Federal Reserve Extends, Expands Main Street Lending Program

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

The Federal Reserve established the MSLP to support lending to small and medium-sized businesses and NPOs that were in sound financial condition before the onset of the COVID-19 pandemic. Under the MSLP, the Federal Reserve Bank of Boston (FRB Boston) formed MS Facilities LLC as a special purpose vehicle (Main Street SPV) to purchase up to $600 billion of participations in eligible loans. McGuireWoods’ previous client alerts (from May 1, May 29, June 12, June 18, July 6 and July 17) summarize the term sheets, guidance and form documents issued and revised by the Federal Reserve for the MSLP.

The MSLP currently consists of five facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility, the Main Street Expanded Loan Facility (MSELF), the Nonprofit Organization New Loan Facility (NONLF) and the Nonprofit Organization Expanded Loan Facility (NOELF).

FRB Boston fully opened the MSLP on July 6, 2020. As of July 29, the Main Street SPV held approximately $82 million of participations in eligible loans.

On July 28, 2020, the Federal Reserve announced it was extending the MSLP through Dec. 31, 2020. The MSLP originally was scheduled to expire on or around Sept. 30, 2020. Current term sheets for the MSLP’s five facilities reflect that extension.

Prior to announcing that extension, the Federal Reserve also released updated term sheets and guidance for the two MSLP facilities focused on NPOs. Although the updated term sheets make limited modifications to basic terms of the NONLF and NOELF described in the initial proposals, the new guidance provides additional insight into those terms and describes limitations and requirements not evident in the term sheets. As updated, the NONLF and NOELF expand the MSLP to support greater access to credit for NPOs such as educational institutions, hospitals and social service organizations. The Federal Reserve is working to create the infrastructure (including legal documents and certifications) necessary to fully open the facilities.

Below are some key takeaways from the updated term sheets and guidance for NPOs.

1. Borrower eligibility requirements are refined. Borrower eligibility requirements for the NONLF and NOELF are modified from the other MSLP facilities to reflect the operational and accounting practices of NPOs. To be eligible under the proposed facilities, an NPO must have been in continuous operation since Jan. 1, 2015, and it must be a tax-exempt organization under section 501(c)(3) or 501(c)(19) of the Internal Revenue Code (IRC). Other borrower eligibility requirements include the following:
   An NPO that received a loan through the PPP or Economic Injury Disaster Loan program can be an eligible borrower under the NONLF or NOELF if it meets the borrower eligibility requirements.
   
   
   • The NPO has at least 10 employees (reduced from the 50 employees required under the initial proposals).
     
     
   • The NPO is not a type of business listed in 13 CFR 120.110(b)–(j) and (m)–(s), such as lenders, life insurance companies, pyramid sale distribution plans, lobbyists and speculative businesses, as that list was modified by regulations implementing the Paycheck Protection Program (PPP).
     
     
   • The NPO (aggregated, if applicable, with its affiliated entities) meets at least one of the following two conditions: (1) it has 15,000 or fewer employees, or (2) it had 2019 annual revenues of $5 billion or less.
     
     
   • The NPO has an endowment of less than $3 billion.
     
     
   • The NPO has total non-donation revenues (i.e., gross revenues minus donations, as further defined in the guidance) equal to or greater than 60 percent of expenses for the period from 2017 through 2019.
     
     
   • The NPO has a ratio of (i) adjusted 2019 earnings before interest, depreciation and amortization (calculated using a methodology the lender used when extending credit to the NPO or to similarly situated borrowers on or before June 15, 2020); to (ii) unrestricted 2019 operating revenue (including a proxy for endowment income in place of unrestricted investment gains or losses), greater than or equal to 2 percent (reduced from the 5 percent stipulated in the initial proposals).
     
     
   • The NPO has a ratio (expressed as a number of days) of (i) liquid assets (i.e., unrestricted cash and investments that can be accessed and monetized within 30 days, as further defined in the guidance) at the time of loan origination; to (ii) average daily expenses over the previous year, greater than or equal to 60 days (reduced from 90 days under the initial proposals).
     
