Federal Reserve Updates Main Street Lending Program Guidance Following Launch

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

On July 15, 2020, the Federal Reserve released updated guidance for the Main Street Lending Program (MSLP). That updated guidance further modifies or clarifies certain requirements of the program, following its launch on July 6.

The Federal Reserve established the MSLP to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic and that currently meet underwriting requirements applied by eligible lenders in accordance with the program. Under the MSLP, the Federal Reserve Bank of Boston (FRB Boston) has 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 and July 6) summarize the term sheets, guidance and form documents issued and revised by the Federal Reserve for the MSLP’s three existing facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF) and the Main Street Expanded Loan Facility (MSELF).

FRB Boston fully opened the MSLP on July 6. That opening followed the issuance of incremental updated guidance on June 20 and June 26 (summarized in McGuireWoods’ July 6 client alert) and the opening of lender registration on June 15 (summarized in the June 18 client alert). On July 8, FRB Boston began publishing a list of lenders accepting new business customers under the program. As of July 15, the Main Street SPV held approximately $12 million of participations in eligible loans.

Here are some key takeaways from the updated guidance:

1. LIBOR floors are not permitted. Loans under the MSLP must be adjustable-rate five-year term loans with an interest rate of one-month or three-month LIBOR plus 3 percent. The updated guidance expressly provides that interest-rate floors with respect to LIBOR are not permitted.
   
   
2. Fees may be included in the principal. A lender may charge certain fees to the borrower at the time an MSLP loan is originated. Those fees can include facility-specific transaction and origination fees (1 percent each for the MSNLF and the MSPLF; 0.75 percent each for the MSELF), fees for services that are customary and necessary in the lender’s underwriting of loans to similar borrowers, and, in the case of the MSELF, customary consent fees. The updated guidance clarifies that a lender may include those fees in the principal amount of the MSLP loan, so long as the total loan amount (including those fees) does not exceed the maximum loan size permitted for the borrower under the applicable MSLP facility.
   
   
3. Updated PPP rules for borrower eligibility are adopted. To be an eligible borrower under the MSLP, among other requirements a business must not be an “Ineligible Business” as defined in certain regulations adopted by the Small Business Administration under the Paycheck Protection Program (PPP). The updated guidance notes that the Federal Reserve has incorporated, for application to the borrower-eligibility requirements under the MSLP, additional interim final rules published on June 18 and June 26 relating to eligibility under the PPP. Under those subsequent interim final rules, a PPP loan would not be approved if an owner of 20 percent or more of the equity of the applicant is then incarcerated, is then subject to pending felony criminal charges or had been convicted of, pleaded guilty or nolo contendere to, or commenced probation or parole for, any felony involving fraud, bribery, embezzlement or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year.
   
   
4. The mortgage-debt exception is clarified. Loans under the MSPLF and the MSELF must be senior to or pari passu with, in terms of priority and security, the borrower’s other loans or debt instruments, other than certain excluded debt (defined in the guidance as “Mortgage Debt”). Previous guidance defined “Mortgage Debt” as (1) debt secured by real property and (2) limited-recourse equipment financing. The updated guidance clarifies that debt secured by real property qualifies as Mortgage Debt only if it is solely secured by real property. MSPLF and MSELF loans funded or submitted to the MSLP lender portal in good faith on or before July 17, 2020, that do not reflect that clarification are not adversely affected.
   
   
5. The MSELF “purchase by” requirement is removed. To be eligible for upsizing under the MSELF, an existing credit facility must have been originated on or before April 24, 2020. An MSELF lender must hold an interest in the underlying credit facility. Previous guidance required the MSELF lender to have originated the facility or to have purchased an interest in the facility before April 24, 2020. The updated guidance removes that specific date with respect to purchases, meaning a lender that purchased an interest in an eligible existing credit facility after that date may make an MSELF loan.
   
   
6. Relevant borrower financial records are clarified. To be an eligible borrower under the MSLP, among other requirements a business must have been established before March 13, 2020. The updated guidance reiterates that a borrower must have a financial record upon which a calculation of adjusted 2019 EBITDA can be made, but clarifies that a business with no financial record of its own but with clear predecessors or subsidiaries that can be referred to in calculating adjusted 2019 EBITDA can use the financial records of those predecessors and subsidiaries. The updated guidance also provides that if a borrower’s fiscal year 2019 does not coincide with calendar year 2019, then the borrower may use its 2019 fiscal year unless otherwise required by the lender.
   
   
7. Certain hedging activities are permitted. The updated guidance clarifies that lenders and borrowers may hedge interest-rate risk associated with MSLP loans. The updated guidance further provides that lenders may hedge credit risk associated with a borrower’s industry but may not engage in borrower-name-specific hedging of an MSLP loan.

Among other updates, the updated guidance also announces a waiver of capital-distribution restrictions with respect to tribal businesses paying dividends to tribal governments, clarifies the “tribal business concern” definition, highlights information-security measures implemented in the MSLP lender portal, clarifies that sole proprietorships are not eligible borrowers, and consolidates existing guidance on the use of MSLP loan proceeds (including that proceeds of an MSPLF loan may not be used to refinance existing debt of the MSPLF lender or its affiliates).

The Main Street SPV may purchase participations in eligible loans until Sept. 30, 2020.

Note: On July 17, 2020, as this client alert was being published, the Federal Reserve released updated term sheets for two new facilities under the MSLP to provide access to credit for nonprofit organizations. McGuireWoods summarized the initial drafts of those term sheets in the June 18 client alert and expects to publish a client alert covering the updated draft term sheets in the coming days.

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