Main Street Lending Programs Principle Terms Summary
Supplement to Main Street Lending Programs (Barack Ferrazzano Client Alert, May 2020)
On April 30, 2020, the Federal Reserve released updated term sheets for the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF) and introduced the Main Street Priority Loan Facility (MSPLF). These programs are intended to facilitate lending to small and medium sized businesses. MSNLF and MSPLF loans are term loans originated after April 24, 2020, while MSELF loans are provided as upsized term loan tranches of existing term loans or revolving credit facilities originated on or before April 24, 2020 with a remaining maturity of at least 18 months. The combined size of the program will be up to $600 billion.
On May 27, 2020, the Federal Reserve released additional guidance along with detailed instructions regarding the borrower covenants and certifications under the three loan facilities. On June 8, 2020, the Federal Reserve adjusted certain terms of all three programs to make the facilities more attractive to prospective borrowers, including adjusting the minimum and maximum loan sizes, respectively. Below is a summary of the principal terms of the programs, reflecting guidance available as of June 8, 2020, but these terms are subject to additional guidance and change.
Summary of Principal Terms
The methodology used by the lender to calculate adjusted 2019 EBITDA must be the same methodology used by that lender on or before April 24, 2020, for adjusting EBITDA when extending credit to the prospective Borrower or to other similarly situated borrowers (provided that, in the case of a loan under the MSELF, the methodology used for calculating adjusted EBITDA must be the same as that applied in the underlying existing loan). If the lender has multiple applicable methods, it must use the most conservative method. In addition, if Borrower is a member of an affiliated group of companies, the maximum loan size is determined on an aggregate basis with that affiliated group. Finally, the Federal Reserve is currently evaluating whether to apply alternatives to adjusted EBITDA for underwriting of asset-based borrowers.
MSELF and MSPLF loans must be senior or pari passu in terms of seniority and collateral other than mortgage debt; however, MSNLF loans need only be senior or pari passu in terms of seniority, but not collateral (i.e., there could be a secured loan outstanding).
Guidance states that the Federal Reserve will publicly disclose the names of Borrowers and loan amounts, among other items.
A subsidiary of a foreign company may be an eligible Borrower, but it may not use the loan proceeds for the benefit of any foreign parents, affiliates, or subsidiaries.
To determine whether the majority of Borrower’s employees are in the United States, Borrower’s operations are consolidated with its subsidiaries, but not its parent companies or sister affiliates.
It is not clear how this requirement should be interpreted in light of other guidance that states that a subsidiary of a foreign company can be an eligible Borrower.
Employee and revenue calculations will include employees and revenues of affiliated companies, using the SBA’s broad affiliation rules.
Section 4003(b)(1)-(3) of the CARES Act authorizes financial support for air carriers and businesses critical to maintaining national security.
Ineligible Businesses are listed in 13 CFR 120.110(b)-(j) and (m)-(s), and include lenders and other businesses primarily engaged in investment or speculation, businesses engaged in illegal activity or that present live performances of a prurient sexual nature, political lobbying firms, and pyramid sales operations. Note that the SBA position that private equity funds engage in investment and speculation has been adopted for the purposes of this requirement and such funds are therefore disqualified.
- If Borrower has existing debt that, upon issuance of new debt, requires prepayment of more than a de minimis amount of the existing debt, then Borrower is ineligible for MSNLF or MSELF unless the lender of the existing debt waives the requirement or reduces the prepayment to a de minimis amount.
- Borrowers under MSPLF may, at the time of origination, refinance existing debt owed to a lender besides the MSPLF lender.
- Section 4019(b) of the CARES Act generally prohibits a business from receiving any relief funds if the President, senior executive branch officials, or members of Congress (including certain immediate family members) directly or indirectly hold at least a 20% equity interest in Borrower.
- Borrowers are not required to demonstrate that its credit applications have been denied or that credit available elsewhere is inadequate.
- Borrowers that are S corporations or other tax pass-through entities may make distributions to the extent reasonably necessary to cover its owners’ tax obligations arising out of the entity’s earnings.