Revised Federal Reserve Main Street Lending Program: Terms and Key Considerations
The Federal Reserve updated the terms of its previously announced Main Street Lending Program, which now includes three proposed credit facility options: (i) the Main Street New Loan Facility (“New Facility”), for new term loans made by eligible lenders, (ii) the Main Street Priority Loan Facility (“Priority Facility”), for new term loans made by eligible lenders under different terms than the New Facility and (iii) the Main Street Expanded Loan Facility (“Expanded Facility”), for upsizing existing loans made by eligible lenders.
The Main Street Lending Program is not yet operational and further details will be made available on the applicable Federal Reserve webpage.[1]
The revised and new term sheets for each facility are available here: (i) New Facility Term Sheet; (ii) Priority Facility Term Sheet; and (iii) Expanded Facility Term Sheet. The Federal Reserve also posted Frequently Asked Questions (“FAQ”) that it will periodically update.
The table below summarizes the key deal terms and eligibility criteria contained in the term sheets and the FAQ.
Summary of Key Terms
| New Loans | Priority Loans | Expanded Loans | |
| Term | 4 years | 4 years | 4 years |
| Facility | Term Loan Originated after April 24, 2020 | Term Loan Originated after April 24, 2020 | Term Loan in the form of an upsized tranche The incremental tranche may be added to an existing secured or unsecured term loan or revolving credit facility made by an Eligible Lender to an Eligible Borrower that originated on or before April 24, 2020 and that has a remaining maturity of at least 18 months (the maturity of the existing term loan or revolving credit facility may be extended at the time of upsizing to satisfy the 18-month remaining maturity requirement). |
| Interest | LIBOR[2] (1 month or 3 month) + 3% Interest payments are deferred for one year and unpaid interest will be capitalized. | ||
| Amortization | Amortization payments deferred one year Year 2: 33.33% Year 3: 33.33% Year 4: 33.33% | Amortization payments deferred one year Year 2: 15% Year 3: 15% Year 4: 70% | Amortization payments deferred one year Year 2: 15% Year 3: 15% Year 4: 70% |
| Minimum Loan Size | $500,000 | $500,000 | $10,000,000 |
| Maximum Loan Size | Lesser of (i) $25 million or (ii) 4 times adjusted 2019 EBITDA | Lesser of (i) $25 million or (ii) 6 times adjusted 2019 EBITDA | Lesser of the following: (i) $200, (ii) 35% of outstanding and undrawn available debt that is pari passu in priority with the eligible loan or (iii) 6 times adjusted 2019 EBITDA |
| Priority / Subordination | Secured or unsecured At origination and at all times during the life of the loan, may not be contractually subordinated in payment priority in bankruptcy to borrower’s other unsecured loans or debt instruments.[3] | Secured or unsecured At origination and at all times during the life of the loan, must be senior to or pari passu, in terms of payment priority and security, with any other debt of the borrower other than mortgage debt. | Secured or unsecured Any collateral that secures the underlying loan must secure the upsized tranche on a pro rata basis. At origination and at all times during the life of the loan, must be senior to or pari passu, in terms of payment priority and security, with any other debt of the borrower other than mortgage debt. |
| Transaction Fee | 100 bps of the principal amount of the loan at the time of origination payable by the Eligible Lender to the Federal Reserve Special Purpose Vehicle (“SPV”), which the Eligible Lender may pass on to the Eligible Borrower. | 100 bps of the principal amount of the loan at the time of origination payable by the Eligible Lender to the SPV, which the Eligible Lender may pass on to the Eligible Borrower. | 75 bps on the principal amount of the upsized tranche at the time of upsizing payable by the Eligible Lender to the SPV, which the Eligible Lender may pass on to the Eligible Borrower. |
| Origination Fee | Up to 100 bps of the principal amount of the loan at the time of origination. | Up to 100 bps of the principal amount of the loan at the time of origination. | Up to 75 bps of the principal amount of the upsized tranche at the time of upsizing. |
| Servicing Fee | The SPV will pay a fee to the lender of 25 bps per annum on the principal amount of the SPV’s participation for loan servicing. | ||
| Prepayments | Permitted without premium or penalty. | ||
