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Practical Guidance for Borrowers and Lenders: CARES Act Main Street Lending Program

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The Main Street Lending Program (the “MSLP”) is designed to provide capital to small- and medium-sized businesses that were in sound financial condition before the pandemic. The MSLP will operate through three facilities: 

(1)  Main Street New Loan Facility (“New Loan Facility”)

(2)  Main Street Expanded Loan Facility (“Expanded Loan Facility”)

(3)  Main Street Priority Loan Facility (“Priority Loan Facility”)

By way of background, on April 9, 2020, the Treasury Department and the Federal Reserve, acting under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), announced the creation of a new Main Street Lending Program under the Federal Reserve’s Section 13(3) emergency lending authority. On April 30, 2020, after receiving public feedback on potential refinements, the Federal Reserve Board announced an expansion of the scope, terms, and eligibility for the MSLP.

Both the Main Street New Loan Facility and the Priority Loan Facility will finance loans originated on or after April 24 and the Expanded Loan Facility will finance additional credit (the “Upsized Tranche”) on loans originated on or before April 24. Borrowers can only participate in one of the facilities.

The Federal Reserve Bank of Boston will set up a special purpose vehicle (“SPV”) that will purchase portions of loans originated by eligible lenders. The SPV will purchase 95% of the New Loan and Expanded Loan Facilities, and 85% of the Priority Loan Facility.

How to Determine Eligibility for Borrowers and Lenders:

Borrowers

Borrowers must meet the following requirements in order to be eligible under the MSLP:

  • Must have (i) 15,000 or fewer employees or (ii) 2019 annual revenues of $5 billion or less.
    • The number of employees is determined by the average total number of employees for each pay period during the 12 months prior to origination. It includes full-time, part-time, seasonal, or otherwise employed individuals. Borrowers should count its own employees and those of affiliates.
    • Borrowers can choose between two tests of 2019 revenue: (i) 2019 GAAP revenue reflected on audited financial statements or (ii) 2019 receipts reported on 2019 federal tax return. Borrower must aggregate its revenue with its affiliates.
  • Must have been established prior to March 13, 2020.
  • Must be a for-profit entity, created or organized in the U.S. or under U.S. law with significant operations and a majority of employees in the U.S.
  • Must not be a business ineligible for an SBA Loan (with some exceptions).
  • Must have not received specific support pursuant to the CARES Act; however, businesses that have received loans under the Paycheck Protection Program (“PPP”) are permitted.

Lenders

The following entities are eligible as lenders under the MSLP:

  • U.S. federally-insured depository institutions (including banks, savings associations, and credit unions)
  • U.S. branches or agencies of foreign banks
  • U.S. bank holding companies
  • U.S. savings and loan holding companies
  • U.S. intermediate holding companies of foreign banking organizations
  • Any U.S. subsidiary of any of the foregoing

Loan Terms:

 

New Loan Facility

Expanded Loan Facility (solely with respect to the Upsized Tranche)

Priority Loan Facility

Origination

After April 24

On or before April 24 and has remaining maturity of at least 18 months (taking into account any adjustments made at the maturity of the loan after April 24, 2020, including at time of upsizing)

After April 24

Security

Can be secured or unsecured

If original loan is secured, extension secured on a pari passu basis with original loan. If original loan is unsecured, extension is unsecured.

Can be secured or unsecured

Maturity

4 years

4 years

4 years

Payment

Principal and interest payments deferred for one year (unpaid interest will be capitalized). 33.33% due each year on years 2-4.  

Principal and interest payments deferred for one year (unpaid interest will be capitalized). 15% due on year two, 15% due on year three, and 70% due on year four.

Principal and interest payments deferred for one year (unpaid interest will be capitalized). 15% due on year two, 15% due on year three, and 70% due on year four.

Interest Rate

LIBOR + 3%

LIBOR + 3%

LIBOR + 3%

Minimum Loan Size

$500,000

$10 million

$500,000

Maximum Loan Size

The lesser of (i) $25 million or (ii) 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 EBITDA

The lesser of (i) $200 million, (ii) 35% of the Borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the loan and equivalent in secured status, or (iii) an amount that, when added to the Borrower’s existing outstanding and available debt, does not exceed six times the Borrower’s adjusted 2019 EBITDA

The lesser of (i) $25 million or (ii) 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

Prepayment

Prepayment permitted without penalty

Prepayment permitted without penalty

Prepayment permitted without penalty

Priority

At the time of origination and at any time the loan is outstanding, it must not be contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments.

