CARES Act: Updated Main Street Lending Program Summary

Overview

On April 30, 2020, the Federal Reserve Board (the Board) announced it is expanding the scope and eligibility for the Main Street Lending Program (the Program). When the initial terms of the Program were announced, the Board indicated that it was seeking feedback from the public on potential refinements. The Board received more than 2,200 letters from individuals, businesses and nonprofits. In response to the public input, the Board expanded the loan options available to businesses, and increased the maximum size of businesses that are eligible for support under the Program. Changes to the Program include, among others:

• Adding a third loan option, the Main Street Priority Loan Facility.
• Lowering the minimum loan size under the Main Street New Loan Facility to $500,000.
• Increasing the minimum loan size under the Main Street Expanded Loan Facility to $10,000,000.
• Expanding the pool of businesses eligible to borrow — now businesses with up to 15,000 employees or up to $5 billion in annual revenue are eligible, provided that they meet the other terms and conditions for eligibility (note: to determine how many employees a business has or a business’s 2019 revenues, the employees and revenues of the business must be aggregated with the employees and revenues of its affiliated entities).

In the Board’s Frequently Asked Questions to the Main Street Lending Program (the FAQs), the Board describes the differences between the Main Street New Loan Facility, the Main Street Priority Loan Facility and the Main Street Expanded Loan Facility (collectively, the Main Street Facilities). All three facilities use the same Eligible Lender and Eligible Borrower criteria (including the requirement that the borrower had adjusted EBITDA in 2019), and have many of the same features, including the same maturity, interest rate, deferral of principal and interest for one year, and ability of the borrower to prepay without penalty. Other features of the loans extended in connection with each facility differ. The loan types also differ in how they interact with the Eligible Borrower’s existing outstanding debt, including with respect to the level of pre­crisis indebtedness an Eligible Borrower may have incurred.

• Main Street New Loan Facility (New Facility). Eligible Lenders extend new loans to Eligible Borrowers ranging in size from $500,000 to $25 million. The maximum size of a loan made in connection with the New Facility cannot, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, exceed four times (4x) the Eligible Borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA). The loans must not be, at the time of origination or at any time during the four-year term of the Eligible Loan, contractually subordinated in terms of priority to any of the Eligible Borrower’s other loans or debt instruments. The unique features of loans originated in connection with the New Facility (New Facility Loans) are provided in the New Facility Term sheet, which you can find here, and which are described in this client alert.
• Main Street Priority Loan Facility (Priority Facility). Eligible Lenders extend new loans to Eligible Borrowers ranging in size from $500,000 to $25 million. The maximum size of a loan made in connection with the Priority Facility cannot, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, exceed six times (6x) the Eligible Borrower’s adjusted 2019 EBITDA. At the time of origination and at all times thereafter, the Eligible Loan must be senior to or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt. Eligible Borrowers may, at the time of origination of the loan, refinance existing debt owed by the Eligible Borrower to a lender that is not the Eligible Lender. The unique features of loans originated in connection with the Priority Facility (Priority Facility Loans) are provided in the Priority Facility term sheet, which you can find here, and which are described in this client alert.
• Main Street Expanded Loan Facility (Expanded Facility). Eligible Lenders increase (or “upsize”) an Eligible Borrower’s existing term loan or revolving credit facility. The upsized tranche is a four-year term loan ranging in size from $10 million to $200 million. The maximum size of a loan made in connection with the Expanded Facility cannot exceed (i) 35% of the Eligible Borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the Eligible Loan and equivalent in secured status (i.e., secured or unsecured); or (ii) when added to the Eligible Borrower’s existing outstanding and undrawn available debt, six times (6x) the Eligible Borrower’s adjusted 2019 EBITDA. At the time of upsizing and at all times thereafter, the upsized tranche must be senior to or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt. The features associated with tranches of loans that are upsized in connection with the Expanded Facility (Expanded Facility Upsized Tranches and together with the New Facility Loans and Priority Facility Loans, the Main Street Loans) are outlined in the Expanded Facility term sheet, which you can find here, and which are described in this client alert.

The table below provides a summary of the different loan options under the revised Program.

The combined size of the Main Street Facilities will be up to $600 billion. The single common special purpose vehicle (the SPV) established to purchase participations in Main Street Loans will cease to purchase such loans on September 30, 2020, unless the Board and the Department of Treasury extend the applicable Main Street Facility.