| EBITDA Calculation | The methodology used by an Eligible Lender to calculate adjusted 2019 EBITDA must be the methodology it has previously used for adjusting EBITDA when extending credit to the Eligible Borrower or similarly situated borrowers on or before April 24, 2020.[4] | For Expanded Loans, the methodology used by the Eligible Lender to calculate adjusted 2019 EBITDA for the Eligible Borrower must be the methodology it previously used for adjusting EBITDA when originating or amending the underlying loan on or before April 24, 2020. | |
| Total Debt (for Calculating Maximum Loan Size): | Borrower’s existing outstanding and undrawn available debt is calculated as of the date of loan application and includes:
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| Loan Classification | Any loans outstanding with the Eligible Lender as of 12/31/2019 must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system as of such date. With respect to Expanded Loans, the existing loan must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system as of December 31, 2019. | ||
| Borrower Eligibility (Size) | The borrower must satisfy at least one of the two alternative size tests; it does not have to satisfy both:
If, as applicable, the 2019 audit is not yet complete or 2019 annual receipts are not yet available, then the borrower (or its affiliate) should use its most recent audited financial statements or annual receipts.
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| Borrower Eligibility (other) |
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| Borrower Eligibility (Ineligible Businesses) | Borrower must not be an ineligible business including businesses listed in 13 CFR 120.110(b)-(j), (m)-(s), as modified and clarified by SBA regulations for purposes of the Paycheck Protection Program on or before April 24, 2020, including the SBA’s recent interim final rules available at 85 Fed. Reg. 20811, 85 Fed. Reg. 21747 and 85 Fed. Reg. 23450. The Federal Reserve may further modify the application of these restrictions to the Main Street Lending Program.[10] | ||
| Financial Condition of Borrower |
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| Eligible Lenders |
At this time, non-bank financial institutions are not considered Eligible Lenders for purposes of the Main Street Lending Program. The Federal Reserve is considering options to expand the list of Eligible Lenders in the future. | ||
| Lender Certifications | Eligible Lender must certify and covenant that:
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| Refinancing Existing Debt; Termination of Commitments; Payments on Existing Debt | Borrower must commit to refrain from repaying the principal balance of, or paying any interest of any debt until the eligible loan is repaid in full, unless the debt or interest payment is mandatory and due.[13] Borrower will not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender.[14] | Borrower may, at the time of origination of the loan, refinance existing debt owed by the borrower to a lender that is not the Eligible Lender. Borrower must commit to refrain from repaying the principal balance of, or paying any interest of any debt until the eligible loan is repaid in full, unless the debt or interest payment is mandatory and due. Borrower will not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender. | Borrower must commit to refrain from repaying the principal balance of, or paying any interest of any debt until the upsized tranche is repaid in full, unless the debt or interest payment is mandatory and due. Borrower will not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender. |
| Other Conditions and Covenants: |
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| Federal Reserve SPV Participation[21] | SPV will purchase 95% participation and Eligible Lenders will retain 5%. The Eligible Lender must retain 5% of the New Loan until it matures or the SPV sells all of its participation, whichever comes first. | SPV will purchase 85% participation and Eligible Lenders will retain 15%. The Eligible Lender must retain 15% of the Priority Loan until it matures or the SPV sells all of its participation, whichever comes first. | SPV will purchase 95% participation of the upsized tranche and Eligible Lenders will retain 5%. The Eligible Lender must retain 5% of the upsized tranche until it matures or the SPV sells all of its participation, whichever occurs first. |
| Section 13(3) Requirements | Among other requirements governing the Federal Reserve’s emergency lending authority, Section 13(3) of the Federal Reserve Act requires that borrowers are not insolvent and requires that the Federal Reserve obtain evidence that each participant in a Federal Reserve program or facility under 13(3) is “unable to secure adequate credit accommodations from other banking institutions.” Under applicable regulations, evidence of such inability may be based on economic conditions in a particular market or markets, on the borrower’s certification of such inability or on other evidence from participants or other sources.[22] | ||
