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Federal Reserve Activates and Identifies the Structure of its Main Street Lending Program

Client Updates

On Thursday, April 9, 2020, the Board of Governors of the Federal Reserve System (the “Fed”) announced actions it has taken and will be taking to provide up to $2.3 trillion in loans to support the U.S. economy. The Fed’s announcement activates, and provides guidance on, the previously announced Main Street Lending Program (the “MSLP”), which will be used to purchase interest of up to $600 billion in the aggregate in bank loans to U.S. businesses, including small to medium-sized enterprises (“SMEs”). This program is made available through the Fed’s powers under section 13(3) of the Federal Reserve Act.12

The MSLP was initially announced on Monday, March 23, 2020 by the Fed as part of a suite of measures to address the economic disruption caused by the COVID-19 pandemic. Those measures included several programs designed to support the debt markets and general corporate lending. See our alert on the Fed’s announcement and programs here. On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), authorizing up to $2 trillion in government spending to address the economic disruption caused by the COVID-19 pandemic. The CARES Act expands or establishes multiple loan programs for qualifying businesses, including SMEs. See our alert on the CARES Act here.

This alert provides a summary of the MSLP.

The MSLP is intended to enable SMEs to obtain loans by supporting direct credit lines to businesses, complementing the Small Business Administration’s loans and guaranties. Structurally, the MSLP uses a mechanism involving the origination and underwriting of loans by private sector lenders, in which the Fed would purchase a participation interest covering almost all of the loan amount. The MSLP is comprised of two loan facilities, the Main Street New Loan Facility (the “MSNLF”), for new term loans, and the Main Street Expanded Loan Facility (the “MSELF”), for increases to existing term loans.

The Fed will create a single special purpose vehicle (“SPV”) common to both facilities that will purchase 95 percent participations in qualifying loans made by eligible lenders, with the lenders retaining a 5 percent share in the loans. The SPV will be capitalized by loans from Federal Reserve Banks, on a recourse basis, and by a $75 billion equity investment by The Department of the Treasury, using funds obtained under the CARES Act. The loans from the Federal Reserve Banks and the equity interest of the Treasury will support funding up to $600 billion for the MSLP. The SPV’s power to purchase participations in eligible loans will cease on September 30, 2020, unless the program is extended or the allocated funds are depleted.

Eligible borrowers: To be eligible for the MSLP, a business must:

  • have no more than 10,000 employees or revenues above $2.5 billion in 2019;

  • be created or organized in the United States or under the laws of the United States and have significant operations, and a majority of its employees based, in the United States;

  • be able to make the attestations described below; and

  • only participate in one of the MSNLF or the MSELF, as applicable.3

Eligible lenders: U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.

Loan terms:

  • Type: New term loans or increase to existing term loans;

  • Term: 4 years;

  • Rate: Adjustable rate of the Secured Overnight Financing Rate + 2.5-4%;

  • Principal and interest payments: Deferred for one year;

  • Minimum loan size: $1 million;

  • MSNLF maximum loan size: the lesser of (i) $25 million or (ii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”);

  • MSELF maximum loan size: the least of (i) $150 million, (ii) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA;

  • Security for MSNLF: unsecured;

  • Security for MSEFL: participating in any security that may be provided for the increase in the existing loan facility;

  • Prepayment: Permitted without penalty; and

  • Non-exclusive: Companies may obtain both Paycheck Protection Program loans and MSLP loans.

Restrictions on Borrowers under the MSLP:

Pursuant to section 4003(c)(3)(A)(ii) of the CARES Act, the borrower is required to agree to the following restrictions

  • No Stock Repurchases. Until the date 12 months after the date on which the loan is no longer outstanding, not to repurchase an equity security that is listed on a national securities exchange of such borrower or any parent company of the borrower, except to the extent required under a contractual obligation that is in effect as of the date of enactment of the CARES Act.

  • No Dividends or Distributions. Until the date 12 months after the date on which the loan is no longer outstanding, not to pay dividends or make other capital distributions with respect to the common stock of the borrower.

