Federal Reserve Announces New Details Of Main Street Lending Program – Corporate/Commercial Law | #corporatesecurity |



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Federal Reserve Announces New Details Of Main Street Lending Program


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Torys previously provided guidance on the
preliminary details of two new loan programs created under the Main
Street Lending Program (MSLP) established by the Coronavirus Aid,
Relief, and Economic Security Act (CARES Act). The Main Street
programs will make up to $600B in loans available to small- and
medium-sized businesses impacted by the COVID-19 pandemic.

In this bulletin we discuss the Federal Reserve’s
announcement of a third loan option under the MSLP and several
critical changes and clarifications to its earlier guidance on its
previously announced programs—the Main Street New Loan
Facility (MSNLF) and Main Street Expanded Loan Facility
(MSELF).

The news is mixed for private equity-sponsored businesses.
Helpful changes include relaxing the programs’ leverage tests
by allowing lenders to apply adjustments to EBITDA and clarifying
that multi-lender loans with non-bank lenders in the lender group
are eligible for upsize tranches under the MSELF. Potential
challenges include the adoption of the Small Business
Association’s (SBA) affiliation rules for purposes of the
programs’ size eligibility standards.

Announcement of the Main Street Priority Loan Facility

The Federal Reserve announced the creation of the Main Street
Priority Loan Program (MSPLF), designed to make loans available to
borrowers with higher leverage ratios than the previous programs
allowed. Under MSPLF, lenders will be able to make loans up to the
lesser of $25M or an amount that, when added to outstanding and
undrawn available debt of the potential borrower, does not exceed
six times the borrower’s 2019 adjusted EBITDA. This compares
with four times 2019 adjusted EBITDA permitted under the MSNLF.
Lenders will be required to retain a greater proportion of the risk
on MSPLF loans, 15% as compared with 5% under the MSNLF and MSELF.
Otherwise, loans under the MSPLF will share many of the
characteristics of loans under the MSNLF and MSELF, including the
newly announced changes described below.

Key changes to the Main Street Loan Program

The Federal Reserve’s guidance sets out several changes to
the previously announced programs, which also generally apply to
the new MSPLF.  The key changes include:

  • The criteria for an “Eligible
    Borrower” will now include businesses with up to 15,000
    employees or 2019 annual revenues up to $5B. Previously, these
    limits were set at 10,000 employees and annual revenues up to
    $2.5B.

  • Critically for private equity and
    pension fund-sponsored businesses, the Federal Reserve has adopted
    the SBA’s affiliation rules (the same rules that apply to the
    SBA’s Paycheck Protection Program), which require an applicant
    to aggregate with its affiliates under common control in
    calculating its number of employees and 2019 annual revenues. This
    additional limitation will likely counteract the positive impact of
    increasing the number of employees and revenue limits for Eligible
    Borrowers.

  • A potential borrower’s 2019
    EBITDA, used to establish maximum loan size and financial
    covenants, may now be calculated on an “adjusted” basis.
    The adjustment methodology used must be consistent with the
    methodology the lender has previously used when extending credit to
    the potential borrower or similarly situated borrowers (or in the
    case of the MSELF, when the underlying loan was originated or
    amended). Torys previously reported on problems many borrowers
    would face if EBITDA were not defined to allow the types of
    adjustments that borrowers typically rely on to improve their
    leverage ratio.

  • The applicable interest rate for Main
    Street loans will be LIBOR (1 or 3 month) + 300 basis points. The
    Federal Reserve’s previous guidance provided that interest
    rates would be based on the Secured Overnight Funding Rate (SOFR) +
    250-400 basis points, which posed an issue as SOFR has not yet been
    widely adopted in the loan markets. While principal and interest
    will remain deferred for 1 year, the Federal Reserve has clarified
    that interest will be capitalized during the term of the loan.

  • The definition of “Eligible
    Lenders” under the Main Street program continues to exclude
    direct lenders, however the Federal Reserve has clarified that only
    the financial institution that is the lender for the upsize tranche
    itself is required to meet the Eligible Lender criteria. Therefore,
    even if the underlying loan is a multi-lender facility with a
    non-bank lender in the group, the loan will be eligible for an
    upsize tranche under the MSELF.

  • Other new “Eligible
    Borrower” requirements include being a business established
    before March 13, 2020 and not otherwise being in one of the
    categories of “Ineligible Business” defined in the SBA
    regulations1.