Note that the Board and the Secretary of the Treasury reserved the right to make adjustments to the terms and conditions of the Main Street Facilities. Any changes (including the official launch date of the Program) will be announced on the Board’s website, which you can find here. Applications for the Main Street Facilities are not available as of the date of this client alert.

Term Sheet Provisions and Related FAQs

This section sets forth the provisions in the New Facility, Priority Facility and Expanded Facility term sheets. The Board’s applicable FAQs are also included to provide the reader additional guidance. Most of the language in this section is directly from the Board’s term sheets and the FAQs, but consolidated to facilitate your review and understanding and with differences between the Main Street Facilities highlighted.

Who is an Eligible Lender? An Eligible Lender is a U.S. federally insured depository institution (including a bank, savings association or credit union), a U.S. branch or agency of a foreign bank, a U.S. bank holding company, a U.S. savings and loan holding company, a U.S. intermediate holding company of a foreign banking organization or a U.S. subsidiary of any of the foregoing.

In the FAQs, the Board answers the question “Under the Expanded Facility, can an Eligible Lender sell a participation in an upsized tranche of a loan that was originated as part of a multi-lender facility?” If the loan underlying an Expanded Facility upsized tranche is part of a multi­lender facility, the Eligible Lender must be one of the lenders that holds an interest in the underlying loan at the date of upsizing. Only the Eligible Lender for the Upsized Tranche is required to meet the Eligible Lender criteria. Other members of the multi­lender facility are not required to be Eligible Lenders.

The Board is considering an expansion of this definition to include additional Eligible Lenders.

Who is an Eligible Borrower? The Eligible Borrower criteria are the same for each Main Street Facility.

1. The Business must have been established prior to March 13, 2020. The Business must have been formed prior to March 13, 2020, under the laws of the United States, one of the several states, the District of Columbia, any of the territories and possessions of the United States, or an Indian Tribal government.
2. The Business must not be an Ineligible Business. Ineligible Businesses include Businesses listed in 13 CFR 120.110(b)­(j), (m)­(s), as modified and clarified by SBA regulations for purposes of the Paycheck Protection Program (PPP) on or before April 24, 2020. Ineligible Businesses include, among others, (i) nonprofit businesses; (ii) financial businesses primarily engaged in the business of lending; (iii) passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds; (iv) life insurance companies; (v) businesses located in a foreign country; and (vi) unless waived by the SBA, businesses that have, or are owned by an applicant that has, previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies sustaining a loss. Due to the SBA’s modifications and clarifications for purposes of the PPP, businesses that receive revenue from legal gaming may be Eligible Borrowers despite 13 CFR 120.110(g). Additional information on the modifications to SBA regulations in connection with the PPP is available here.
3. The Business must meet at least one of the following two conditions: (a) the Business has 15,000 employees or fewer, or (b) the Business has 2019 annual revenues of $5 billion or less. To determine how many employees a Business has or a Business’s 2019 revenues, the employees and revenues of the Business must be aggregated with the employees and revenues of its affiliated entities.
4. The Business must be a U.S. Business. Under section 4003(c)(3)(C) of the Coronavirus Aid, Relief and Economic Security (CARES) Act, Eligible Borrowers must be Businesses that were created or organized in the United States or under the laws of the United States with significant operations in and a majority of their employees based in the United States. Neither the term sheets for the Program nor the FAQs provide any commentary on what constitutes “significant operations” for purposes of the Program.
5. The Business may only participate in one of the Main Street Facilities (New Facility, Priority Facility or Expanded Facility) and must not also participate in the Primary Market Corporate Credit Facility created by the Board for U.S. issuers of certain corporate debt.
6. The Business must not have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act). A Business is not eligible if it is an air carrier or business critical to national security that has received support pursuant to section 4003(b)(1)­(3) of the CARES Act.
7. The Business must be able to make all of the certifications and covenants required under the Program. See the “Required Borrower Certifications and Covenants” section below.

The FAQs provide additional guidance with respect to what constitutes an Eligible Borrower. Certain questions and answers in the FAQs regarding Eligible Borrowers are set forth below.

