The Main Street Lending Program (Program) is intended to facilitate lending to small and mid-sized businesses that were in sound financial condition prior to the onset of the COVID-19 pandemic. The Program as to for-profit businesses became fully operational on July 6, 2020, nearly three months after the first proposals were released by the Federal Reserve.

Under the Program, eligible lenders will originate new term loans (or expand the size of an existing credit facility) to eligible borrowers. A special purpose vehicle (SPV) funded by the Federal Reserve Bank of Boston (Reserve Bank) will then purchase a 95 percent participation in such loans (or the upsized tranches). Lenders will retain 5 percent of each such loan (or each upsized tranche).

In all, the SPV will purchase up to $600 billion in participations. The purchases by the SPV will cease on December 31, 2020, unless the Program is extended.

There are three facilities for for-profit companies under the Program – the Main Street New Loan Facility (New Loan Facility), the Main Street Priority Loan Facility (Priority Loan Facility) and the Main Street Expanded Loan Facility (Expanded Loan Facility).

This alert summarizes and compares these three facilities and reflects guidance through the most recent FAQ of August 24, 2020. The Program has been expanded to include facilities for nonprofit organizations, which additional facilities are covered here.

The Program differs from the Paycheck Protection Program (PPP) in many ways. Most significantly, the Program does not feature a loan forgiveness component.

Eligible Borrowers. An eligible borrower is a Business1 that:

  1. Was established prior to March 13, 2020;
  2. Is not an Ineligible Business;2
  3. Meets at least one of the following two conditions: (i) has 15,000 employees or fewer; or (ii) had 2019 annual revenues of $5 billion or less;
  4. Is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States;
  5. Does not also participate in one of the other facilities under the Program or the Primary Market Corporate Credit Facility; and
  6. Has not received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act) (but an eligible borrower that has received a PPP loan may still participate in the Program).

The U.S. Small Business Administration (SBA) affiliation regulations apply for purposes of calculating a Business’s employees and 2019 revenues, so the employees and revenues of the borrower must be aggregated with the employees and revenues of its affiliated entities. These regulations specify that companies are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. These restrictions could prove problematic for private equity portfolio companies.

Eligible Lenders. 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.

Direct lenders (that is, non-bank lenders) are not eligible to lend under the Program.

Eligible Loans. Each loan (or upsized tranche) must be made by an eligible lender to an eligible borrower and satisfy the following criteria.

Criteria New Loan Facility Priority Loan Facility Expanded Loan Facility3
Type of Loan Term loan The underlying loan may be a term loan or a revolving credit facility; the upsized tranche must be a term loan

Note: The underlying loan must have 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)

Note: The eligible lender must hold an interest in the underlying loan on the date of upsizing

Secured or Unsecured Secured or unsecured Secured or unsecured

Note: If the eligible borrower has other secured loans (other than Mortgage Debt4), the eligible loan must be secured

The underlying loan and the upsized tranche may be secured or unsecured

Note: If the underlying loan is secured, the upsized tranche must be secured

Note: An eligible lender can require the pledge of additional collateral

Origination Date After April 24, 2020 The underlying loan must have been originated on or before April 24, 2020
Maturity Five years
Payment Deferral Principal payments deferred for two years

Interest payments deferred for one year (unpaid interest will be capitalized)

Amortization Principal amortization of 15 percent at the end of the third year, 15 percent at the end of the fourth year, and a balloon payment of 70 percent at maturity at the end of the fifth year
Interest Rate Adjustable rate of LIBOR (1 or 3 month) + 3 percent
Minimum Loan Amount $250,000 $10 million
Maximum Loan Amount Lesser of (i) $35 million; or (ii) an amount that, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed 4x the eligible borrower’s adjusted 2019 EBITDA

To calculate adjusted 2019 EBITDA, use the methodology the eligible lender previously used for adjusting EBITDA when extending credit to the eligible borrower or similarly situated borrowers on or before April 24, 2020

