Main Street Lending Program Expands (Again!)

Less than two weeks after releasing additional details and Frequently Asked Questions surrounding the $600 billion Main Street Lending Program (MSLP), on June 8, 2020 the Board of Governors of the Federal Reserve (Federal Reserve) released updated term sheets and FAQs containing several key changes to allow even more small- and medium-sized businesses to participate in the program. 

Federal Reserve Chair Jerome H. Powell stated that he believes the changes “will improve the ability of the Main Street Lending Program to support employment during this difficult period.” A link to the press release and the updated term sheets can be found here. 

For additional information and comprehensive summaries on the programs see our updated, as of June 10, 2020, Client Alerts titled Main Street Lending Program Set to Launch – Additional Terms and Guidance Released, and Update to Main Street Lending Program – Federal Reserve Announced Revised Terms & FAQs.

This alert summarizes how the changes to the MSLP impact both borrowers and lenders expecting to participate in the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF).

1. Loan Size and Term Expanded

Perhaps most significantly, the Federal Reserve increased the maximum loan sizes for all MSLP facilities. Specifically, the maximum loan size is now $35 million for the MSNLF (previously $25 million), $50 million for the MSPLF (previously $25 million), and $300 million for the MSELF (previously $200 million). Also, the minimum loan size was reduced from $500,000 to $250,000 for the MSNLF and MSPLF, and the Federal Reserve simplified the maximum loan size test for the MSELF by removing the 35% of the borrower’s existing indebtedness prong. Additionally, the Federal Reserve extended the term of the loans from 4 years to 5 years under all facilities. These welcome changes will expand the program to a wider range of borrowers looking for support during the COVID-19 crisis and will provide more flexibility for borrowers to achieve a workable repayment schedule.

2. Principal Deferral Extended and Amortization Schedule Modified; No Change to Interest Deferral

In tandem with the extension of the term of the loans by one year, the deferral period for principal payments was extended from one year to two years. After two years, principal under the MSNLF will have principal amortization of 15% at the end of year 3, 15% at the end of year 4, and 70% at maturity at the end of year 5 (previously equal payments of 33.33% were to be paid in years 2-4). This amortization schedule now matches that of the MSPLF and MSELF. However, no change was made to the interest deferral period, so borrowers will be required to start making interest payments after the first year.

3. Risk Retention Reduced Under the MSPLF

When the Federal Reserve first introduced the MSPLF in April, it carried with it a 15% risk retention requirement for lenders, due to the higher risk inherent in lending to higher leveraged borrowers that would qualify for Priority Loans. With the latest update, however, the Main Street SPV will now be purchasing 95% of MSPLF loans (i.e., a 5% risk retention requirement for the lenders), bringing the MSPLF in line with the other facilities.

4. Affiliation Rules & Restriction on Private Equity/VC Funds

One of the few restrictions confirmed in the FAQs is that portfolio companies of private equity and VC funds will have a more difficult time accessing the program since, if one or more of their affiliates has borrowed (or has an application pending) under a MSLP facility, the EBITDA and debt of all their affiliates will be included when determining the maximum loan amount (note that as per the SBA regulations and the FAQs, private equity funds themselves are ineligible to participate in MSLP). Our previous Client Alerts have addressed the application of the affiliation rules when determining eligibility but the FAQs recently released confirmed the affiliation rules also apply when determining the maximum loan size. 

The clarification in the FAQ states that if a borrower is the only business in its affiliated group that has received (or applied for) a MSLP loan, its affiliated group’s debt and EBITDA are not relevant to determining the maximum loan size, other than to the extent any subsidiaries of the borrower are consolidated into the borrower’s financial statements. However, if any affiliates of a borrower have previously borrowed or have an application pending to borrow from a MSLP facility, the entire affiliated group’s debt and EBITDA will be included when determining the maximum loan amount. 

This clarification means a borrower will not be consolidated with its affiliates for determining debt and EBITA if it is the only member of an affiliated group that has received (or is applying for) a MSLP loan, but if more than one member of an affiliated group has received (or is applying for) a MSLP loan, all members of the affiliated group will be consolidated when determining the maximum loan amounts, including, for purposes of calculating the total the amount a borrower is eligible to receive under a MSLP facility and the total debt and adjusted EBITDA. 

In addition, an affiliated group of borrowers can only participate in one MSLP facility, which means all borrowers in an affiliated group must participate in MSNLF, MSPLF or MSELF. While these rules primarily impact portfolio companies of PE/VC funds, they also apply to larger companies and conglomerates with multiple affiliates and business lines that might not typically be consolidated for financial or borrowing purposes.

5. Additional Revisions and Guidance

In addition to the above, the updated FAQs include the following: 

• Comprehensive details for lenders on the requirements for retaining and selling participations; 
• Confirmation that the interests purchased by the Main Street SPV are “true participations” and, among other things, the interests have characteristics of participations under the bankruptcy code; 
• Confirmation that unpaid interest will be capitalized as per the lender’s standard practices (e.g., monthly, quarterly or annually); 
• Confirmation that any excess payments of principal will be applied in the order of maturity, as opposed to pro rata or the inverse order of maturity;
• Confirmation that lenders can charge customary consent fees to the extent necessary to amend existing loan agreements; 
• Confirmation that the unforgiven portion of any Paycheck Protection Program loans should be treated as outstanding indebtedness; 
• A revision to the definition of “Mortgage Debt” to now include limited recourse equipment financings, as well as real property. This is most relevant when determining what indebtedness must be subordinated to or pari passu with the MSPLF or MSELF; and
• Additional details on calculating adjusted EBITDA and other financial reporting requirements (e.g., borrowers must prepare audited or reviewed financial statements if they typically do so). 

The other loan terms under the MSLP, such as interest rate, required certifications and covenants of borrowers and lenders, and loan fees remained unchanged in the Federal Reserve’s latest version of the program.

Preparing for Launch

In its press release, the Federal Reserve stated that it expects the MSLP to be “open for lender registration soon and to be actively buying loans shortly afterwards.” It also noted yet again that it is working to establish a similar program for nonprofit organizations soon, but no details were provided. We recommend that interested borrowers and lenders review the updated MSLP term sheets, undertake the other steps described in our previous Client Alerts linked above, and be prepared to act quickly once the program officially opens. 

Summary of Terms 

The chart below sets forth a summary of each facility.