• How is “Business” defined? For purposes of each Main Street Facility, a “Business” is defined as an entity that is organized for profit as a partnership; a limited liability company; a corporation; an association; a trust; a cooperative; a joint venture with no more than 49 percent participation by foreign business entities; or a tribal business concern. The term sheet for each Main Street Facility also provides that other forms of organization may be considered for inclusion as a Business under the applicable Main Street Facility at the discretion of the Board.
• How should a Business count employees for purposes of determining eligibility under the Program? To determine how many employees a Business has, it should follow the framework set out in the SBA’s regulation at 13 CFR 121.106. As set out in 13 CFR 121.106, the Business should count as employees all full­time, part­time, seasonal, or otherwise employed persons, excluding volunteers and independent contractors. Businesses should count their own employees and those employed by their affiliates. In order to determine the applicable number of employees, Businesses should use the average of the total number of persons employed by the Eligible Borrower and its affiliates for each pay period over the 12 months prior to the origination or upsizing of the Main Street Loan.
• How should a Business calculate 2019 revenues for purposes of determining eligibility under the Program? To determine its 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.
  • A Business may use its (and its affiliates’) annual “revenue” per its 2019 Generally Accepted Accounting Principles (GAAP)-based audited financial statements.
  • A Business may use its (and its affiliates’) annual receipts for the fiscal year 2019, as reported to the Internal Revenue Service. For purposes of the Program, the term “receipts” has the same meaning used by the SBA in 13 CFR 121.104(a).If a potential borrower (or its affiliate) does not yet have audited financial statements or annual receipts for 2019, the borrower (or its affiliate) should use its most recent audited financial statements or annual receipts.

If a potential borrower (or its affiliate) does not yet have audited financial statements or annual receipts for 2019, the borrower (or its affiliate) should use its most recent audited financial statements or annual receipts.

• Which entities are a Business’s affiliates for purposes of the employee and revenue eligibility criteria? To determine eligibility, a Business’s employees and 2019 revenues are calculated by aggregating the employees and 2019 revenues of the Business itself with those of the Business’s affiliated entities in accordance with the affiliation test set forth in 13 CFR 121.301(f). Generally under this provision, concerns and entities are affiliates of each other if one controls or has the power to control the other or a third party controls or has the power to control both. It does not matter if control is exercised so long as the power to control exists. Additional information on how the applicable affiliation rules work for purposes of this size test is available here. This new criterion for calculating the size of Eligible Borrowers, which was not included in the previous term sheets for the Program, could significantly limit the Program’s availability to Businesses in which private equity or venture capital funds have an ownership interest.
• Are nonprofit organizations eligible to borrow under the Program? Nonprofit organizations are not currently eligible under the Program. The Board recognized that the credit risk of nonprofit organizations, as a matter of practice, is generally not evaluated on the basis of EBITDA. Therefore, the Board and the Treasury Department will be evaluating the feasibility of adjusting the borrower eligibility criteria and loan eligibility metrics of the Program for such organizations.
• Will an alternative underwriting metric be developed for asset­based borrowers? The Board recognized that the credit risk of asset­based borrowers, as a matter of practice, is generally not evaluated on the basis of EBITDA. Therefore, the Board and the Treasury Department will be evaluating the feasibility of adjusting the loan eligibility metrics of the Program for such borrowers.
• Is a Business eligible to borrow if it receives a PPP loan? A Business that receives a loan through the SBA’s PPP can be an Eligible Borrower under Main Street if it meets the Eligible Borrower criteria.
• Do Eligible Borrowers qualify automatically for a Main Street Loan? No. The term sheets for the Main Street Facilities contain the minimum requirements for the Program. Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application. Eligible Lenders will apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower. An Eligible Lender may require additional information and documentation in making this evaluation and will ultimately determine whether an Eligible Borrower is approved for a Main Street Loan in light of these considerations. Businesses that otherwise meet the Eligible Borrower requirements may not be approved for a loan or may not receive the maximum allowable amount.
• How should an Eligible Lender evaluate an Eligible Borrower’s creditworthiness? Eligible Lenders should view the eligibility criteria in the term sheets as the minimum requirements for the Program. Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application.