Lesser of (i) $50 million; or (ii) an amount that, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed 6x the eligible borrower’s adjusted 2019 EBITDA

Same EBITDA methodology as the New Loan Facility

Lesser of (i) $300 million; or (ii) an amount that, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed 6x the eligible borrower’s adjusted 2019 EBITDA

To calculate adjusted 2019 EBITDA, use the methodology the eligible lender previously used for adjusting EBITDA when originating or amending the underlying loan on or before April 24, 2020

Priority Requirement May not include any provisions that would cause the eligible loan (or the upsized tranche) to be contractually subordinated to other debt in or outside of bankruptcy
Security Requirement None Must include a standard lien covenant or negative pledge that is of the type and that contains the exceptions, limitations, carveouts, baskets, materiality thresholds and qualifiers that are consistent with those used by the eligible lender in its ordinary course lending to similarly situated borrowers

At the time of origination and at all times the eligible loan is outstanding, the eligible loan is senior to or pari passu with, in terms of priority and security, the eligible borrower’s other loans or debt instruments, other than Mortgage Debt

Note: If a Priority Loan Facility loan is secured, a “Collateral Coverage Ratio” must be satisfied

Same requirement as to a standard lien covenant or negative pledge

At the time of upsizing and at all times the upsized tranche is outstanding, the upsized tranche is senior to or pari passu with, in terms of priority and security, the eligible borrower’s other loans or debt instruments, other than Mortgage Debt

Prepayment Penalty No prepayment penalty

With respect to the leverage test, note that:

  • The test utilizes an “adjusted EBITDA” concept;
  • The guidance specifies that “existing outstanding and undrawn available debt” does not include, among other things, any undrawn commitment that is used to finance receivables (including seasonal financing of inventory); and
  • If the borrower has an affiliate that has previously borrowed or has an application pending to borrow under the Program, then the entire affiliated group’s debt and EBITDA are relevant to determining the borrower’s maximum loan size. The affiliated group’s total participation in a facility cannot exceed the maximum loan size that the entire affiliated group is eligible to receive on a consolidated basis. The SBA affiliation rules apply.

Finally, any borrower intending to use an accordion or incremental facility provision in an existing credit facility, in connection with the Expanded Loan Facility, should carefully consider whether the upsizing complies with the credit agreement.<a href=”https://www.reinhartlaw.com/knowledge/main-street-lending-program-for-for-profit-businesses/#easy-footnote-bottom-5-27754″ title=”Indeed, borrowers and lenders should consider how any stimulus loan might impact, and require amendments to, a borrower’s existing loan documents.”>5

Borrower Certifications and Covenants. In addition to other certifications required by applicable law, the eligible borrower must make certain certifications and covenants under each facility.

Topic New Loan Facility Priority Loan Facility Expanded Loan Facility
Repayment of other debt The eligible borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the eligible loan is repaid in full, unless the debt or interest payment is mandatory and due Same

Note: A Priority Loan Facility loan can be used to refinance existing debt of another lender at the time of borrowing the eligible loan