  • Among the changes for potential
    lenders, a lender is now required to hold its participation in the
    loan or upsize tranche until the loan or tranche matures, or until
    the Federal Reserve sells all of its participation in that loan.
    The new guidance expressly provides that lenders are expected to
    assess each potential borrower’s financial condition at the
    time of application and collect the required certifications and
    covenants from each potential borrower at the time of origination.
    U.S. branches and agencies of foreign banks are now included as
    Eligible Lenders.

Key terms of the loans


















 

Main Street New Loan Facility

Main Street Priority Loan Facility

Main Street Existing Loan Facility

Maturity:

4 years

Interest rate:

Adjustable; LIBOR + 300 basis points

Deferral:

1-year deferral of amortization of principal and interest;
unpaid interest is capitalized

Minimum loan:

$500,000

$500,000

$10 million

Maximum loan:

Lesser of a) $25 million; and b) 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
“adjusted” EBITDA

Lesser of a) $25 million; and b) 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
“adjusted” EBITDA

The lesser of a) $200 million; b) 35% of the borrower’s
existing outstanding and undrawn available debt that is pari passu
with the Main Street loan and equivalent in secured status; or c)
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 “adjusted” EBITDA

Eligible loan:

An unsecured or secured term loan originated on or after April
24, 2020

An upsize tranche originated after April 24, 2020 of an
unsecured or secured term loan or revolving credit facility,
originated before April 24, 2020, that has 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)

Payment:

33% at the end of each of years 2-4

15% at the end of each of years 2-3

70% balloon payment at maturity in year 4

15% at the end of each of years 2-3

70% balloon payment at maturity in year 4

Prepayment:

Permitted without penalty

Transaction fee:

Transaction fee of 100 basis points of the principal amount of
the loan, payable by the lender to the Federal Reserve’s
special purpose vehicle. The facility fee may be passed on to the
borrower

Transaction fee of 75 basis points of the principal amount of
the upsize tranche, payable by the lender to the Federal
Reserve’s special purpose vehicle. The facility fee may be
passed on to the borrower

Loan origination / upsize fee:

Origination fee of 100 basis point of the principal amount of
the loan

Upsize fee of 75 basis point of the principal amount of the
upsize tranche

Servicing fee:

The Federal Reserve’s special purpose vehicle will pay the
lender 25 basis points per annum of the principal amount of its
participation in the loan / upsize tranche

Participation retained by lender:

5%

15%

5%

Loan classification:

If the borrower had other loans outstanding with the 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

Priority:

The loan must not be (at any time) contractually subordinated in
terms of priority to any of the borrower’s other debt

The loan must be (at all times) senior to or pari passu with, in
terms of payment priority and lien priority, the borrower’s
other debt (other than mortgage debt)

The upsize tranche must be (at all times) senior to or pari
passu with, in terms of payment priority and lien priority, the
borrower’s other debt (other than mortgage debt)

Security:

Unsecured

Unsecured

Any collateral securing the original loan (at any time) must
secure the upsize tranche on a pro rata basis as between the lender
and the Federal Reserve’s special purpose vehicle

Facility termination:

Unless extended by the Federal Reserve, will close to new
participations September 30, 2020

Considerations for Eligible Borrowers

As we previously discussed, potential borrowers and private
equity sponsors should be aware that the Main Street program
imposes certain operational restrictions on borrowers, including
restrictions on compensation, stock repurchases and distributions,
and must make certain attestations in connection with receiving
Main Street loans. A description of those operational restrictions
and attestations can be found here .

The new guidance also provides that borrowers will be required
to refrain from repaying principal and interest on any other debt
until the Main Street loan is repaid (other than mandatory
payments) and refrain from seeking to cancel or reduce committed
lines of credit.  A potential borrower must certify that it
has a reasonable basis to believe it can meet its financial
obligations for the next 90 days (after giving effect to the Main
Street loan) and does not expect to file for bankruptcy in the next
90 days.

Next steps

As before, the terms of the Main Street programs are subject to
additional guidance from the U.S. Treasury and the Federal Reserve.
According to the Federal Reserve, operationalization of the Main
Street program is underway, including the creation of the Federal
Reserve’s special purpose vehicle to purchase eligible loan
participations from eligible lenders.  Potential borrowers are
advised to assess their eligibility for the Main Street programs
and to contact an eligible lender for assistance in preparing to
apply.

Footnote

1. Specifically as defined in 13 CFR 120.110(b)-(j) and
(m)-(s), as modified by regulations implementing the Paycheck
Protection Program established by section 1102 of the CARES Act on
or before April 24, 2020.

Originally published 5 May, 2020

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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