The Federal Reserve Board (FRB) provided additional guidance (FAQs) and new term sheets for the Main Street Lending Program (Program) facilities. Initially, the Program and related term sheets were announced on April 9, 2020, as described in our related client alert. The updated term sheets and FAQs were published to address issues raised in more than 2,200 letters received from stakeholders during the comment period.
Taken together, the guidance and new term sheets clarify issues regarding affiliates and add another lending facility to the Program – the Main Street Priority Loan Facility (MSPLF). This new facility allows increased risk-sharing by lenders for borrowers with greater leverage that would not qualify under the other MSLP facilities. Under the new MSPLF, an eligible lender may “sell an 85% participation in that MSPLF Loan to the Main Street SPV at par value.” With the addition of the MSPLF, there are now three separate lending facilities. We are including a link to each of the new term sheets here for reference: the Main Street New Loan Facility (MSNLF), the Main Street Expanded Loan Facility (MSELF), and the MSPLF.
Eligibility Criteria for Borrowers
Notably, the new term sheets amend borrowers’ eligibility requirements. In particular, eligible borrowers now include those that had 2019 revenues up to $5 billion, or up to 15,000 employees on average over the 12 month period preceding the date of the loan origination. This has been amended from the previous (April 9) term sheets, increasing the ceilings from the previous levels of 10,000 employees and $2.5 billion in 2019 annual revenue.
The FAQs guide on how to calculate employees and revenue. Namely, a business must calculate the number of employees and 2019 revenue of itself and its affiliated entities “in accordance with the affiliation test set forth in 13 CFR 121.301(f) (1/1/2019 ed.).” See FAQ, E.5. As a practical matter, to determine the 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 before the origination or upsizing of the Main Street loan.” See FAQ, E.3.
Concerning determining 2019 annual revenue, the calculation must be aggregated with a business’s affiliates. Two methods of calculating revenue are acceptable to determine eligibility. A business may use its (and its affiliates’):
- “[A]nnual ‘revenue’ per its 2019 Generally Accepted Accounting Principles-based (GAAP) audited financial statements; or
- [A]nnual 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).”
A potential borrower (or its affiliate) that do not yet have either “should use [their] most recent audited financial statements or annual receipts.” See FAQ, E.4.
An eligible borrower is a business that meets the eligibility requirements and is not considered an “ineligible business,” as discussed below. A “business is 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 [as further defined].” Others may be considered at the discretion of the Federal Reserve.
Ineligible business are those listed in 13 CFR 120.110(b)-(j) and (m)-(s), as modified by regulations implementing the PPP established by section 1102 of the CARES Act (“PPP”) on or before April 24, 2020. These include businesses such as, generally: (i) passive businesses; (ii) life insurance companies; (iii) businesses located in a foreign country or owned by undocumented aliens; (iv) business selling through a pyramid plan; (v) businesses engaged in any illegal activity; (vi) businesses which restrict patronage (e.g. men-only or women-only); (vii) government-owned entities (excluding, to be clear, Native American tribes); (viii) businesses engaged in promoting religion; (ix) businesses engaged in SBA loan packaging; (x) businesses with an associate of poor character; (xi) any equity interest by a lender or associates in applicant concern (except as noted above); (xii) businesses providing prurient sexual material; (xiii) prior loss to the government and delinquent federal debt; (xiv) businesses primarily engaged in political or lobbying activities; and (xv) businesses engaged in speculation.
Loan Amounts and Loan Size Calculations
As per FAQ, A.4, the maximum loan amounts and corresponding loan size calculations for each of the three Facilities are as follows:
- MSNLF: 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 MSNLF cannot, when added to the eligible borrower’s existing outstanding and undrawn available debt, exceed four times the eligible borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA).
- MSPLF: 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 MSPLF cannot, when added to the eligible borrower’s existing outstanding and undrawn available debt, exceed six times the eligible borrower’s adjusted 2019 EBITDA.
- MSELF: 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 MSELF 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 the Eligible Borrower’s adjusted 2019 EBITDA.
Finally, the minimum loan size has been lowered from $1M to $500,000 for the MSNLF and MSPLF.
Terms and Conditions
Additionally, as set forth in section 4003(c)(3)(C) of the CARES Act, the borrower must be a business that was “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.” Borrowers must also certify that they 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.”
These restrictions apply to all Program facilities. However, “in each case, restrictions on dividends and other capital distributions will not apply to distributions made by an S corporation or other tax pass-through entity to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.” See FAQ, H.2, and applicable term sheets. Please note that, concerning all of the eligibility requirements, these are the minimum standards – lenders may impose additional underwriting criteria. See FAQs, F.3.
A borrower that receives assistance via the SBA’s PPP may also receive a Program loan. However, the business cannot participate in another Program facility or the Federal Reserve’s Primary Market Corporate Credit Facility (intended for larger companies). See FAQs, F.2.
For further information, we recommend reviewing updated term sheets and FAQs linked above. In addition, the FRB published the following table comparing the Program options, available at this link:
Our teams of lawyers across the globe are continuing to compile the latest thinking and legal guidance on the coronavirus outbreak. To track our latest updates, which will include more specific discussions of particular contractual concepts, we encourage you to check the Hogan Lovells COVID-19 Topic Center, which covers a wide variety of practice areas across the globe.
These are only general considerations and should not be relied on as legal advice concerning a particular transaction or situation. If you have any questions or would like any additional information regarding this matter, please contact your relationship partner at Hogan Lovells or any of the lawyers listed below.
Authored by Aaron Cutler, Robert Glennon, Ari Fridman, Ashley Hutto-Schultz, Kevin Wysocki