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May 4, 2020

Federal Reserve Board Issues Updated Guidance on Main Street Lending Program

After receiving thousands of comments to its initial proposal of the Main Street Lending Program, the Federal Reserve Board announced on Thursday that it would be expanding the scope and eligibility of the program to allow for increased borrower participation. Along with that announcement came new term sheets and guidance that update the information provided in our prior legal alert.

The Main Street Lending Program is the overarching program encompassing three loan facilities: the Main Street New Loan Facility (MSNLF), the Main Street Expanded Loan Facility (MSELF), and the Main Street Priority Loan Facility (MSPLF). Loans will be made by financial institutions, which can then sell between 85 to 95 percent of the loan to a special purpose vehicle created by the Federal Reserve Bank of Boston. The special purpose vehicle will purchase up to $600 billion of participations in eligible loans, however, depending on the needs of borrowers, the Treasury Department and Federal Reserve may adjust the program’s size in the future.

All three programs have the same eligible borrower criteria, four-year maturity date, an adjustable interest rate of LIBOR (one or three month) plus 300 basis points, deferral of principal and interest for one year, and the borrower’s ability to prepay without penalty. For purposes of these three programs, an eligible borrower is a business that:

  1. Was established prior to March 13, 2020
  2. Has 15,000 or fewer employees or 2019 annual revenue of $5 billion or less
  3. Is a US entity with significant operations and a majority of its employees based in the United States
  4. Is not participating in more than one of the three Main Street Lending Facilities or the Primary Market Corporate Credit Facility

Recent guidance has clarified that not-for-profits are not currently eligible under the Main Street Lending Programs.

When determining eligibility and calculating the number of employees, borrowers should take into account its full-time, part-time, seasonal, or otherwise employed individuals and those of their affiliated entities. For purposes of determining affiliation, business should apply the same affiliation rules being applied under the Paycheck Protection Program. With respect to calculating 2019 revenue for the purposes of determining eligibility, borrowers can use one of two methods. First, a business may use the annual revenue as per its 2019 GAAP audited financial statements or, second, its annual receipts for the 2019 fiscal year as reported to the Internal Revenue Service.

In addition to the loan terms above, the highlights of the MSNLF are as follows:

  1. The minimum loan amount is $500,000 (lowered from $1 million in the previous term sheet).
  2. The maximum loan amount is the lesser of $25 million or an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed four times the borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA).
  3. While principal and interest payments are deferred for one year, any unpaid interest will be capitalized. Additionally, the principal amount will be amortized one-third at the end of the second year, one-third at the end of the third year, and one-third at maturity at the end of the fourth year.
  4. Finally, at the time of origination of the loan and at any time during its term, the loan may not be contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments.

The highlights of the MSELF are as follows:

  1. The minimum loan amount is $10 million (increased from $1 million in the previous term sheet).
  2. The maximum loan amount is the lesser of $200 million, 35 percent of the borrower’s existing outstanding and undrawn available debt that is of equal priority with the loan and equivalent in secured status, or an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times the borrower’s adjusted 2019 EBITDA.
  3. While principal and interest payments are deferred for one year, any unpaid interest will be capitalized. Additionally, the principal amount will be amortized 15 percent at the end of the second year, 15 percent at the end of the third year, and a balloon payment of 70 percent at maturity at the end of the fourth year.
  4. Finally, at the time of the upsizing and any time while the upsized amount is outstanding, the upsized amount is senior to or pari passu with the borrower’s other loans or debt instruments, other than mortgage debt, with respect to priority and security.

The highlights of the MSPLF are as follows:

  1. The minimum loan amount is $500,000.
  2. The maximum loan amount is the lesser of $25 million or an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times the borrower’s EBITDA.
  3. While principal and interest payments are deferred for one year, any unpaid interest will be capitalized. Additionally, the principal amount will be amortized 15 percent at the end of the second year, 15 percent at the end of the third year, and a balloon payment of 70 percent at maturity at the end of the fourth year.
  4. Finally, at the time of origination of the loan and at any time during its term, the loan senior to or pari passu with the borrower’s other loans or debt instruments, other than mortgage debt, with respect to priority and security.

Unlike the Paycheck Protection Program, facilities under the Main Street Lending Program are not eligible for forgiveness. Additionally, borrowers may be responsible for fees associated with the loans at the time of origination or upsizing. Although the maximum fees have been set by the term sheets, it remains within the discretion of each lender to determine when and whether to charge borrowers for these fees.

Finally, each borrower that participates in any of the three facilities under the Main Street Lending Program should make commercially reasonable efforts to maintain its payroll and retain its employees during the time the loan or upsized amount is outstanding.

If you have any questions regarding the content of this alert, please contact Roger Cominsky, Financial Institutions & Lending Practcie Area chair, at rcominsky@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or another member of the firm’s Financial Institutions & Lending Practice Area.

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