UPDATE: Federal Reserve Issues Revised Term Sheets and Guidance for Main Street Lending Facilities, Announces New Main Street Priority Lending Facility

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Key Takeaways

• On April 30, 2020, the Federal Reserve (“Fed”) issued revised term sheets for the Main Street Lending Program’s Main Street New Loan Facility (“MSNLF”)[1] and Main Street Expanded Loan Facility (“MSELF”)[2] and a term sheet for the new Main Street Priority Loan Facility (“MSPLF”). This new program permits borrowers to refinance existing debt with other lenders into a MSPLF loan subject to a higher EBITDA multiple cap than the MSNLF.[3] The Fed also issued new Main Street FAQs.[4]
• Prospective borrowers are now subject to certain ineligibility tests and affiliation rules similar to those applicable in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”). Other changes include adjustments to minimum and maximum loan sizes and the use of adjusted EBITDA consistent with market practice in determining loan sizes.
• The Fed also announced that it will disclose, among other information, the names of participating lenders and borrowers, the amounts borrowed and interest rates charged, and overall costs, revenues and other fees.

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Overview

The new and revised Main Street Lending Program’s (“Main Street” or “Program”) guidance preserves many of the prior guidance’s key features, including that the U.S. Treasury (“Treasury”) will still make a $75 billion equity investment in a single special purpose vehicle (“SPV”) established to implement the Program, which will leverage that investment in order to provide up to $600 billion in loans in the aggregate under all three of the Program’s facilities to support small and midsize businesses. Consistent with the initial terms of MSNLF and MSELF, prospective borrowers may not participate in a Main Street facility and the Primary Market Corporate Credit Facility.

While the latest Main Street guidance expands eligibility criteria for both borrowers and lenders, many prospective borrowers will continue to face challenges in qualifying for and obtaining Main Street loans, particularly in light of the new affiliation requirements. The Main Street loans will be obtained directly from eligible lenders, who are required to underwrite the loans pursuant to an assessment of the borrower’s financial condition at the time of application. Among other things, this is likely to include an assessment of the borrower’s expected EBITDA in light of the pandemic and governmental restrictions on business activity and, consequently, the ability of borrowers to take on incremental debt.

This memorandum summarizes the key changes and updates to MSNLF and MSELF and describes the key terms of MSPLF, and also includes a comparative chart outlining the key terms of each of the three facilities.[2]

I.     Revisions and Clarifications to MSNLF and MSELF

Many of the requirements from the initial term sheets for MSNLF and MSELF remain unchanged or substantially similar to their prior iterations,[5] and we highlight here certain material revisions and clarifications that recent guidance has implemented.