The fifth criteria for an Eligible Borrower is “The Business may only participate in one of the Main Street Facilities (New Facility, Priority Facility or Expanded Facility) and must not also participate in the [Primary Market Corporate Credit Facility] PMCCF.” In the FAQs, the Board addressed the question “What are the primary differences between the Program, the PPP and the PMCCF?” Certain differences between these programs that were highlighted by the Board are as follows:

• PPP. The PPP was established by the CARES Act and implemented by the Small Business Administration (SBA) to support the payroll and operations of small businesses through the issuance of government­guaranteed loans that include a forgiveness feature for borrowers that satisfy the requirements of the PPP.
• The Program. The Board designed the Program to support small and medium­sized businesses that were unable to access the PPP or that require additional financial support after receiving a PPP loan. Loans issued under the Program are not forgivable.
• PMCCF. The Board established the PMCCF to support large companies through the purchase of eligible corporate bonds from, and lending through syndicated loans to, large companies. PMCCF loans are not forgivable.

What is an Eligible Loan? What constitutes an “Eligible Loan” differs in the respective term sheets for the Main Street Facilities. The table below provides a summary of what constitutes an Eligible Loan under each Main Street Facility.

The FAQs provide additional guidance with respect to what constitutes an Eligible Loan. Certain questions and answers in the FAQs regarding Eligible Loans are set forth below.

• How is EBITDA determined?
  • New Facility and Priority Facility. The methodology used by the Eligible Lender to calculate adjusted 2019 EBITDA must be the methodology it has previously used for adjusting EBITDA when extending credit to the Eligible Borrower or similarly situated borrowers on or before April 24, 2020.
  • Expanded Facility. The methodology used by the Eligible Lender to calculate adjusted 2019 EBITDA must be the methodology it previously used for adjusting EBITDA when originating or amending the Eligible Loan on or before April 24, 2020.
• What is the effect of the requirement that New Facility loans not be “contractually subordinated in terms of priority” to other loans or debt instruments? A New Facility Loan, at the time of origination or at any time during its term, may not be contractually subordinated in terms of priority to the Eligible Borrower’s other loans or debt instruments. This means that a New Facility Loan may not be junior in priority in bankruptcy to the Eligible Borrower’s other unsecured loans or debt instruments. This provision does not prevent:
  • the issuance of a New Facility Loan that is a secured loan (including in a second lien or other capacity) to an Eligible Borrower, whether or not the Eligible Borrower has an outstanding secured loan of any lien position or maturity.
  • the issuance of a New Facility Loan that is an unsecured loan to an Eligible Borrower, regardless of the term or secured or unsecured status of the Eligible Borrower’s existing indebtedness.
  • the Eligible Borrower from taking on new secured or unsecured debt after receiving a New Facility Loan, provided the new debt would not have higher contractual priority in bankruptcy than the New Facility Loan.
• How will “existing outstanding and undrawn available debt” be calculated? “Existing outstanding and undrawn available debt” includes all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, non­bank 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 (1) any undrawn commitment that serves as a backup line for commercial paper issuance, (2) any undrawn commitment that is used to finance receivables (including seasonal financing of inventory), any undrawn commitment that cannot be drawn without additional collateral, and (3) any undrawn commitment that is no longer available due to change in circumstance. Existing outstanding and undrawn available debt should be calculated as of the date of the loan application.
• Why are Main Street Loans based on LIBOR rather than SOFR? The Board received feedback from potential participants that quickly implementing new systems to issue loans based on SOFR would require diverting resources from challenges related to the pandemic. Although financial institutions are transitioning to more robust reference rates, LIBOR remains the most common base rate used in business lending, even though firms cannot rely on LIBOR being published after the end of 2021. Consistent with the recommendations of the Alternative Reference Rates Committee, Eligible Lenders and Eligible Borrowers should include fallback contract language to be used should LIBOR become unavailable during the term of the loan.
• Is collateral required for Main Street Loans? Main Street Loans may be secured or unsecured. However, an Upsized Tranche must be secured if the underlying loan is secured. Any collateral securing the underlying loan (at the time of upsizing or on any subsequent date) must secure the Upsized Tranche on a pro rata basis. Under such an arrangement, if the borrower defaults, the SPV and lender(s) would share equally in any collateral available to support the loan relative to their proportional interests in the loan (including the Upsized Tranche). Eligible Lenders can require Eligible Borrowers to pledge additional collateral to secure Upsized Tranche as a condition of approval.
• Can an Eligible Borrower receive more than one Main Street Loan? An Eligible Borrower may only participate in one of the Main Street Facilities: the New Facility, the Priority Facility, or the Expanded Facility. However, an Eligible Borrower may receive more than one loan under a single Main Street Facility, provided that the sum of New Facility loans or Priority Facility Loans received by a single borrower cannot exceed $25 million; and the sum of the Expanded Facility Upsized Tranches received by a single borrower cannot exceed $200 million.