  • Limitation on Compensation. Until the date 12 months after the date on which the loan is no longer outstanding:
    • no officer or employee of the borrower whose total compensation (consisting of salary, bonuses, awards of stock, and other financial benefits) exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through a collective bargaining agreement entered into prior to March 1, 2020):

      • will receive total compensation from the borrower in any consecutive 12-month period which exceeds the total compensation received by the officer or employee from the borrower in calendar year 2019; or

      • will receive severance pay or other benefits upon termination of employment from the borrower which exceeds twice the maximum total compensation received by the officer or employee from the borrower in calendar year 2019; and

    • no officer or employee of the borrower whose total compensation exceeded $3,000,000 in calendar year 2019 may receive during any 12 consecutive months total compensation in excess of the sum of: (A) $3,000,000; and (B) 50 percent of the excess over $3,000,000 of the total compensation received by the officer or employee from the borrower in calendar year 2019.

Required Attestations of the Borrower:

  • The borrower must commit to refrain from using the proceeds of the loan to repay other loan balances. The borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the borrower has first repaid the loan in full.

  • The borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender.

  • The borrower must attest that it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 (“COVID-19”) pandemic, and that, using the proceeds of the loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan.

  • The borrower must attest that it meets the EBITDA leverage condition stated above under the caption “Loan Terms.”

  • The borrower will be required to certify that the entity is eligible to participate in the MSLP, including in light of the conflicts of interest prohibition contained in section 4019(b) of the CARES Act.

  • The borrower must attest 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.

Attestations Required of the Lender:

  • The lender must attest that the proceeds of the loan will not be used to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower, including, in the case of the MSELF, the pre-existing portion of the loan.

  • The lender must attest that it will not cancel or reduce any existing lines of credit outstanding to the borrower.

  • The lender will be required to certify that the entity is eligible to participate in the MSLP, including in light of the conflicts of interest prohibition contained in section 4019(b) of the CARES Act.

Facility Fee: Under the MSNLF, the lender will pay the SPV a facility fee of 1% of the principal amount of the loan participation purchased by the SPV. The lender may require the borrower to pay this fee.

Loan Origination and Servicing: The borrower will pay the lender a fee of 1% of the principal amount of the loan. The SPV will pay the lender 0.25% of the principal amount of its participation in the loan per year for loan servicing.

Facility Termination: The SPV will cease purchasing participations in loans on September 30, 2020, unless the Fed and the Treasury Department extend the MSLP. The Fed will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.

Interaction with the Treasury’s Previously Announced Mid-Sized Business Lending Program:

  • As described in our previous CARES Act alert, here, Congress tasked the Treasury with endeavoring to implement a mid-sized business lending program for businesses between 500 and 10,000 employees.

  • If implemented, this program would include a number of restrictions on the borrower, including using the funds to retain 90% of the borrower’s workforce, restricting stock buybacks or payment of dividends while the loan is outstanding, not outsourcing or offshoring jobs for two years after the term of the loan and remaining neutral in union organizing efforts.

  • Although the MSLP shares several similarities with the mid-sized business lending program, the MSLP term sheets do not directly tie the new programs to the provisions in the CARES Act that describe the mid-sized business lending program or the associated borrower restrictions.

See the term sheet for the MSNLF here and the term sheet for the MSELF here. The Fed has stated that it and the Secretary of the Treasury may make adjustments to the terms and conditions described in the term sheets and that it would announce any changes on the Fed’s website. Comments may be sent to the feedback form until April 16.

112 USC Section 343(3).
2Concurrently, the Fed has modified some of the terms of its other programs (principally the Primary Market Corporate Capital Facility and Secondary Markets Corporate Capital Facility). Among those changes, significantly, is to permit the facility to cover certain bonds and notes that have been downgraded after March 22, 2020. In addition, the facilities will be significantly expanded in size. The Fed also provided support to the Small Business Administration's Paycheck Protection Program (the “PPP”) through the Paycheck Protection Program Liquidity Facility by extending term financing to eligible financial institutions that originate PPP loans, taking the PPP loans as collateral at face value. The PPP provides loans to small businesses to retain and pay their employees.
3No borrower under either of these facilities can participate in the Fed’s Primary Market Corporate Credit Facility or its Secondary Market Corporate Credit Facility.

 

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