| Facility Termination | On September 30, 2020, the SPV will cease purchasing participations, unless the facility is extended by the Fed and the Treasury. The Federal Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold. | ||
| Disclosure by the Federal Reserve | The Federal Reserve will disclose information, including information regarding names of the lenders and borrowers, amounts borrowed and interest rates charged, and overall costs, revenues and other fees. Further, the Federal Reserve also will disclose information concerning the facilities one year after the effective date of the termination of the authorization of the facilities. This disclosure will include names and identifying details of each participant in the facilities, the amount borrowed, the interest rate or discount paid, and information concerning the types and amounts of collateral pledged or assets transferred in connection with participation in the facilities. | ||
Certain Borrower Considerations
Eligibility
In addition to other eligibility criteria, the size, revenue, categories of ineligible borrowers and U.S. nexus criteria may raise a number of questions for companies with complex ownership structures, including those with non-U.S. parent companies or subsidiaries, and sponsor-backed companies. In determining whether it satisfies either the maximum 15,000 employee or maximum $5 billion 2019 revenue, a company must aggregate employees or revenues (or receipts) with those of its domestic and foreign affiliates, in accordance with SBA affiliation rules.[23] The analysis is fact specific, but generally, entities are considered affiliates where one entity controls or has the power to control the other, or a third party controls both entities. Under this principle of control, majority ownership creates affiliation, and minority ownership with certain rights to block a quorum or board or stockholder action often establishes affiliation. Companies that previously analyzed their affiliation status and resulting employee and/or revenue numbers for purposes of the Paycheck Protection Program should review such analysis taking into account the Main Street Lending Program criteria.
Refinancing, Debt Repayment, Priority and Other Covenants
Existing debt terms greatly impact the utility of the Main Street Lending Program loan facilities. Important issues to consider include the borrower’s ability to refinance existing debt with a Main Street Lending Program loan or to make other payments on existing debt, the required priority of debt facilities, and related inter-creditor concerns.
The prohibitions on (i) refinancing of existing debt with loan proceeds (except for the Priority Loans, as discussed below) and (ii) the repayment of existing debt obligations (other than mandatory payments or in connection with revolving and similar facilities, as discussed above) have several implications, including limiting a borrower’s ability to refinance prior potentially expensive “emergency” bridge financing. Prepayments of pre-existing debt obligations, such as seller notes, and, depending on how “debt” is defined, earn-out obligations, may also be restricted, depending on the circumstances. These issues may not always raise short-term concerns, but could become problematic if the Main Street Lending Program loans remain outstanding for a substantial period of time. Documentation relating to other debt obligations, including the timing of any mandatory repayments or prepayments, must be reviewed and inform a company’s decision to apply for or otherwise incur loans under the Main Street Lending Program.
The Priority Loans, while providing for the same restrictions on payments of other debt, allow for the refinancing of existing debt owed by the borrower to a lender that is not the eligible lender at the time the Priority Loan is originated. Unlike New Loans, however, Priority Loans must be senior or pari passu in payment and security priority with all other debt (other than mortgage debt). Existing senior lenders will carefully consider whether to permit the incurrence of such Priority Loans to the extent that the debt such Priority Loans is intended to refinance is subordinated. Reduced debt service expense (including one year of deferred principal and interest payments), however, may make such Priority Loans attractive to a senior lender.