Loan Classification

• New Facility and Priority Facility. The Eligible Borrower must have been in sound financial condition prior to the onset of the COVID­19 pandemic. In order for an Eligible Borrower to receive a loan under the New Facility or Priority Facility, any existing loan it had outstanding with the Eligible Lender as of December 31, 2019, must have had an internal risk rating (based on the Eligible Lender’s risk rating system) that was equivalent to a “pass” in the Federal Financial Institutions Examination Council’s (FFIEC) supervisory rating system as of that date.
• Expanded Facility. The Eligible Borrower must have been in sound financial condition prior to the onset of the COVID­19 pandemic. The existing loan or revolving credit facility must have had a risk rating, based on the Eligible Lender’s internal rating system, equivalent to a “pass” in the FFIEC’s supervisory rating system as of December 31, 2019.

Assessment of Financial Condition. Under each Main Street Facility, Eligible Lenders must conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application.

Loan Participations. The table below provides a summary of the SPV’s participation in each Main Street Facility.

Required Lender Certifications and Covenants. In addition to other certifications required by applicable statutes and regulations, the following certifications and covenants will be required from Eligible Lenders under the respective Main Street Facilities:

• The Eligible Lender must commit that it will not request that the Eligible Borrower repay debt extended by the Eligible Lender to the Eligible Borrower, or pay interest on such outstanding obligations, until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due, or there has been a default and acceleration.
• The Eligible Lender must commit that it will not cancel or reduce any existing committed lines of credit to the Eligible Borrower, except in an event of default.
• The Eligible Lender must certify that the methodology used for calculating the Eligible Borrower’s adjusted 2019 EBITDA for purposes of calculating the maximum loan amount under the applicable Main Street Facility is the methodology it has previously used for adjusting EBITDA when:
  • for the New Facility and Priority Facility — extending credit to the Eligible Borrower or similarly situated borrowers on or before April 24, 2020.
  • for the Expanded Facility — originating or amending the Eligible Loan on or before April 24, 2020.
• The Eligible Lender must certify that it is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act (which prohibits any business that is owned by the president, senior executive branch officials or members of congress — or certain of their immediate family members — from receiving any relief funds).

Required Borrower Certifications and Covenants. In addition to other certifications required by applicable statutes and regulations, the following certifications and covenants will be required from Eligible Borrowers under the respective Main Street Facilities:

• Repayment of Other Debt.
  • New Facility. The Eligible Borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due.
  • Priority Facility. The Eligible Borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due. However, the Eligible Borrower may, at the time of origination of the Eligible Loan, refinance existing debt owed by the Eligible Borrower to a lender that is not the Eligible Lender.
  • Expanded Facility. The Eligible Borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the upsized tranche of the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due.
• The Eligible Borrower must commit that it will not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender.
• The Eligible Borrower must certify that it has a reasonable basis to believe that, as of the date of origination of the Eligible Loan and after giving effect to such loan, it 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.
• The Eligible Borrower must commit that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act, except that an S corporation or other tax pass-through entity that is an Eligible Borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings. A summary of the restrictions under section 4003(c)(3)(A)(ii) of the CARES Act is below. The relaxation of the prohibition on distributions in the April 30 term sheets to permit tax distributions partially addresses comments that the Board received about the Program, but notably continues not to permit distributions to a holding company to pay costs or other amounts and does not permit certain types of entities, such as real estate investment trusts, to make distributions that may be required to maintain their tax status under applicable laws, but are not required for any owner to cover the owner’s tax obligations.
• The Eligible Borrower must certify that it is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.

Notably, the April 30 term sheets eliminate the previously contemplated certification by each Eligible Borrower that “it requires financing due to the exigent circumstances presented by the coronavirus disease 2019.” That certification was expected to cause significant concern for potential borrowers similar to the concerns that have arisen from the borrower certification required by the PPP that “current economic uncertainty makes the loan request necessary to support the ongoing operations of the borrower.”

