COVID-19: Federal Reserve Releases Updated Guidance on Main Street Lending Program Part One

Nearly one month after releasing the last round of guidance, the Federal Reserve Bank of Boston released additional information on May 27 for both borrowers and lenders looking to participate in the Main Street Lending Program (MSLP) in the form of greatly expanded FAQs as well as operational documents.

As a brief summary, the MSLP is the umbrella under which multiple loan facilities are being made available to borrowers with 15,000 or fewer employees or 2019 revenue of $5 billion or less. The MSLP encompasses the Main Street New Loan Facility (MSNLF), the Main Street Expanded Loan Facility (MSELF), and the Main Street Priority Loan Facility (MSPLF). All three facilities have a four-year term, an adjustable rate of LIBOR (one or three months) plus 300 basis points, deferral of principal and interest for one year, and no prepayment penalties. The recently released guidance further clarified the terms of each loan facility as previously summarized here.

Eligibility

In addition to the previously announced requirements, the guidance clarifies that an eligible borrower may be a subsidiary of a foreign company as long as the borrower itself is created or organized in the United States and has significant operations in and a majority of its employees based in the United States. Furthermore, an affiliated group of companies can participate in only one MSLP facility. Lenders of facilities under the MSLP will use the same affiliation rules being applied under the Paycheck Protection Program to determine a borrower’s affiliates. The guidance also makes clear that private equity funds are ineligible for the MSLP and reiterates that not-for profits are similarly ineligible.

CARES Act Restrictions

The Coronavirus Aid, Relief, and Economic Security (CARES) Act authorized the Department of the Treasury secretary Secretary to make loans and other investments in programs or facilities established by the Federal Reserve System Board of Governors for purposes of providing liquidity to the financial system that supports lending to eligible businesses. The secretary committed $75 billion of funds appropriated under the CARES Act in support of the MSLP, and the following CARES Act restrictions apply:

1. If a business has received “specific support” pursuant to section 4003(b)(1)-(3) of the CARES Act, it will not be eligible for the MSLP.
2. Borrowers must comply with the stock buy-back provisions of section 4003(c)(3)(A)(ii) of the CARES Act.
3. Eligible borrowers must be businesses created or organized in the United States or under the laws of the United States and must have significant operations in and a majority of its employees based in the United States.
4. The principal amount of any MSNLF, MSPLF, or any upsized tranche of a MSELF can’t be reduced through loan forgiveness.
5. Section 4019 of the CARES Act requires lenders and borrowers to certify that no “covered individual” owns, controls, or holds 20 percent or more, by vote or value, of any class of equity ownership interest in the business. A covered individual is defined as the president, vice president, head of any executive department, and member of Congress or certain immediate family members of the same.

Required Collateral

Until now, the guidance stated the facilities under the MSLP could either be secured or unsecured. The MSLP is designed to prevent the MSNLF, MSPLF, and MESLF from being subordinated or otherwise disadvantaged in terms or priority or security in relation to other loans or debt of the borrower. With this in mind, new guidance clarifies in what situations secured and unsecured loans are required.

The MSNLF loans can’t be contractually subordinated in terms of priority to other loans or debt instruments of the borrower. However, this doesn’t prevent the following:

1. The issuance of an MSNLF loan that’s a secured loan to a borrower, whether or not the borrower has an outstanding secured loan of any lien position or maturity
2. The issuance of an MSNLF loan that’s an unsecured loan to a borrower, regardless of the term or secured or unsecured status of the borrower’s existing indebtedness
3. The borrower taking on new secured or unsecured debt after receiving a MSNLF loan, as long as the new debt wouldn’t have higher contractual priority in bankruptcy than the MSNLF loan

The MSPLF loan must be secured if, at the time of origination of the loan, the borrower has any other secured loans or debt instruments other than mortgage debt. The MSPLF loan can only be unsecured if the borrower doesn’t have any secured loans or debt (other than mortgage debt) as of the date of origination of the loan.

The MSELF upsized tranche must be secured if, at the time of origination, the borrower has any other secured loans or debt instruments other than mortgage debt. The upsized tranche must be secured by the collateral securing any other tranche of the underlying credit facility on a pari passu basis. The MSELF upsized tranche can only be unsecured if the borrower doesn’t have any secured loans or debt (other than mortgage debt) as of the date of origination.

Securing Credit Elsewhere

Under the MSLP facilities, borrowers must certify they’re “unable to secure adequate credit accommodations from other banking institutions.” The guidance clarifies that this doesn’t mean there’s no credit from other courses available to the borrower. Rather, this means that because the amount, price, or terms of credit from other sources are inadequate, the borrower is unable to secure other adequate credit accommodations. Borrowers aren’t required to demonstrate there was no adequate credit available elsewhere.

A launch date for the program hasn’t been se yet and is expected to be announced, along with additional details about the program, as they become available. In the meantime, borrowers should assess their needs and continue to keep an eye out for guidance.

If you have any questions regarding the content of this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or Samantha Podlas, associate, at spodlas@barclaydamon.com.

We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.