     
   • At the time of loan origination, the NPO has a ratio of (i) unrestricted cash and investments; to (ii) existing outstanding and undrawn available debt, plus the amount of any loan under the proposed facility, plus the amount of any accelerated or advance payment from the Centers for Medicare & Medicaid Services, that is not greater than 55 percent (reduced from the 65 percent stipulated in the initial proposals).
     
     
   • The NPO was created or organized under the laws of the United States and has significant operations in and a majority of its employees based in the United States.
     
     
   • The NPO does not also participate in any other MSLP facility or in the Federal Reserve’s Primary Market Corporate Credit Facility or Municipal Liquidity Facility.
     
     
   • The NPO has not received industry-specific support pursuant to the CARES Act.
     
     

   An NPO that received a loan through the PPP or Economic Injury Disaster Loan program can be an eligible borrower under the NONLF or NOELF if it meets the borrower eligibility requirements.
   
   

2. Certain loan terms remain the same as for other MSLP facilities. The following terms and requirements under the NONLF and NOELF are the same as for the other MSLP facilities:
   
   
   • To be eligible, a lender must be 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.
     
     
   • Lenders are expected to assess a potential borrower’s financial condition at the time of the potential borrower’s application.
     
     
   • Borrowers must certify as to their solvency and eligibility and must commit to certain restrictions on compensation, distributions and repayment of other debt.
     
     
   • The loans will be term loans with a five-year maturity.
     
     
   • The interest rate will be LIBOR (one- or three-month) plus 3 percent, and LIBOR floors are not permitted.
     
     
   • Principal payments will be deferred for two years.
     
     
   • Interest payments will be deferred for one year.
     
     
   • Principal will amortize 15 percent at the end of each of the third and fourth years and 70 percent at maturity at the end of the fifth year.
     
     
   • The loan documents must permit prepayment without penalty.
     
     
   • The Main Street SPV will purchase 95 percent participations in eligible loans.
     
     
3. NONLF: MSNLF, but for NPOs. The NONLF is most comparable to the MSNLF. The minimum loan size under the NONLF is $250,000, and the maximum loan size is the lesser of $35 million and the borrower’s average 2019 quarterly revenue. Like the MSNLF, a loan under the NONLF may be secured or unsecured, but it may not be contractually subordinated in terms of priority to any of a borrower’s other loans or debt instruments. The lender will pay the Main Street SPV a transaction fee of 1 percent of the principal amount of the NONLF loan (which fee the lender may pass through to the borrower), and the borrower will pay the lender an origination fee of up to 1 percent of the principal amount of the NONLF loan.
   
   
4. NOELF: MSELF, but for NPOs. The NOELF is most comparable to the MSELF. An eligible loan under the NOELF is an upsize tranche of an existing credit facility that was originated on or before June 15, 2020, and that has a remaining maturity of at least 18 months. The minimum loan size under the NOELF is $10 million, and the maximum loan size is the lesser of $300 million and the borrower’s average 2019 quarterly revenue. Like the MSELF, an upsize tranche under the NOELF may be secured or unsecured, but it must be senior or pari passu with, in terms of priority and security, a borrower’s other loans or debt instruments (other than mortgage debt and limited-recourse equipment financing). The lender will pay the Main Street SPV a transaction fee of 0.75 percent of the principal amount of the NOELF upsize tranche (which fee the lender may pass through to the borrower), and the borrower will pay the lender an origination fee of up to 0.75 percent of the principal amount of the NOELF upsize tranche.
   
   
5. Public hospitals and public colleges and universities might be eligible. A public hospital or a public college or university might not be recognized as a tax-exempt organization under section 501(c)(3) of the IRC. But such an entity might qualify as tax-exempt under another provision of the IRC and as an organization described in section 501(c)(3) of the IRC, and therefore be considered an NPO for purposes of the NONLF and NOELF. To establish eligibility as an NPO, a public hospital or public college or university must reasonably determine, in a written record maintained by the NPO, that it is an organization described in section 501(c)(3) of the IRC.
   
   
6. Government-owned hospitals might be eligible. Government-owned entities generally are considered ineligible under 13 CFR 120.110(j). But a hospital that is otherwise eligible would not be considered ineligible due to ownership by a state or local government if the hospital receives less than 50 percent of its funding from state or local government sources, excluding Medicaid. This exception is consistent with the approach adopted by the U.S. Small Business Administration in determining the eligibility of hospitals under the PPP.

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