The FAQs provide additional guidance with respect to the Borrower and Lender certifications and covenants. Certain questions and answers in the FAQs regarding these certifications and covenants are set forth below.

• Pursuant to the FAQs, the debt payment restrictions set forth above would not prohibit an Eligible Borrower from undertaking any of the following actions during the term of the applicable Main Street Loan:
  • repaying a line of credit (including a credit card) in accordance with the Eligible Borrower’s normal course of business usage for such line of credit.
  • taking on and paying additional debt obligations required in the normal course of business and on standard terms, including inventory and equipment financing, provided that such debt is secured by newly acquired property (e.g., inventory or equipment), and, apart from such security, is of equal or lower priority than the New Facility loan, the Priority Facility loan, or the Expanded Facility Upsized Tranche.
  • refinancing maturing debt.
• Is an Eligible Lender permitted to accept partial repayment of an Eligible Borrower’s existing line of credit with the Eligible Lender? The Eligible Lender would not be prevented from accepting regularly scheduled, periodic repayments on a line of credit from an Eligible Borrower in accordance with the Eligible Borrower’s normal course of business usage for such line of credit.
• What restrictions are placed on an Eligible Lender’s ability to cancel or reduce any existing committed lines of credit outstanding? An Eligible Lender must commit that it will not cancel or reduce any existing committed lines of credit outstanding to the Eligible Borrower, except in an event of default. This requirement does not prohibit the reduction or termination of uncommitted lines of credit, the expiration of existing lines of credit in accordance with their terms, or the reduction of availability under existing lines of credit in accordance with their terms due to changes in borrowing bases or reserves in asset­based or similar structures.
• What is the Eligible Lender’s role in verifying certifications and covenants? An Eligible Lender must collect the required certifications and covenants from each Eligible Borrower at the time of origination or upsizing. Eligible Lenders may rely on an Eligible Borrower’s certifications and covenants, as well as any subsequent self­reporting by the Eligible Borrower. The Eligible Lender is not expected to independently verify the Eligible Borrower’s certifications or actively monitor ongoing compliance with covenants required for Eligible Borrowers under the Program term sheets. If an Eligible Lender becomes aware that an Eligible Borrower made a material misstatement or otherwise breached a covenant during the term of a New Facility Loan, Priority Facility Loan, or Expanded Facility Upsized Tranche, the Eligible Lender should notify the Federal Reserve Bank of Boston, which will administer the SPV.

The term sheets for the respective Main Street Facilities state that an Eligible Lender is expected to collect the required certifications and covenants from each Eligible Borrower at the time of (i) origination of the Eligible Loan (for New Facility Loans or Priority Facility Loans) or (ii) upsizing of the Eligible Loan (for Upsized Tranches under the Expanded Facility). Eligible Lenders may rely on an Eligible Borrower’s certifications and covenants, as well as any subsequent self-reporting by the Eligible Borrower.

• What are the restrictions under 4003(c)(3)(A)(ii) of the CARES Act? Pursuant to Section 4003(c)(3)(A)(ii) of the CARES Act, until 12 months after a direct loan is no longer outstanding the borrower must:
  • not purchase equity securities of borrower or parent that are listed on a national securities exchange; provided that existing contractual obligations as of March 27, 2020 may be honored.
  • not pay dividends or other capital distributions with respect to the common stock of the borrower.
  • comply with the compensation restrictions for officers and employees (for those that made (i) $425,000 or more in 2019, they may not exceed their 2019 compensation in any 12-month period and their severance is capped at 2x their 2019 compensation, and (ii) $3 million or more in 2019, they may not exceed $3 million plus 50% of their 2019 compensation over $3 million, in any 12-month period).

Retaining Employees. The term sheet for each Main Street Facility states that each Eligible Borrower that participates in a Main Street Facility “should make commercially reasonable efforts to maintain its payroll and retain its employees during the time the [Main Street Loan] is outstanding.” In the respective term sheets for the Main Street Facilities, this requirement is separated from the “Required Borrower Certifications and Covenants” described above. This appears to be a significant change from the term sheets initially provided by the Board on April 9, 2020, which required each Eligible Borrower to attest that it required financing due to the exigent circumstances presented by the coronavirus disease 2019 pandemic, and that “using the proceeds of the [Main Street Loan], it will make reasonable efforts to maintain its payroll and retain its employees” during the term of the Main Street Loan.