• Eligible Borrowers; Affiliation; Employment and Revenue Tests. The eligibility requirements for prospective borrowers were modified such that businesses with not more than 15,000 employees (up from 10,000 employees) or not more than $5 billion (up from $2.5 billion) in annual revenues are eligible for the Program. However, the FAQ provides that when determining whether a business meets these criteria, the business must aggregate its employees[6] and 2019 revenues[7] with those of its affiliates. The FAQ instructs borrowers to refer to SBA regulations in determining affiliation.[8] However, the affiliation waivers under Title I of the CARES Act applicable to the PPP (e.g., for food service and accommodations businesses and franchises) do not appear to apply to Main Street.
  • Number of Employees. A borrower should count each of its (and its affiliates, if any) full-time, part-time, seasonal, or otherwise employed persons, excluding volunteers and independent contractors, as a single full employee. Borrowers should calculate the average number of employees over the 12 months prior to loan origination or upsizing by using each pay period over that time.
  • 2019 Annual Revenues. A borrower should aggregate its revenues with those of its affiliates (if any), using either annual revenue as reported in fiscal year 2019 GAAP-compliant audited financial statements or fiscal year 2019 annual receipts[9] as reported to the Internal Revenue Service.
• Ineligible Borrowers. Certain businesses deemed categorically ineligible under SBA’s business loan program (as modified by PPP rules and related SBA guidance)[10] and businesses that have received specific support pursuant to Subtitle A of Title IV of the CARES Act are prohibited from participating in the Programs.[11] The SBA regulations generally deem financial businesses primarily engaged in lending (e.g., banks and finance companies), life insurance companies, government-owned entities, businesses in which the lender or any of its associates owns an equity interest and speculative businesses, among others, to be ineligible, although in a few limited cases PPP guidance has relaxed certain of these disqualifying criteria. The reference to SBA guidance in the Main Street guidance suggests that private equity firms and hedge funds will be excluded from borrowing under the Programs, but portfolio companies of private equity firms may qualify for Main Street programs subject to the other Main Street eligibility requirements, including affiliation.
• Eligible Lenders. The scope of “Eligible Lenders” has been expanded somewhat, and now includes U.S. branches or agencies of foreign banks, U.S. intermediate holding companies of foreign banks, and U.S. subsidiaries of any otherwise eligible lender in addition to the previously eligible U.S. federally insured depository institutions (including banks, savings associations, or credit unions), U.S. bank holding companies and U.S. savings and loan holding companies.
• Underwriting. Lenders must conduct an assessment of each prospective borrower’s financial condition. The FAQ clarifies that lenders should apply their own underwriting standards and may demand additional documentation or information from borrowers as part of this process. Ultimately, lenders have the authority to deny loan applications based on their own underwriting standards, even if a prospective borrower satisfies the minimum requirements set forth in the Main Street guidance and there is no requirement in the Main Street guidance for any lender to offer these loans.
• Loan Size.
  • MSNLF: Decreased minimum loan size to $500,000 (from $1 million) and clarified that the maximum loan size is calculated based on adjusted EBITDA[12] (but preserved the four times (4x) multiplier) relative to the sum of the MSNLF loan plus the borrower’s existing outstanding undrawn available debt as of the loan application date.[13]
  • MSELF: Increased minimum loan size to $10 million (from $1 million) and clarified that the maximum loan size is equal to the lesser of (i) $200 million (up from $150 million), (ii) 35% of “existing outstanding and undrawn available debt that is pari passu in priority with the loan and equivalent in secured status,” or (iii) an amount, when added to existing outstanding and undrawn debt, that does not exceed 6x 2019 adjusted EBITDA.[14]
  • While the term sheets provide that maximum loan size is based on 2019 adjusted EBITDA, the term sheets constitute the minimum requirements of the Programs and lenders will apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower, which may take into account projections of the borrower’s EBITDA and other metrics in light of present and anticipated economic and sociopolitical conditions.
• Loan Terms.
  • Loan terms continue to be four years, with principal and interest payments deferred for one year (unpaid interest will be capitalized), and amortization schedules have now been mandated as follows:
    • MSNLF: Principal amortizes in one-third installments at the end of each of the second, third and fourth years.
    • MSELF: Principal amortizes 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at the end of the fourth year.
  • Loans must now have an adjustable rate of LIBOR (1 or 3 month) plus 300 basis points, rather than the previously mandated SOFR plus 250–400 basis points.
  • Loans cannot, at the time of origination or at any time during the term of the loan, be contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments. However, MSNLF loans can be of any priority (and secured or unsecured), even if the borrower has existing loans that are of higher priority or that are secured, but the borrower may not incur any subsequent debt with a higher priority than the MSNLF loan.
• Covenants and Certifications.
  • Dividends and Capital Distributions. An exception to the prohibition on dividends and capital distributions has been added for borrowers that are S corporations or other tax pass-through entities, in which case such a borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings. Notably, the latest guidance does not contemplate an exception for dividends or capital distributions in the context of sale transactions.
  • Payroll and Employees. In contrast to the previous term sheets’ requirement that borrowers make reasonable efforts to retain employees and maintain payroll during the term of the loan, the revised guidance provides that borrowers must use commercially reasonable efforts to retain employees and maintain payroll during the loan term. The guidance explains that such efforts are “good-faith efforts to maintain payroll and retain employees, in light of [the borrower’s] capacities, the economic environment, its available resources, and the business need for labor.”
  • Solvency. Borrowers must certify that they have a reasonable basis to believe that, as of the date of origination or upsizing, as applicable, of the loan and after giving effect to the loan, the borrower 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.
  • Repayment of Other Debt. The Fed has clarified that the prohibition on repaying principal or interest on other debt until the Main Street loan has been repaid in full does not apply to debt or interest payments that are mandatory and due. In addition, borrowers may (i) repay lines of credit (including credit cards) in the ordinary course, (ii) take on and pay additional debt as required in the ordinary course on standard terms (e.g., inventory or equipment financing) so long as that additional debt is pari passu or junior to the loan and does not include any collateral other than newly acquired property in connection therewith and (iii) refinance maturing debt.
  • Risk Rating. If a 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 supervisory rating system on that date.
  • Exigent Circumstances Related to COVID-19. The revised term sheets for both facilities no longer include a requirement that borrowers attest that they require financing due to the exigent circumstances presented by COVID-19.
• Public Disclosure. The Fed will disclose, among other information, the names of participating lenders and borrowers, the amounts borrowed and interest rates charged, and overall costs, revenues and other fees.
• Other MSELF-Specific Changes.
  • Eligible Loans. MSELF has been expanded to include upsized tranches of revolving credit facilities, in addition to previously authorized term loans (which the recent guidance confirms may be secured or unsecured).
  • Syndicated Loans. The fact that an underlying loan has been syndicated to multiple lenders, some of which are not “Eligible Lenders” under MSELF, does not disqualify the underlying loan from participating in MSELF so long as a lender from the syndicate that qualifies as an “Eligible Lender” provides the MSELF upsized tranche. However, the guidance is unclear on whether the upsized tranche may be syndicated at all, and if so whether syndication must be limited to other lenders who qualify for MSELF.

