Federal Reserve Tweaks Terms of Main Street Lending Program Ahead of Launch

Update: For information on the most recent developments in the Main Street Lending Program (MSLP), see our November 25, 2020, alert.

On June 8, 2020, the Federal Reserve released updated term sheets and guidance for the Main Street Lending Program (MSLP).

The MSLP is designed to provide support to small and medium-sized businesses and their employees across the United States during the current period of financial strain by supporting the provision of credit to those businesses. The availability of additional credit is intended to help businesses that were in sound financial condition before the COVID‑19 pandemic maintain their operations and payroll until conditions normalize. Under the MSLP, the Federal Reserve has formed MS Facilities LLC as a special purpose vehicle (Main Street SPV) to purchase up to $600 billion of participations in eligible loans.

Three separate but related facilities comprise the MSLP: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF). The updated term sheets change some of the basic terms of those facilities and supersede the term sheets, which were released by the Federal Reserve on April 30 and summarized in McGuireWoods’ May 1 client alert. The updated guidance supersedes guidance released by the Federal Reserve on May 27 and summarized in McGuireWoods’ May 29 client alert.

On June 11, the Federal Reserve Bank of Boston released updated form documents for the MSLP that conform with the updated term sheets and guidance and replace prior versions released May 27 (also summarized in McGuireWoods’ May 29 client alert).

Here are some key takeaways from the updated term sheets, guidance and form documents.

1. New five-year maturity. All MSLP loans will be term loans with a five-year maturity. Previously, the maturity for all MSLP loans was four years.
   
   
2. Principal deferred for two years. Principal payments for MSLP loans will be deferred for two years. Previously, principal payments were to be deferred for one year. Interest payments remain subject to a one-year deferral.
   
   
3. Amortization the same for all MSLP loans. Principal amortization is now the same across all three facilities: 15 percent at the end of year three, 15 percent at the end of year four and 70 percent at maturity (at the end of year five). Previously, the MSNLF amortization schedule differed from that of the other two MSLP facilities.
   
   
4. Minimum loan sizes reduced for MSNLF and MSPLF (but not for MSELF). Minimum loan sizes for the MSNLF and the MSPLF were reduced from $500,000 to $250,000. The minimum loan size for the MSELF remains $10 million.
   
   
5. Maximum loan sizes increased. Maximum loan sizes were increased for all three MSLP facilities:
   
   • MSNLF — Lesser of $35 million (previously $25 million) and four times the borrower’s adjusted 2019 EBITDA
     
     
   • MSPLF — Lesser of $50 million (previously $25 million) and six times the borrower’s adjusted 2019 EBITDA
     
     
   • MSELF — Lesser of $300 million (previously $200 million) and six times the borrower’s adjusted 2019 EBITDA
     
     
6. Equivalent-debt ratio limitation removed from MSELF. The updated MSELF term sheet further simplifies the determination of maximum loan size by eliminating a provision that limited MSELF loans to 35 percent of the borrower’s existing outstanding and undrawn available debt.
   
   
7. Unforgiven Paycheck Protection Program (PPP) loans counted in leverage tests. A business that received PPP loans may be eligible to participate as a borrower under the MSLP. But any outstanding PPP loan that has not yet been forgiven is counted as outstanding debt for purposes of the leverage tests noted above.
   
   
8. All participations to be 95 percent. Participations and lender risk-retention levels are now the same across all MSLP facilities: the Main Street SPV will purchase a 95 percent participation in an eligible loan, and the lender will retain a 5 percent interest. Previously, the MSPLF had an 85/15 split.
   
   
9. Additional exclusion for equipment financing from pari passu collateral requirement. The requirement that MSPLF loans and MSELF upsize tranches be senior to or pari passu with a borrower’s other debt in terms of security previously excluded mortgage debt (i.e., debt secured by real property at the time of the origination of the MSPLF loan or the MSELF upsize tranche). That requirement also now excludes limited-recourse equipment financing secured only by the acquired equipment. But if any other term loan tranche of an existing credit facility to which an MSELF upsize tranche is added constitutes such mortgage debt or limited-recourse equipment financing, then the MSELF upsize tranche must also be secured by all of the collateral securing such mortgage debt or limited-recourse equipment financing on a pari passu basis.
   
   
10. Nonprofit plan in the works. The Federal Reserve confirmed that it is working on a program similar to the MSLP for nonprofit organizations, which remain ineligible to participate in the MSLP.
    
    
11. Lender fees expanded for MSELF. In addition to program fees and de minimis fees for services that are customary and necessary in a lender’s underwriting of commercial and industrial loans to similar borrowers, a lender also may charge customary consent fees if those fees are necessary to amend existing loan documentation in the context of originating an MSELF upsize tranche.
    
    
12.  Records requirements updated. The updated guidance provides more detail about what kinds of financial records a borrower must provide a lender in making certifications about EBITDA and the borrower’s financial condition. Borrowers that are subject to U.S. GAAP reporting requirements or that already prepare their financials in accordance with U.S. GAAP must submit U.S. GAAP-compliant financial records in connection with the applicable certifications.
    
    
13. Limited window for participations in loans made in reliance on previous term sheets. The Main Street SPV will purchase participations in eligible loans issued in reliance on the previous term sheets, so long as (1) the required documentation is complete and consistent with MSLP requirements under those term sheets and (2) the loan was funded prior to June 10, 2020. This option will be available only during the first 14 days of the relevant MSLP facility’s operation. Any loans submitted for a participation after that time must conform with the current term sheets.
    
    
14. Opportunity to amend and refinance loans made in reliance on prior term sheets. Eligible loans issued in reliance on the previous term sheets may be amended or refinanced in accordance with the current MSLP terms.

McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.