The Main Street Lending Program (“MSLP”) was established by the Federal Reserve on April 8, 2020 to promote lending to a variety of small and medium sized businesses. Under the MSLP, the Federal Reserve Bank of Boston will lend up to $600 billion to a special purpose vehicle (“SPV”), leveraging a $75 billion equity investment from the U.S. Department of Treasury in the SPV. The SPV will then purchase participations in loans from eligible lenders under the MSLP. MSLP funds are intended to support businesses by opening additional paths to affordable credit. The specific date on which the MSLP will be operational is not yet known; however, the SPV will cease acquiring loan participations on September 30, 2020, unless that date is extended by the Federal Reserve and the Treasury.
There are three loan facilities available under the MSLP: the Main Street New Loan Facility (“MSNLF”); the Main Street Priority Loan Facility (“MSPLF”); and the Main Street Expanded Loan Facility (“MSELF”). The MSNLF and MSPLF will be evidenced by newly originated term loans, while the MSELF will be evidenced by increases to term loans or revolving credit facilities. The loans under the MSNLF and MSELF can range from $500,000 to $25,000,000 and loans under the MSELF can range from $10,000,000 to $200,000,000. A summary of the requirements for loan eligibility under each facility can be found here.
It is important for borrowers to understand that the MSLP is not like the Paycheck Protection Program (“PPP”), in which small business applicants that meet the basic eligibility requirements are processed by lenders without much additional case-by-case review by the lender. This is because those loans were effectively grants (assuming that the loan satisfies the eligibility requirements) and were 100% guaranteed by the SBA. In the MSLP, simply meeting the Federal Reserve’s criteria as an eligible borrower will not entitle an applicant to be approved or to receive the maximum allowable loan amount. The ultimate decision of whether to extend credit to the applicant will rest with the lender. Under the MSLP, lenders will follow their normal policies and procedures, as well as underwriting criteria for originating new loans to determine if borrowers are eligible for financing under the MSLP.
On May 27, 2020, the Federal Reserve Bank of Boston published additional guidance on the MSLP, including certain lender and borrower related documents, certifications, covenants, terms and conditions, and additional FAQs (the “FAQ”) in anticipation of rolling out the MSLP in the very near term. The following section provides a few key considerations for borrowers and lenders. The complete package of guidance promulgated by the Federal Reserve Bank of Boston can be accessed here.
Interested businesses should begin by contacting their lenders to discuss applying for a loan that would meet criteria for an eligible loan and to confirm they are an eligible borrower under the MSLP. What follows below is an analysis of several points flagged in our review of the latest guidance from the Federal Reserve and the practical implications of the same.
Selected Issues for Consideration
Borrower Eligibility
As an initial step, possibly before reaching out to lenders, a potential MSLP borrower should assess whether they fall within the definition of an “Eligible Borrower,” which can be found in the above table. While some requirements are straightforward, others may require additional consultation.
For example, the employee total and 2019 revenue calculations are based upon the aggregate of those figures for the borrower and its affiliates. The affiliation test is defined in 13 CFR 121.301(f) (1/1/2019 ed.), which generally tracks with the notion that affiliated entities are those in which one person (e.g., a majority shareholder) or a third-party (e.g., a parent company) has control over the referenced entities. What this means is borrowers under a larger umbrella of entities or principal investors with multiple entity investments will need to fold those other affiliated entities into their assessment for compliance with the employee or revenue requirements, regardless of whether those entities are seeking the loan. This will likely show-up as a detailed disclosure the lender will need to run-to-ground to satisfy its own compliance requirements, adding layers of documentation to the origination process for both borrower and lender. The same affiliate rules were and are at issue in the PPP, but under that program the lender could assume the borrower had “run-to-ground” the affiliation question. Here, and especially in light of the affiliate rule scrutiny that has been part of PPP, borrowers are going to need to be diligent as to the question.
Adjusted EBITDA
Another eligibility question for the borrower will be assessing the appropriate loan size to request and evaluating whether that amount is at least equal to the minimum loan size and not more than the maximum available for the relevant MSLP facility. If the latter is ultimately based upon the borrower’s 2019 “adjusted EBITDA,” it must be evaluated and verified by the lender using the lender’s own methodologies for adjusted EBITDA. Borrowers would do well to have a clear understanding of their lender’s methodology, especially if such borrower’s 2019 financials include a number of line items commonly subject to “normalizing” adjustments like a casualty event or the sale and disposition of an asset outside the borrower’s normal course of business.