The FAQs addressed the question “What constitutes ‘commercially reasonable efforts’ to maintain payroll and retain employees?” The Board responded that Eligible Borrowers should make commercially reasonable efforts to retain employees during the term of the New Facility Loan, Priority Facility Loan, or Expanded Facility Upsized Tranche. Specifically, an Eligible Borrower should undertake good­faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor. Borrowers that have already laid­off or furloughed workers as a result of the disruptions from COVID­19 are eligible to apply for Main Street loans.

Fees. The transaction, origination and servicing fees associated with each Main Street Facility are summarized in the table below. The table below provides a summary of the transaction, origination and servicing fees under each Main Street Facility.

Facility Termination. The SPV will cease purchasing participations in Eligible Loans on September 30, 2020, unless the Board and the Department of the Treasury extend the Facility.

Additional FAQs Regarding Participations, Regulatory Treatment and Operational Details

These FAQs provide additional guidance with respect to participations, regulatory treatment and operational details. Certain questions and answers set forth in the FAQs regarding these items are as follows.

• Participations.
  • What loan documentation is required to sell a participation to the SPV under the Program? Information regarding the loan documentation required to sell a loan participation to the SPV is not available as of the date of this client alert. This information will be made available on the Board’s website here.
  • What loan­level information will the SPV collect for credit monitoring purposes? The SPV will collect information on certifications, covenants, lender, loan terms, and loan performance as well as the borrower, borrower fundamentals, collateral, and other characteristics. The information will be used to verify that the lender, loan, and borrower meet eligibility requirements and to support ongoing accounting and credit risk monitoring needs with respect to purchased loan participations. Information will be collected at different stages and at appropriate frequencies through a variety of channels designed to accommodate the range of Eligible Lenders and Eligible Borrowers anticipated to participate in the Program. More details will be provided by the Board at a later date.
  • Is there a limit to the volume of participations the SPV can purchase from a single Eligible Lender? Apart from the Program’s size and time limitations, there is no limit on the amount of participations the SPV can purchase from a single Eligible Lender.
• Regulatory Treatment.
  • What is the regulatory capital treatment for the interest in a Main Street loan retained by an Eligible Lender? The interest in the portion of a Main Street Loan that is retained by an Eligible Lender should be assigned the risk weight applicable to the counterparty for the loan — generally a 100 percent risk weight for a corporate exposure under the standardized approach. For purposes of risk­based capital rules and leverage rules, the exposure amount for Priority Loans is 15 percent of the outstanding Priority Loan balance; and the exposure amount for New Facility Loans and Expanded Facility Upsized Tranches is 5 percent of the New Facility Loan balance or Expanded Facility Upsized Tranche balance, respectively. With respect to the Expanded Facility, this treatment applies only to the outstanding Expanded Facility Upsized Tranche balance; the underlying loan or line of credit would be subject to the capital treatment that applied prior to the sale of the participation to the SPV.
    
    Secured Main Street Loans are eligible for the credit risk mitigation treatment in the standardized approach provided that any collateral securing the loan is eligible financial collateral. Eligible Lenders are not permitted to recognize collateral attributable to the SPV’s interest for purposes of the credit risk mitigation treatment under the capital rule. The treatment described above applies only to Eligible Lenders that are subject to the federal banking agencies’ capital rule. Credit unions that participate in the Program are subject to any capital requirements implemented by the National Credit Union Administration.
• Operational Details.
  • How will the Federal Reserve administer the Program? The Program will be administered by the Federal Reserve Bank of Boston, which will establish the SPV to purchase loan participations from Eligible Lenders in any of the twelve Federal Reserve districts. Further detail regarding how the Program will be operationalized will be made available in the future.
  • What information will the Federal Reserve disclose regarding the Main Street facilities? The Federal Reserve will disclose information regarding the Main Street Facilities during the operation of the facilities, including information regarding names of lenders and borrowers, amounts borrowed, interest rates charged, and overall costs, revenues and other fees.
    
    Balance sheet items related to the Main Street Facilities will be reported weekly, on an aggregated basis, on the H.4.1 statistical release titled "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks," published by the Federal Reserve. In addition, the Federal Reserve will disclose to Congress information pursuant to Section 13(3) of the Federal Reserve Act, as amended by the Dodd­Frank Wall Street Reform and Consumer Protection Act, and the Board’s Regulation A.
    
