The new guidance both modified and supplemented the two previously announced facilities and added a new Main Street Priority Loan Facility, expanding the overall scope of the program.

The Federal Reserve Board issued initial guidance regarding its Main Street Lending Program on April 9, 2020, as authorized under the Coronavirus Economic Stabilization Act (Title IV of the CARES Act). This original guidance established the broad brush parameters of the program, but was short on details, raising concerns among both borrowers and lenders about its eventual implementation. On April 30, in response to a flood of public comments, the Federal Reserve released updated guidance, containing substantially greater operational details. The new guidance both modified and supplemented the two previously announced facilities―the Main Street New Loan Facility and the Main Street Expanded Loan Facility―and added a third facility, the Main Street Priority Loan Facility, expanding the overall scope of the program.

This Alert supplements our prior program summary, identifying revisions to guidance relating to the original facilities and providing details on the new Priority Loan Facility. This Alert does not entirely restate provisions, which remain unchanged and were covered in our prior Alert about the program.

Borrowers and Lenders

Eligible Borrowers

The Federal Reserve has expanded the reach of the program to allow businesses that either have 15,000 or fewer employees or had 2019 annual revenues of $5 billion or less (compared to caps of 10,000 employees or $2.5 billion annual revenues in the original guidance) to be eligible borrowers. Both of these tests are now to be calculated on a combined basis with all affiliates of a participating borrower, in accordance with the same Small Business Administration affiliation rules that apply to the Paycheck Protection Program (PPP). Employee headcount will be determined based on the average total number of individuals―including all full-time, part-time, seasonal or other employed individuals, but excluding volunteers and independent contractors―employed by a borrower and its affiliates over the 12 months prior to origination of a program loan. Businesses may calculate 2019 annual revenues based either on their 2019 Generally Accepted Accounting Principles-based (GAAP) audited financial statements, or their annual receipts for 2019, as reported to the Internal Revenue Service.

An eligible borrower must be a business established prior to March 13, 2020, that is a for-profit partnership, LLC, corporation, association, trust, cooperative, tribal business concern or joint venture with not more than 49 percent participation by foreign business entities (the program currently excludes not-for-profit organizations). An eligible borrower must be a legal entity organized in the United States or under the laws of the United States, with significant operations in and a majority of its employees in the United States.

In addition, an eligible borrower cannot be an Ineligible Business. An "Ineligible Business" is defined as a business that would be ineligible for a PPP loan by virtue of its business activities. Thus, financial businesses, gambling businesses, life insurance companies, loan packagers and private clubs, among others, are ineligible businesses that are not eligible for program loans.

As with respect to all bank loans, a borrower’s financial condition at the time of its application for credit under the program is of great importance, and lenders are expected to apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower under general Federal Reserve standards. Furthermore, the Federal Reserve has imposed additional specific rules with respect to the determination of borrower creditworthiness under the program. Borrowers must have been in sound financial condition prior to the onset of the COVID-19 pandemic and, if a lender had an existing loan with a borrower as of December 31, 2019, it must have had a “pass” risk rating at that date as a prerequisite to the extension of new credit under the program.

Finally, a borrower may only participate in one of the program’s facilities (i.e., there is no double-dipping within the program). This prohibition, however, does not prevent a borrower from simultaneously participating in the PPP.

Eligible Lenders

Under prior guidance, eligible lenders were limited to U.S. insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies. Under the Federal Reserve's current guidance, U.S. branches or agencies of foreign banks, U.S. intermediate holding companies of foreign banking organizations, federally insured banks, savings associations, credit unions and U.S. subsidiaries of any of the foregoing categories of eligible lenders are added to the class of eligible lenders. Nonbank financial institutions continue to remain ineligible. Under the program, lenders retain only a small portion of originated loans and transfer, as part of their participation, the bulk thereof (95 percent under the original two facilities, and 85 percent under the new Priority Loan Facility) to a special-purpose vehicle (SPV) established by the Federal Reserve Bank of Boston. The new guidance provides that lenders are required to continue to hold their retained portion of originated program loans until maturity or the earlier sale of the amount purchased by the SPV.