[2]

II.      Main Street Priority Loan Facility

Eligibility requirements for both lenders and borrowers (including affiliation rules), loan terms (e.g., four year term to maturity, interest rates), covenants and certifications (e.g., restrictions on executive compensation, stock buybacks and dividends and capital distributions) and public disclosure considerations are generally the same in MSPLF as in MSNLF and MSELF. Below we clarify certain terms of MSPLF and highlight a few key differences between it and the other Main Street facilities.

• Fed Participation. The SPV will purchase 85% participations in MSPLF loans, with lenders retaining the other 15%, as contrasted with the 95% participations the SPV will purchase under MSNLF and MSELF.
• Eligible Loans. Like MSNLF, only secured or unsecured term loans may be made under MSPLF.
• Loan Size.
  • Minimum Size. As in MSNLF, loans made under MSPLF have a minimum size of $500,000.
  • Maximum Size. The maximum loan size under the MSPLF equals the lesser of (i) $25 million (the same as MSNLF) or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, is not greater than six times (6x) the borrower’s 2019 EBITDA (the same as MSELF), among other criteria. The terms used in this calculation have the same meanings as under MSNLF.
• Amortization. MSPLF loans amortize on the same schedule as MSELF loans, 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at the end of the fourth year.
• Covenants and Certifications.
  • Repayment of Debt. In addition to the carve-outs to the Program’s prohibition on repayment of other debt, under MSPLF only the borrower may, at the time of origination, refinance existing debt owed by the borrower to a lender that is not the MSPLF lender.
• Fees. MSPLF loans are subject to the same fees as MSNLF loans, 100 basis points paid by the lender to the SPV at origination (which the lender may require the borrower to pay) and up to 100 basis points paid by the borrower to the lender at origination, in addition to a 25 basis points per annum fee on the SPV’s participation payable by the SPV to the lender.

[2]

III.       Ongoing Updates

The Main Street Facilities term sheets are under continuing review and open for public comment. The Fed and the Treasury may make adjustments to the terms and conditions of any of the lending facilities described above as they deem appropriate. We will continue to provide updates on any further developments.

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[1]      For the revised MSNLF term sheet, please click here.

[2]      For the revised MSELF term sheet, please click here.

[3]      For the MSPLF term sheet, please click here.

[4]      For the FAQs, please click here.

[5]      For additional information regarding Main Street’s prior guidance, please click here.

[6]      To determine how many employees it has, a borrower should follow the framework set out in SBA regulations (available here).

[7]      To determine 2019 annual revenues, Businesses must aggregate their revenues with those of their affiliates. Businesses may use either of the following methods to calculate 2019 annual revenues for purposes of determining eligibility: (1) A Business may use its (and its affiliates’) annual “revenue” per its 2019 Generally Accepted Accounting Principles-based (GAAP) audited financial statements; or (2) A Business may use its (and its affiliates’) annual receipts for the fiscal year 2019, as reported to the Internal Revenue Service.

[8]      The applicable regulations are available here. For additional information regarding SBA affiliation requirements, please click here and here.

[9]      For purposes of the Program, the term “receipts” has the same meaning given to it in SBA regulations, available here.

[10]     The applicable regulations are available here.

[11]     Such programs include support for air carriers and businesses critical to national security, but does not include the PPP.

[12]     For MSNLF, EBITDA methodology must be one previously used between the lender and the borrower or the lender and other similarly situated borrowers. 

[13]     The Fed clarified that the phrase “existing outstanding and undrawn available debt” includes all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, non-bank financial institution or private lender, as well as any publicly issued bonds or private placement facilities. It also includes all unused commitments under any loan facility, excluding (i) any undrawn commitment that serves as a backup line for commercial paper issuance, (ii) any undrawn commitment that is used to finance receivables (including seasonal financing of inventory), (iii) any undrawn commitment that cannot be drawn without additional collateral and (iv) any undrawn commitment that is no longer available due to change in circumstance.  

[14]     For MSELF loans, EBITDA methodology  must be the methodology previously used for adjusting EBITDA when originating or amending the underlying loan on or before April 24, 2020.