    Under section 11(s) of the Federal Reserve Act, the Federal Reserve also will disclose information concerning the facilities one year after the effective date of the termination by the Board of the authorization of the facilities. This disclosure will include names and identifying details of each participant in the facilities, the amount borrowed, the interest rate or discount paid, and information concerning the types and amounts of collateral pledged or assets transferred in connection with participation in the facilities.
  • When will the Program begin operating? As noted above, several critical details regarding the Program’s operation, including the form of participation that the SPV will use in connection with the Program, remain unclear. When the Program will begin operating and the SPV will begin purchasing participations therefore remains uncertain as of the date of this client alert.

Prospective Borrower Action Items

The following action items are for prospective borrowers considering a Main Street Loan.

• Primary Action Items.
  • Gather evidence that you meet the eligibility requirements for an Eligible Loan. This would include:
    • Analyzing who your affiliates are for purposes of the Program to determine what other entities’ employees and revenues need to be aggregated with your own for purposes of the Eligible Borrower size test.
    • If the affiliation rules would result in you not being an Eligible Borrower, (1) analyzing whether the elimination or irrevocable waiver of certain rights held by venture capital or other equity holders could result in other entities ceasing to be affiliates such that you would satisfy the Eligible Borrower size test, and (2) whether any such modifications of an equity holder’s rights is desirable to potentially obtain an Eligible Loan given your circumstances.
    • Gathering your most recent financial statements, determining the current status of your fiscal year 2019 audit, if not already complete, and the expected timing for completion of that audit.
  • Contact your Eligible Lender and begin the approval process. For borrowers entering into a new relationship with an Eligible Lender, this approval process is likely to take longer than a borrower seeking an Expanded Facility Upsized Tranche. Eligible Lenders are likely to be inundated with requests for financing under the Program and therefore we recommend you get in line as quickly as you can.
  • Analyze the maximum loan amount available for the type of facility expected to be used and the amount of the loan that you would seek to obtain in light of the Business’s current financial position, recent results of operations and projected financial performance.
• Additional Action Items.
  • Analyze your existing agreements to determine if any action is required, such as amendments, waivers of defaults and notices. For example, if you have several lending relationships and seek an Expanded Facility, then the other facilities would likely need to be amended to permit the Expanded Facility as the incurrence of indebtedness thereunder is likely a breach of a negative covenant, which typically triggers an automatic event of default. Similarly, subordination and intercreditor agreements will likely need to be amended as many include provisions that would be violated by the incurrence of an Eligible Loan (e.g., maximum debt thresholds and standstill periods).
  • Prepare board materials to demonstrate due care was used in determining whether to apply for a loan. These materials should include a thorough analysis of the Eligible Borrower’s recent results and financial position and near-term projections to support the required certification that the Eligible Borrower has a reasonable basis to believe that, after giving effect to a Program loan, it will have 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.
  • Consider the effects that the compensation restrictions imposed by the CARES Act could have on your workforce and ability to retain key employees. In light of the four-year duration of Eligible Loans, and the one-year post repayment applicability of the CARES Act’s compensation and other restrictions, these restrictions could be in place for a significant period of time. The nature and duration of the restrictions could have a significant effect on your ability to increase compensation for both your top-compensated employees, as well as for employees who currently are a “tier” below those employees and who, under normal circumstances, might be expected to receive compensation increases that would cause the lower-tier employee’s compensation surpassing the compensation of an employee whose compensation is frozen as a result of the CARES Act’s restrictions.
  • Consider the effects that the compensation, distribution and repurchase restrictions imposed by the CARES Act could have on a sale of your business. As noted above, these restrictions would continue to apply for one year after the Eligible Loan is repaid. Despite the request of some commentators, these restrictions were not eliminated in the April 30 iteration of the Program if the Eligible Borrower is sold to a third party. These continuing restrictions could affect the value of the Business in a sale transaction, and that potential effect on value should be analyzed in light of the Business’s need for funds sought under the Program.
  • If a public company, consider (i) drafting a press release and required Form 8-K disclosures and (ii) limiting dissemination of the borrower’s plan to apply for an Eligible Loan to those who “need to know” as such information may be considered material nonpublic information.

As the number of cases around the world grows, Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.