Borrower and Lender Covenants, Certifications and Restrictions

Lenders

Under the prior program guidance, lenders were required to certify that the proceeds of a program loan would not be used to repay debt extended by the lender to a borrower. The current guidance clarifies that this certification does not apply to mandatory principal or interest payments, or in the case of default or acceleration (and that loan proceeds may be used in such circumstances). Under prior guidance, lenders were required to certify that they would not cancel or reduce any existing committed lines of credit outstanding to a participating borrower. The current guidance clarifies that this certification does not apply in the case of an event of default (and in such circumstance such cancellation or reduction is allowed). Further, the current guidance requires that the methodology used for calculating a borrower’s adjusted 2019 EBITDA for the applicable loan leverage requirement is the methodology a lender has previously used for adjusting EBITDA when extending credit to such borrower or similarly situated borrowers on or before April 24, 2020. The current guidance also affirms that lenders must certify that they are not ineligible to participate in the program.

Borrowers

The current guidance acknowledges certain circumstances under which borrowers are required to pay existing indebtedness and the need for pass-through entities to make tax distributions. Whereas under the prior program guidance there was an unqualified prohibition on the use of loan proceeds to repay existing indebtedness, under current guidance, borrowers are now free to make debt or interest payments that are mandatory and due, and to seek to cancel or reduce any of uncommitted lines of credit with a lender. The Federal Reserve’s current guidance also clarifies that repaying a line of credit in the normal course of business usage, incurring and repaying debt obligations required in the normal course of business on standard terms, including inventory and equipment financing (so long as security is only in the newly acquired inventory or equipment and is otherwise not superior in priority or security to the facility loan), and refinancing maturing debt are, in each case, not prohibited. In addition, the prior flat prohibition on common stock dividends has been qualified to permit tax distributions for S corporations and other pass-through entities.

The certifications required of a participating borrower, as set forth in the Federal Reserve’s prior guidance (i.e., that the borrower will abide by executive compensation, stock repurchase, capital distribution, with the exception of permitted tax distributions mentioned above, and use of proceeds restrictions) generally remain in place, with certain additional certifications imposed and certain prior certifications deleted. Under the Federal Reserve’s current guidance, a participating borrower must now certify that it has a reasonable basis to believe that, as of its loan origination date, it has the ability to meet its financial obligations for at least 90 days, and does not expect to file for bankruptcy during that period (insolvent or bankrupt businesses will not be eligible under the program).

The current guidance removes the prior guidance requirements for a participating borrower to certify that (i) it requires financing due to the exigent circumstances presented by COVID-19, (ii) it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan, and (iii) such borrower meets the EBITDA leverage condition for the applicable loan. The Federal Reserve stated that each borrower that participates in the program should make commercially reasonable efforts to maintain its payroll and retain its employees during the term of its program loan. It further clarified that a participating borrower 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 COVID-19 emergency remain eligible for program loans.

General Program Loan Terms

Summary of Facility Loan Terms
Main Street Lending Program Loan Options	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	The lesser of $25 million or an amount that, when added to outstanding and undrawn debt, does not exceed 4x adjusted 2019 EBITDA	The lesser of $25 million or an amount that, when added to outstanding and undrawn debt, does not exceed 6x adjusted 2019 EBITDA	The lesser of $200 million, 35% of existing outstanding or undrawn available debt, or an amount that, when added to outstanding and undrawn available debt, does not exceed 6x adjusted 2019 EBITDA
Risk Retention	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%

The Federal Reserve’s original guidance for the program established the Secured Overnight Financing Rate plus 250-400 basis points as the applicable interest rate for program loans. The current guidance substitutes LIBOR plus 300 basis points as the applicable adjustable rate. The current guidance makes clear that program loans may be unsecured or secured. Loans under the Expanded Loan Facility must be secured if the underlying loan is secured. In such case, any collateral securing the underlying loan (at the time of upsizing or on any subsequent date) must secure the loan made under the Expanded Loan Facility on a pro rata basis, and if the borrower defaults, the program and lender(s) will share in any collateral available to support the loan relative to their proportional interests in the loan. Lenders can require borrowers to pledge additional collateral to secure a loan under the Expanded Loan Facility as a condition of approval.

All program loans continue to be prepayable without penalty, and amortization thereon will be deferred for one year and no payments of principal or interest will be due during this period. Unpaid interest will be capitalized.

Loan sizes under the New Loan Facility and Priority Loan Facility will range from a minimum principal amount of $500,000 up to a maximum principal amount that is the lesser of (i) $25 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, is less than or equal to four times the borrower’s 2019 adjusted EBITDA. The $500,000 minimum is a 50 percent decrease from the minimum established under prior guidance. These loans continue to have a term of four years, and the new guidance established that they must have ratable principal amortization at the end of the second, third and fourth loan years.