Same, but refers to the upsized tranche: The eligible borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the upsized tranche is repaid in full, unless the debt or interest payment is mandatory and due
Cancellation or reduction of existing lines The eligible borrower must commit that it will not seek to cancel or reduce any of its committed lines of credit with the eligible lender or any other lender
Ability to meet financial obligations The eligible borrower must certify that it has a reasonable basis to believe that, as of the date of origination of the eligible loan (or the date of upsizing) and after giving effect to such loan (or upsizing), 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
Solvency The eligible borrower must certify that it is not currently in bankruptcy and that it was not “generally failing to pay undisputed debts as they become due” during the 90 days preceding the date of borrowing
Compensation, stock purchase and distribution restrictions The eligible borrower must commit that it will follow the compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act<a href=”https://www.reinhartlaw.com/knowledge/main-street-lending-program-for-for-profit-businesses/#easy-footnote-bottom-6-27754″ title=”Section 4003(c)(3)(A)(ii) of the CARES Act contains the following restrictions, which apply during the term of the loan plus an additional 12 months:
  • Distributions. The eligible borrower may not pay dividends or make other capital distributions with respect to the common stock of the eligible borrower.
  • Stock Repurchases. The eligible borrower may not repurchase an equity security of it or any parent company that is listed on a national securities exchange, except to the extent required under a contractual obligation that is in effect as of March 27, 2020.
  • Compensation. No officer or employee (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020) of the eligible borrower:
    • whose 2019 total compensation exceeded $425,000 but was less than or equal to $3,000,000:
      • may receive from the eligible borrower total compensation which exceeds, during any 12-month period, such 2019 total compensation; or
      • may receive from the eligible borrower severance pay or other benefits upon termination of employment with the eligible borrower which exceeds twice such 2019 total compensation; and
    • no officer or employee of the eligible borrower whose 2019 total compensation exceeded $3 million may receive during any 12-month period total compensation in excess of the sum of:
      • $3 million; and
      • 50 percent of the excess over $3 million of such 2019 total compensation.

The term “total compensation” includes salary, bonuses, awards of stock, and other financial benefits provided by an eligible borrower to an officer or employee of the eligible borrower.”>6

Note: 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

Eligibility

The eligible 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

Each facility further contains a safe harbor allowing a borrower to refinance debt that is maturing no later than 90 days from the date of such refinancing.

Finally, each eligible borrower that participates in the Program is expected to make commercially reasonable efforts to maintain its payroll and retain its employees during the time the eligible loan (or the upsized tranche) is outstanding. This requires the borrower to 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.

Lender Certifications and Covenants. In addition to other certifications required by applicable law, the eligible lender must make certain certifications and covenants under each facility.

Topic New Loan Facility Priority Loan Facility Expanded Loan Facility
Repayment of other debt extended by the eligible lender The eligible lender must commit that it will not request that the eligible borrower repay debt extended by the eligible lender to the eligible borrower, or pay interest on such outstanding obligations, until the eligible loan (or the upsized tranche) is repaid in full, unless the debt or interest payment is mandatory and due, or in the case of default and acceleration
Cancellation or reduction of existing lines The eligible lender must commit that it will not cancel or reduce any existing committed lines of credit to the eligible borrower, except in an event of default
Adjusted EBITDA The eligible lender must certify that the methodology used for calculating the eligible borrower’s adjusted 2019 EBITDA for the leverage requirement above is 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 The eligible lender must certify that the methodology used for calculating the eligible borrower’s adjusted 2019 EBITDA for the leverage requirement above is the methodology it previously used for adjusting EBITDA when originating or amending the underlying loan on or before April 24, 2020
Eligibility The eligible lender 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

Moreover, the guidance specifies that the eligible lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application. The mere fact that a company is eligible under the Program does not mean that a lender must approve a loan or entitle the company to the maximum loan amount.

Note that the eligible lender is tasked with collecting the eligible borrower’s required certifications and covenants at the time of origination of the eligible loan (or the time of upsizing). Eligible lenders are entitled to rely on the eligible borrower’s certifications and covenants, as well as any subsequent self-reporting by the eligible borrower.

Finally, the guidance has a requirement as to risk rating classification.

New Loan Facility Priority Loan Facility Expanded Loan Facility
If the eligible borrower had other loans outstanding with the eligible lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s (FFIEC) supervisory rating system on that date The underlying loan must have had an internal risk rating equivalent to a “pass” in the FFIEC’s supervisory rating system as of December 31, 2019

Fees. The guidance sets forth the following fees for the Program:

Fee New Loan Facility Priority Loan Facility Expanded Loan Facility
Transaction Fee An eligible lender will pay the SPV a transaction fee of 100 basis points of the principal amount of the eligible loan at the time of origination

Note: The eligible lender can require the eligible borrower to pay this fee

An eligible lender will pay the SPV a transaction fee of 75 basis points of the principal amount of the upsized tranche at the time of upsizing