Companies will need to evaluate the impact on strategic planning in connection with the executive compensation, stock buy-back and dividend restrictions, which will remain in effect during the life of the loan and with a one-year tail, in addition to the employment retention requirements. Further guidance is needed regarding the details of certain of these restrictions, any applicable exceptions (for example, intercompany dividends, dividends to cover expenses of parent companies, director fees and the like), and any penalties resulting from breach of the one-year tail after loans have been repaid. In addition, companies with near term acquisition or other investment strategies will need to be mindful of any potential restrictions on acquisitions or other investments contained in the definitive documentation for Main Street Lending Program loans.
We note that in response to comments to the Main Street Lending Program, the revised term sheets permit borrowers that are S corporations or other tax pass-through entities to “make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.” Further, the revised term sheets removed the express requirement that proceeds be used to retain employees and replaced it with a general requirement (though not a certification at the time of loan origination) that an Eligible Borrower will use commercially reasonable efforts (which the Federal Reserve explained as requiring 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) to maintain its payroll and retain its employees during the time the loan is outstanding.
Existing Lenders and Credit Facilities
In our view, the best avenue to access capital under these facilities is a company’s existing lenders. In addition to the statutory, regulatory and term sheet requirements, Eligible Lenders are expected to apply their own credit underwriting standards to evaluate the financial condition and creditworthiness of a potential borrower at the time of its application. A more efficient process would likely occur between existing borrowers and lenders, where such underwriting standards have already resulted in loans at certain pricing and terms and ongoing reporting, covenant testing and monitoring has occurred. As of the date of this article, however, alternative direct lenders that often finance middle market transactions are not eligible lenders for these facilities, although the Federal Reserve continues to evaluate whether to expand the group of eligible lenders. This may foreclose a borrower’s access to such facilities, or otherwise cause potentially complex intercreditor issues among the eligible banks providing such facilities and a company’s existing lenders. Where companies with existing credit facilities must look to other eligible lenders, they can reasonably expect more extensive negotiations of amendments to existing loan documents to occur. The incremental costs imposed by amendment fees and otherwise negotiating with existing lenders will be part of a company’s overall considerations as to the viability of these facilities. Clearly, having a bank lender in their existing credit, including revolving lenders (cash flow or asset based), is advantageous to companies considering the Main Street Lending Program.
Subject to further guidance, certain structures may be useful for borrowers with existing debt to explore. For example, the Expanded Loan contemplates a term loan that is an upsized tranche of an underlying term loan or revolving credit facility. If the underlying term loan or revolving credit facility is a multi-lender or syndicated facility, the Eligible Lender must be one of the lenders that holds an interest in the underlying loan at the date of upsizing, but only the Eligible Lender for the upsized tranche is required to meet the eligible lender criteria. Other members of the multi-lender facility are not required to be Eligible Lenders. This could enable, quite seamlessly from a documentation perspective, the incurrence of an “incremental term loan” from an Eligible Lender. In this case, given the lower interest rates applicable to Main Street Lending Program loans, “most favored nations” provisions with respect to pricing, for example, should not be implicated. Other requirements of uncommitted incremental tranches (such as average weighted life to maturity requirements) and pro rata sharing requirements with respect to amortization included in existing loan documentation will prove more challenging in connection with the Main Street Lending Program loan amortization requirements.
In addition, the possibility of New Loan or Priority Loan obligations residing at a holdco or other level structurally subordinated to existing loans could mitigate intercreditor issues, without conflicting (under current guidance) with the requirement for New Loans that such loans may not be contractually subordinated in terms of priority to certain of a borrower’s other loans or debt instruments, or for Priority Loans, that such loans must be senior to or pari passu with, in terms of payment priority and security, the Eligible Borrower’s other loans or debt instruments. Bank underwriting standards, including taking into account typical pricing of a structurally subordinated holdco loan, will likely impact the utilization of this structure. In addition, existing loan documents would need to be amended to allow for, among other things, cash distributions to service holdco debt.
