In addition to the recently released guidance for borrowers summarized in our alert on the Main Street Lending Program (MSLP), below is a summary of guidance that eligible lenders under the MSLP should be aware of.
The MSLP encompasses three options for borrowers, the Main Street New Loan Facility (MSNLF), the Main Street Expanded Loan Facility (MSELF), and the Main Street Priority Loan Facility (MSPLF). Made directly by eligible lenders, 85 to 95 percent of a loan or upsized tranche can be sold to a special purpose vehicle (SPV) created by the Federal Reserve Bank of Boston and supported in part by US Department of Treasury.
It’s important to note that, unlike in the Paycheck Protection Program, eligible lenders will use their own credit documents under the MSLP. Although there’s no standardized application being released, Appendix A of the FAQs provides a loan document checklist so eligible lenders can ensure the terms in their documents are consistent with MSLP requirements. Eligible lenders may rely on the certifications and any subsequent self-reporting of borrowers. Lenders aren’t expected to independently verify the certifications required to be made by borrowers in conjunction with participating in a MSLP facility or actively monitor ongoing compliance with the covenants required under the MSLP term sheets.
The debt repayment covenants generally prohibit a borrower from repaying the principal or interest on any debt until the MSLP loan is repaid in full, unless the principal or interest payment is “mandatory and due.” Lenders may request borrowers to pay principal and interest on outstanding debt on or after the payment due date if the payment due date was scheduled prior to April 24, 2020. Lenders may not request that borrowers prepay principal or interest on debt ahead of schedule during the time a MSLP loan is outstanding unless it’s required by a prepayment clause as specifically permitted by the guidance.
If a borrower becomes distressed and enters into bankruptcy or insolvency proceedings or misses a mandatory and due payment on a MSLP loan during the time it has an outstanding MSLP facility, the SPV will have the option to elevate its participation to an assignment to be in privity with the borrower. The expectation is that eligible lenders will follow the market-standard workout processes and exercise the standard of care set forth in the MSLP loan participation agreement. If borrowers avail themselves of the protections under the Bankruptcy Code, the SPV, through the MSLP loan participation agreement and MSLP co-lender agreement, has waived and disclaimed its right to assert special administrative priority under Section 507(a)(2) of the Bankruptcy Code.
The regulatory capital treatment for the portion of interest due under a MSLP loan retained by an eligible lender is assigned the risk weight applicable to the counterparty for the loan. Generally, this means a 100-percent risk weight for a corporate exposure under the standardized approach. Proposed under Basel II capital adequacy rules for banking institutions, the standardized approach requires banking institutions to use ratings from external credit rating agencies to quantify required capital for credit risk. Specifically, an eligible lender’s exposure amounts for the MSLP loans are as follows:
- 15 percent of the outstanding MSPLF loan balance
- 5 percent of the MSNLF loan balance
- 5 percent of the MSELF upsized tranche balance (underlying loan or line of credit remains subject to the capital treatment that applied prior to the sale of the participation to the MSLP SPV)
The FAQs state secured MSLP loans are eligible for the credit risk mitigation treatment in the standardized approached as long as any collateral securing the loan is considered eligible financial collateral. Eligible lenders are unable to recognize collateral attributable to the SPV’s interest for purposes of the credit risk mitigation treatment under the capital rule, which requires banks to adjust their capital requirements based on the market risks of their trading positions. This treatment applies solely to eligible lenders who are subject to the federal banking agencies’ capital rule, specifically banks with total trading activity of more than 10 percent of total assets or banks with assets in excess of $1 billion.
Capital planning guidance issued by the Federal Reserve in 2015 should continue to be referenced when evaluating loans for capital planning and stress testing purposes. Eligible lenders subject to capital planning guidance are to evaluate only the retained portion of the MSLP loans, as the sale of participations to the SPV are to be structured as “true sales.”
Additionally, FinCEN has provided guidance that MSLP loans being made to an existing customer don’t need necessary customer information re-verified as long as it was previously verified. Beneficial ownership information on existing customers not yet collected also doesn’t need to be collected and verified unless otherwise indicated by the eligible lender’s risk-based approach.
Eligible lenders are encouraged to work with borrowers affected by COVID-19 and may originate or expand loans to borrowers under the MSLP. Eligible lenders should follow their normal policies and procedures for originating a loan to a new customer—including Know Your Customer Procedures—and require any new borrower to use an adjusted EBITDA methodology based on a methodology the eligible lender was previously required to use when extending credit to similarly situated borrowers on or before April 24, 2020. Eligible lenders are also encouraged to evaluate a borrower’s ability to repay a MSLP loan by considering a borrower’s credit history and financial performance prior to the pandemic as well as its post-pandemic business prospects.
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.