Loans under the Expanded Loan Facility must upsize loans that were originated on or before April 24, 2020, and that have a remaining maturity of at least 18 months (taking into account any adjustments made to the maturity of a loan after April 24, 2020, including at the time of upsizing). Loans under the Expanded Loan Facility are required to have principal amortization of 15 percent at the end of the second loan year, 15 percent at the end of the third loan year and a balloon payment of 70 percent at maturity at the end of the fourth year. Minimum loan size was increased from $1 million to $10 million, while the maximum was increased from $150 million to $200 million, and the related 30 percent limit, relative to a participating borrower’s existing outstanding debt and committed but undrawn bank debt, was upped to 35 percent of such borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the putative loan and equivalent in secured status (i.e., secured or unsecured).

The Federal Reserve has also clarified that for purposes of calculating the leverage ratios to determine the maximum amount (if any) that can be borrowed under the program facilities, the numerator must include all existing outstanding and undrawn available debt. This includes all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, nonbank financial institution or private lender, as well as any publicly issued bonds or private placement facilities. It also includes all unused commitments under any loan facility, but excludes (i) any undrawn commitment that serves as a backup line for commercial paper issuance, (ii) any undrawn commitment that is used to finance receivables (including seasonal financing of inventory), (iii) any undrawn commitment that cannot be drawn without additional collateral and (iv) any undrawn commitment that is no longer available due to change in circumstances. Existing outstanding and undrawn available debt should be calculated as of the date of the loan application. These same concepts of undrawn available debt are also used for purposes of calculating the amount of debt that is pari passu with any loan under the Expanded Loan Facility for purposes of the 35 percent test applicable to such loans.

The Newly Announced Main Street Priority Loan Facility

In addition to its modifications and clarifications relating to the previously announced program facilities, the Federal Reserve’s current guidance establishes the new Priority Loan Facility. The Priority Loan Facility is generally on the same terms as the New Loan Facility (as updated by the Federal Reserve’s current guidance) with several key differences. First, the Priority Loan Facility allows for greater borrower leverage. Whereas the maximum size of a loan under the New Loan Facility is limited to four times a participating borrower’s 2019 adjusted EBITDA, under the Priority Loan Facility the loan sizing is limited to six times a participating borrower’s 2019 adjusted EBITDA. New Loan Facility loan proceeds cannot be used to refinance existing debt, while proceeds of a Priority Loan Facility loan may be used to refinance existing debt of the borrower that is held by a different lender. Amortization of a New Loan Facility loan is ratable over the final three years of its term, while amortization of a Priority Loan Facility loan is 15 percent at the end of its second year, 15 percent at the end of its third year and a 70 percent bullet at maturity. Priority Loan Facility loan must be senior to or pari passu with, in terms of priority and security, a participating borrower’s other debt (other than mortgage debt). Finally, a lender’s require retention of a Priority Loan Facility loan is 15 percent versus a 5 percent retention of a loan under the New Loan Facility (85 percent SPV participation versus 95 percent SPV participation of New Loan Facility loans).

New Guidance Conclusions and Future Actions

Current guidance from the Federal Reserve provides an opportunity for potential borrowers and lenders to more fully evaluate the program. From a borrower standpoint, the Federal Reserve has made it clear that the program’s borrower eligibility and loan metric requirements are minimums, and that lenders must underwrite loans using their customary underwriting criteria. Accordingly, potential borrowers meeting the program’s eligibility requirements may nonetheless not receive loans because they fail lenders’ underwriting standards. Reciprocally, this means that program lenders must assess potential borrowers’ creditworthiness at the time of application and apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower. Lenders may require additional information and documentation in making this evaluation. Loans under the program must be compliant with its requirements, but they are not automatic if those requirements are met; they are ultimately dependent on lenders’ typical credit determinations in light of current circumstances. Lenders are required to collect the required certifications and covenants from each participating borrower. Lenders may rely on eligible borrowers’ certifications and covenants. Lender are not expected to independently verify eligible borrowers' certifications or actively monitor ongoing compliance with covenants required for eligible borrowers under the program.

No firm date has yet been announced for the commencement of the program, but its start appears to be much closer based on the more detailed information contained in the Federal Reserve’s current release. Program details of great importance to both lenders and borrowers relating to loan participation terms, credit administration and loan servicing have not yet been released, but should be expected shortly based on the current guidance.

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