In addition, prior to incurring any Main Street Lending Program loans, companies, equity sponsors, and their respective counsel and advisors should carefully review existing loans documents to determine, among other things, the impact of additional leverage on projected financial covenant compliance (in particular if declining EBITDA is projected in the near term), and whether such additional leverage would foreclose certain actions by the company that are subject to leverage and other incurrence tests, including acquisitions and other investments. Cross-default provisions should also be analyzed to determine risks that could arise with any actual or purported non-compliance with the facilities documentation. Finally, it is not yet clear how the SPV will exercise voting rights over its participation in the facilities in connection with loan document waivers and amendments and the enforcement of any rights and remedies if an event of default were to occur and continue.
We will continue to monitor developments and any further guidance issued by the Federal Reserve.
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Endnotes
1 The Federal Reserve indicated that it will publicly issue a form loan participation agreement, form borrower and lender certifications, and other form agreements that are necessary to implement the Main Street Lending Program in accordance with the term sheets. The Federal Reserve will not provide form loan documents for Eligible Lenders to use when making eligible loans to Eligible Borrowers and will require Eligible Lenders to provide applicable loan documents that reflect the terms of the Main Street Lending Program.
2 As stated in the FAQ, SOFR fallback contract language should be included to be used should LIBOR become unavailable during the term of the loan.
3 The following actions would be permitted: (i) incurrence of a New Loan that is secured (including in a second lien or other capacity), whether or not the borrower has an outstanding secured loan of any lien position or maturity; (ii) incurrence of a New Loan that is unsecured regardless of the term or secured or unsecured status of the borrower’s existing indebtedness; and (iii) incurrence of new secured or unsecured debt after receiving a New Loan, provided that the new debt would not have a higher contractual priority in bankruptcy than the new loan.
4 This does not mean that all EBITDA add-backs and adjustments included in a borrower’s existing credit agreement will be eligible in connection with the determination of adjusted EBITDA for any of the three facilities; however, non-recurring add-backs and adjustments used by a lender’s credit committee in connection with loan underwriting should be permitted. Also, the FAQ states that the Federal Reserve and the Treasury Department will be evaluating the feasibility of adjusting the loan eligibility metrics for asset-based borrowers.
5 Note that there is no requirement that a company have a minimum of 500 employees, as alluded to in the programs contemplated by the CARES Act under the heading “Assistance for Mid-Sized Businesses”. See Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), H.R. 748, 116th Con. (2020), § 4003(c)(3)(D).
6 A “business” is an entity organized for profit as a partnership; a limited liability company; a corporation; an association; a trust; a cooperative; a joint venture with no more than 49% participation by foreign business entities; or a tribal business concern as defined in 15 U.S.C. § 657a(b)(2)(C), except that “small business concern” in that paragraph should be replaced with “business” as defined in the Main Street Lending Program. The Federal Reserve, in its discretion, may consider for inclusion in the Main Street Lending Program other forms of organization.
7 There is currently no guidance on how to calculate majority of employees when the applicant borrower is a subsidiary of a foreign parent.
8 The Primary Market Corporate Credit Facility is another Federal Reserve program intended for investment grade issuers and borrowers.
9 A business is not eligible if it has received support pursuant to Section 4003(b)(1) – (3) of the CARES Act (i.e., loans and loan guarantees for (1) passenger air carriers and certain related businesses, (2) cargo air carriers and (3) businesses critical to maintaining national security).
10 Among others, the list of ineligible businesses includes (i) non-profits (although the FAQ states that the Federal Reserve is considering the feasibility of opening the programs to non-profits); (ii) firms engaged in investment or speculation, such as oil wildcatting, hedge funds, and private equity firms; (iii) financial businesses primarily engaged in the business of lending, such as banks and finance companies, and factors; (iv) passive businesses owned by developers and landlords, subject to certain exceptions; and (v) businesses engaged in any illegal activity.