For lenders, the determination of a borrower’s adjusted EBITDA will be a potential area of pre- and post-closing scrutiny due to the degree of discretion afforded to the lender and its underwriting process. Nevertheless, the Federal Reserve stated that to the extent a lender has used more than one methodology for adjusting EBITDA for the applicable borrower or similarly situated borrowers, the lender is required to use the “most conservative method it has employed.”[1] lenders will need to diligently document their method for calculating adjusted EBITDA and apply it uniformly, without “cherry picking” from other adjustments used at different times or for different purposes.
Borrower Covenants
The loan documents will also include certain additional borrower requirements that are unique to the MSLP. One such borrower covenant will cap the compensation for certain highly compensated officers and employees at their 2019 levels for the term of the loan and continuing for an additional year after the date the loan is satisfied. A covenant that extends beyond repayment of the loan is uncommon and should be carefully considered by borrowers. In effect, the loan documents will freeze those salaries for approximately five years (assuming the loan is not repaid until maturity).
The borrower will also need to make commercially reasonable efforts to retain its employees during the term of the loan. For the avoidance of doubt, a potential borrower that has already laid-off or furloughed workers is not precluded from obtaining an MSLP loan. Lenders typically do not weigh-in on or otherwise monitor their borrowers’ hiring practices, so these covenants represent another departure from typical loan covenant requirements. Borrowers will therefore need to closely monitor their hiring and firing practices during the term of the loan. Although the phrase “commercially reasonable” is commonly used within the legal lexicon and typically read to afford the performing party a degree of discretion with respect to the subject matter at hand, the requirements of the loan documents could expose a borrower’s decision to lay-off employees during the term of the loan to additional scrutiny and potential default liability.
Public Disclosure
Another unique and possibly vexing element of the MSLP is the right of the Federal Reserve to publicly disclose borrower and lender names, loan amounts, rates charged, costs, revenues, and other fees. This requirement alone may be enough to turn away many borrowers and lenders who wish to keep their business affairs and customer lists out of the public domain.
Timing/Conditional Funding
As noted above, lenders will apply their own underwriting standards in determining whether or not to extend credit to an eligible borrower, while also taking into consideration the various borrower certifications and covenants. Unlike PPP funding, which occurred shortly after submission of an eligible borrower’s application, borrowers under any MSLP facility should expect additional lag time between the time of submission and the potential receipt of loan proceeds.
Furthermore, lenders will have the option to make funding a loan contingent upon such lender’s receipt of a binding commitment from the SPV confirming the SPV will purchase a participation in the applicable loan. Within three business days of submitting all necessary documents by the lender, the SPV is expected to issue a binding commitment letter to enter into a participation purchase. The letter will require the lender fund and close the loan within three business days of the date of the commitment letter, and the SPV will then purchase its participation within three business days after the lender notifies the SPV the lender funded the loan. In short, there could more than a week between what would traditionally be viewed as the loan closing and the borrower receiving loan proceeds.
Looking Forward
COVID-19 has created a liquidity crisis for many borrowers. Up to this point, loan deferrals/loan forbearances and PPP loan proceeds have helped borrowers manage the crisis. However, with most loan deferrals/forbearances expiring and PPP loan proceeds running out, borrowers and their lenders should now be in the process of analyzing viability of the borrower’s business but for the continued liquidity issues. Borrowers that still have a strong business model following COVID-19 and a bankable balance sheet through the end of June 2020 may find alternative sources of liquidity more palatable than the MSLP given the amount of energy and expense that will be expended complying with the upfront and ongoing MSLP requirements. On the other hand, borrowers that: (1) had a strong performance in 2019, (2) experienced a significant disruption in 2020 due to COVID-19 and (3) do not have a bankable balance sheet, may find, along with their existing lender, the MSLP appealing, especially if such borrowers can demonstrate to their lenders likely success in 2021 and beyond and sufficient cash flow to support the high leverage created by the MSLP loan.
For borrowers interested in participating in the MSLP, the best place to begin will be with lending institutions with whom the borrower has an ongoing relationship. The lender will have already established a knowledge base specific to the borrower and its business and will likely have an incentive to work with the borrower given the lender’s existing credit exposure to such borrower.
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[1] See FAQ G.13.