At the time of upsizing and at all times the upsized tranche is outstanding, it must be senior or pari passu in terms of priority and security to the borrower’s other loans or debt instruments (other than mortgage debt).

At the time of origination and at any time the loan is outstanding, it must be senior or pari passu in terms of priority and security to the borrower’s other loans or debt instruments (other than mortgage debt).

 

What are the Required Certifications/Covenants for Borrowers and Lenders?

Borrower:

  • Refrain from using proceeds of eligible loans to repay any other loans, unless a payment is mandatory and due. However, for loans issued under the Priority Loan Facility, the borrower may, at the time of origination, refinance existing debt owed to another lender.
  • Commit that it will not seek to cancel/reduce any outstanding credit lines.
  • Certify that it has a reasonable basis to believe that as of the date or the loan (and after giving effect to the loan) it will be able to meet its obligations for at least the next 90 days and does not expect to file for bankruptcy in that time period.
  • Commit that it will follow the one-year post-repayment restrictions on compensation, share repurchases, and capital distributions set forth in the CARES Act (except that S Corporations or other tax pass-through entities may make distributions to the extent reasonably required to cover equityholder tax obligations in respect of the entity’s earnings).
  • Certify that it is eligible to participate in the MSLP, including compliance with conflicts of interest prohibitions contained in the CARES Act.
  • Commit to use commercially reasonable efforts to maintain payroll and retain employees.

Lender:

  • Cannot request repayment of debt or payment of interest on outstanding obligations until the loan is repaid in full, unless debt or interest payment is mandatory and due.
  • Cannot cancel or reduce existing committed lines of credit.
  • Must certify as to methodology used for calculating the borrower’s adjusted 2019 EBITDA.
  • Must certify that it is eligible to participate in the MSLP, including compliance with conflicts of interest prohibitions contained in the CARES Act.

Other Considerations:

Borrowers:

The MSLP facilities contain the same affiliation tests used for the PPP loans. Under these tests, entities are affiliates if one controls or has power to control the other or when a third party controls or has power to control both. For VC/PE backed companies, these affiliation rules often led to exclusion from the PPP loans. For the MSLP loans, the maximum number of employees is significantly greater, which may make this a viable alternative for these companies that were excluded from PPP.

However, the MSLP loans are not without their challenges, and the terms are much less favorable than the PPP loans. The maximum loan size for each MSLP facility is a function of adjusted 2019 EBITDA. The adjustments to EBITDA will be determined by the lender based on its own methodology previously used for that borrower or similarly situated borrowers. For VC/PE backed early stage companies, the calculation of maximum loan size may prove problematic if the company is not EBITDA positive. Borrowers should also consider the relatively short maturity of the loan of four years and the significant annual payments that are required under each facility before pursuing a MSLP loan.

Lenders:

While the MSLP term sheets provide some guidance to lenders in determining borrower suitability, the Federal Reserve has largely left the assessment of a borrower’s creditworthiness up to the lender. In that regard, the term sheets provide the minimum requirements for the MSLP. Lenders may apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower, including requiring additional information and documentation beyond what is outlined in each MSLP facility’s term sheet.

The MSLP loans will have interest rates based on LIBOR, however there is no standardization across the MSLP with respect to what will happen when LIBOR becomes unavailable at the end of 2021. Not all lenders have the same loan language regarding LIBOR unavailability. MSLP loans that are not prepaid or accelerated prior to the end of 2021 could have very different rates if and when the lender’s LIBOR unavailability language is triggered.  

The terms of the participation agreement between the lender and the SPV have not yet been published. The agreements may have voting rights, provisions related to the exercise of remedies, and put back abilities, but the underlying terms that lenders will be required to agree to are largely unknown. In addition, the level of the SPV’s review of loan documents has yet to be determined. 

Fees:

For both the New Loan Facility and the Priority Loan Facility, the borrower will pay a transaction fee up to up to 100 basis points of the principal amount of the loan at the time of origination. For the Expanded Loan Facility, the borrower will pay a transaction fee up to 75 basis points of the principal amount of the upsized tranche of the loan.

What’s Next?

We are following MSLP developments closely, and can help borrowers and lenders navigate the parameters of this program and its impact on small- and medium-sized businesses. To learn more, please listen to our webinar, CARES Act Main Street Lending Program: What You Need to Know Now. Our team will continue to provide relevant updates and guidance on this topic and others.

This advisory was prepared by Tom Curry, Matt Doring, Josh French, Josh Gray, Meghan Kelly, and Ellie Myers in Nutter’s Corporate and Transactions Department. For more information, please contact Tom, Matt, Josh, Josh, Meghan, Ellie, or your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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