11 Lender eligibility requirements disqualify many non-bank alternative lenders and funds from participation, as well as foreign lenders, each of which accounts for a significant segment of middle market lending activity. Separate federal programs, including the Term Asset-Backed Securities Loan Facility (TALF), are designed to provide liquidity directly to CLOs to fund debt investments. For the Expanded Loans, if the underlying loan is a multi-lender or syndicated facility, an Eligible Lender must be one of the lenders that holds an interest in the underlying loan at the date of upsizing. Only the Eligible Lender, not the other lenders that hold interests in the underlying loan, is required to meet the eligibility criteria.
12 Under the CARES Act no conflict of interest prohibition, an entity in which the President, the Vice President, the head of an Executive department, or a Member of Congress, or a spouse, child, son-in-law, or daughter-in-law of such person, directly or indirectly holds a 20% or larger voting or economic interest cannot take part in designated programs. CARES Act, H.R. 748, 116th Con. (2020) § 4019(b).
13 The covenant does not prohibit a borrower from: (i) repaying a line of credit (including a credit card) in accordance with the borrower’s normal course of business usage for such line of credit; (ii) incurring and paying additional debt obligations required in the normal course of business and on standard terms, including inventory and equipment financing, provided that such debt is secured by newly acquired property and, apart from such security, is of equal or lower priority than the applicable facility; or (iii) refinancing maturing debt.
14 The requirement does not prohibit: (i) the reduction or termination of uncommitted lines of credit; (ii) the expiration of existing lines of credit in accordance with their terms; or (iii) the reduction of availability under existing lines of credit in accordance with their terms due to changes in borrowing bases or reserves in asset-based or similar structures.
15 The FAQ further states that a borrower should make 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.
16 CARES Act, H.R. 748, 116th Con. (2020) § 4004(b).
17 Officers and other employees (other than unionized employees) whose total compensation exceeded $425,000 in 2019: (i) annualized total compensation cannot exceed the total compensation received by such employee in calendar year 2019; and (ii) severance pay or other benefits upon termination of employment cannot exceed two times the total compensation received by such employee in 2019. Officers and other employees whose total compensation exceeded $3 million in 2019: annualized total compensation cannot exceed the sum of (i) $3 million and (ii) 50% of the amount that such individual’s total compensation in 2019 exceeded $3 million. Total compensation includes salary, bonuses, awards of stock, and other financial benefits provided by a company to an officer or employee.
18 We note that the Federal Reserve has not announced programs contemplated by the CARES Act under the heading “Assistance for Mid-Sized Businesses” under the $454 billion authorization for the Treasury to make loans to eligible businesses. Noticeably missing from the express terms and attestations for the New Facility, Priority Facility and the Expanded Facility are, among others, the following terms contemplated by the CARES Act for the Assistance for Mid-Sized Businesses program: (i) the requirement to retain at least 90% of the borrower’s workforce, at full compensation and benefits, until September 30, 2020; (ii) the requirement to restore at least 90% of the borrower’s workforce that existed before February 1, 2020, and restore all compensation and benefits to the borrower’s workforce no later than 4 months after the termination of the declared public health emergency arising from the pandemic; and (iii) the requirement not to outsource or offshore jobs until 2 years after repayment of the loans, not to abrogate existing collective bargaining agreements until 2 years after repayment of the loan, and to remain neutral in any union organizing effort during the term of the loan.
19 The term sheets and FAQ are silent regarding other common permitted dividends and distributions, such as intercompany distributions and distributions to holding companies for the payment of basic corporate overhead, among other things.
20 See footnote 12.
21 With respect to each facility, the sale of a participation in the eligible loan to the SPV will be structured as a “true sale” and must be completed expeditiously after the origination or upsizing of the eligible loan.
22 We note that the revised term sheets removed the language contained in the prior versions that required a borrower to “attest that it requires financing due to the exigent circumstances presented by” the pandemic.
23 13 CFR 121.301(f) (1/1/2019 ed.)
The Federal Reserve Main Street Lending Program: Terms and Key Considerations
April 14, 2020| Advisory|
Authors
Joseph W. Price
Member