Note: The eligible lender can require the eligible borrower to pay this fee

Loan Origination Fee An eligible borrower will pay an eligible lender an origination fee of up to 100 basis points of the principal amount of the eligible loan at the time of origination An eligible borrower will pay an eligible lender an origination fee of up to 75 basis points of the principal amount of the upsized tranche at the time of upsizing
Servicing Fee The SPV will pay an eligible lender 25 basis points of the principal amount of its participation in the eligible loan (or the upsized tranche) per annum for loan servicing

Loan Participations. As mentioned above, the SPV will purchase participations in the eligible loans (or in the upsized tranches).

Criteria New Loan Facility Priority Loan Facility Expanded Loan Facility
Participation Percentage The SPV will purchase at par value a 95 percent participation in the eligible loan (or the upsized tranche)
Retention The eligible lender must retain its 5 percent of the eligible loan until it matures or the SPV sells all of its participation, whichever comes first Same, but refers to the upsized tranche: The eligible lender must retain its 5 percent of the upsized tranche until it matures or the SPV sells all of its participation, whichever comes first

Note: The eligible lender must retain its interest in the underlying loan until the underlying loan matures, the upsized tranche matures, or the SPV sells all of its participation, whichever comes first

Risk Sharing The SPV and the eligible lender will share risk in the eligible loan (or the upsized tranche) on a pari passu basis
Existing Collateral N/A Any collateral securing the underlying loan (at the time of upsizing or on any subsequent date) must secure the upsized tranche on a pari passu basis
Structure True sale
Timing of Sale To be completed expeditiously after the eligible loan’s origination (or upsizing)

If you have any questions about the Main Street Lending Program or your eligibility to participate as a borrower or a lender, please contact Bob Heinrich or your Reinhart attorney.

Please visit Reinhart’s Coronavirus Resource Center for up-to-date information.

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  1. A “Business” is an entity that is 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 percent participation by foreign business entities; or certain tribal business concerns.
  2. An “Ineligible Business” is a type of business listed in 13 CFR 120.110(b)-(j) and (m)-(s) (as modified by certain regulations implementing the PPP) – for example, banks and other lenders, life insurance companies and more.
  3. The upsized tranche – not the underlying loan – must satisfy the criteria beginning with the row titled “Maturity.”
  4. Beware a literal reading of “Mortgage Debt.” The FAQ defines the term to include (i) debt secured only by real property at the time of the eligible loan’s (or the upsized tranche’s) origination; and (ii) limited recourse equipment financings (including equipment capital or finance leasing and purchase money equipment loans) secured only by the acquired equipment.
  5. Indeed, borrowers and lenders should consider how any stimulus loan might impact, and require amendments to, a borrower’s existing loan documents.
  6. Section 4003(c)(3)(A)(ii) of the CARES Act contains the following restrictions, which apply during the term of the loan plus an additional 12 months:
    • Distributions. The eligible borrower may not pay dividends or make other capital distributions with respect to the common stock of the eligible borrower.
    • Stock Repurchases. The eligible borrower may not repurchase an equity security of it or any parent company that is listed on a national securities exchange, except to the extent required under a contractual obligation that is in effect as of March 27, 2020.
    • Compensation. No officer or employee (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020) of the eligible borrower:
      • whose 2019 total compensation exceeded $425,000 but was less than or equal to $3,000,000:
        • may receive from the eligible borrower total compensation which exceeds, during any 12-month period, such 2019 total compensation; or
        • may receive from the eligible borrower severance pay or other benefits upon termination of employment with the eligible borrower which exceeds twice such 2019 total compensation; and
      • no officer or employee of the eligible borrower whose 2019 total compensation exceeded $3 million may receive during any 12-month period total compensation in excess of the sum of:
        • $3 million; and
        • 50 percent of the excess over $3 million of such 2019 total compensation.

    The term “total compensation” includes salary, bonuses, awards of stock, and other financial benefits provided by an eligible borrower to an officer or employee of the eligible borrower.