2] The PPP regulations list specific businesses that cannot participate. Those business listed in 13 CFR 120.110(b)-(j) and (m)-(s) are Ineligible Businesses for purposes of the Main Street Lending Program, as such definitions may be further modified at the discretion of the Federal Reserve. 


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