Nonprofit organizations are on the front lines in the battle against the coronavirus (COVID-19), but they also number among the many victims of COVID-19’s devastating financial impact. In response, the Federal Reserve recently announced that loans would be available to nonprofit borrowers under the Main Street Lending Program, and issued a FAQ on two new facilities—the Nonprofit Organization New Loan Facility and the Nonprofit Organization Expanded Loan Facility.
Nonprofits are taking care of the sick and needy, developing treatments, educating students, and performing countless other essential functions during COVID-19. Yet just as demand for nonprofit services has skyrocketed, so have operating costs—necessitated by the challenges and realities of operating during a global pandemic. For many nonprofits, funding streams have all but dried up as budget cuts and other “belt-tightening” measures have proven insufficient, and the risk of insolvency mounts.
To address this issue, the federal government recently announced the enactment of new borrowing programs to assist nonprofits with few other options. The Nonprofit Organization New Loan Facility (NONLF) and Nonprofit Organization Expanded Loan Facility (NOELF) are available to a broad range of nonprofit borrowers, including hospitals, senior care and housing communities, museums, animal rights organizations, performing arts organizations, educational institutions, and social service organizations.
LATEST UPDATE: On October 30, The Federal Reserve Bank of Boston (FRB) published updated FAQs to lower the minimum loan size for the NONLF from $250,000 to $100,000, change the fee structure for loans with a principal amount of less than $250,000, and enable lenders and borrowers to exclude certain Paycheck Protection Program (PPP) loans from the calculation of “outstanding debt.”
For a deeper-dive analysis on the Main Street program, read our White Paper on the MSLP.
As a general matter, loan terms under both the NONLF and NOELF—including the interest rate, principal and interest payment deferral, and five-year term—are the same as for Main Street loans for for-profit businesses.
Similar to the for-profit facilities, for the new nonprofit facilities under the Main Street Lending Program (Nonprofit Main Street Program), the FRB will purchase 95% of the loans from commercial lenders through a special purpose vehicle (SPV), and the loans must be made by a participating bank willing to keep 5% on its own books until the earlier of maturity or until the Nonprofit Main Street Program sells all of its 95% participation.
The sale of a participation interest in NONLF or NOELF loans will be structured to be a true sale and must be completed expeditiously after the loan’s origination or upsizing, as applicable.
These programs represent a welcome lifeline to nonprofits that would otherwise have significant difficulty obtaining access to credit from commercial lenders that may be wary of their ability to repay.
The NONLF and NOELF will be open to nonprofit borrowers (tax-exempt organizations under section 501(c)(3) or 501(c)(19) of the Internal Revenue Code), with at least 10 and as many as 15,000 employees, that have been in operation since January 1, 2015. To be eligible, non-donation revenue (e.g., proceeds from fundraising events, federated campaigns, gifts, donor-advised funds) must have accounted for 60% or more of the borrower’s expenses from 2017–2019.
Additionally, borrowers must have
The methodology used by the lender to calculate adjusted 2019 EBIDA must be the methodology it has previously used for adjusting EBIDA when extending credit to the borrower or, if applicable, similarly situated borrowers on or before June 15, 2020. The lender should calculate “operating revenue” as unrestricted operating revenue, excluding funds committed to be spent on capital, and including a proxy for endowment income in place of unrestricted investment gains or losses. The methodology used by the lender to calculate the proxy for endowment income must be the methodology it has used for the borrower or, if applicable, similarly situated borrowers on or before June 15, 2020.
Borrowers must otherwise meet the eligibility requirements applicable to borrowers under the other Main Street loans, including the requirements to (1) be an entity organized in the United States or under US laws, with significant operations in and a majority of its employees based in the United States; and (2) not be an Ineligible Business (as listed in 13 CFR 120.110(b)-(j) and (m)-(s), and modified by regulations implementing the PPP under the CARES Act). In the case of multi-borrower loans, each borrower must meet the borrower eligibility criteria. For a deeper-dive analysis on these requirements, read our White Paper on the Main Street Lending Program.
Borrowers that have taken advantage of the PPP may still obtain a Nonprofit Main Street Loan. However, borrowers will only be eligible under the Main Street Lending Program to obtain one Nonprofit Main Street Loan (i.e., a NONLF or NOELF loan) and must not also participate in the Primary Market Corporate Credit Facility or Municipal Liquidity Facility.
Eligible lenders under the Nonprofit Main Street Program include US federally insured depository institutions (including banks, savings associations, and credit unions), US branches or agencies of foreign banks, US bank holding companies, US savings and loan holding companies, US intermediate holding companies of foreign banking organizations, and US subsidiaries of any of the foregoing. Direct lenders (non-bank lenders) are not eligible lenders.
Various borrower and lender certifications and covenants will be required in connection with each Nonprofit Main Street Loan.
Borrower Certifications & Covenants. Borrowers must provide the required certifications and covenants in a writing executed by the borrower’s principal executive officer and principal financial officer or functional equivalents. Each co-borrower in a multi-borrower loan must deliver a set of Borrower Certifications and Covenants, completed and signed by the co-borrower’s principal executive officer and principal financial officer, even if the co-borrowers share the same principal executive officer and principal financial officer.
In addition to other certifications required by applicable statutes and regulations, the below certifications and covenants will be required from borrowers:
Borrowers should make commercially reasonable efforts to maintain payroll and retain employees during the term of the loan; however, no corresponding certification is required.
Lenders that participate in the Nonprofit Main Street Program are expected to collect the required certifications and covenants from each borrower at the time of origination or upsizing of the Nonprofit Main Street Loan, as applicable. Lenders may rely on a borrower’s certifications.
Lender Certifications & Covenants. In addition to other certifications required by applicable statutes and regulations, the following certifications and covenants will be required from lenders of Nonprofit Main Street loans:
The SPV will pay lenders 0.25% of the principal amount of the participation in Nonprofit Main Street Loans per annum for loan servicing.
The FRB will disclose information regarding Nonprofit Main Street Loans during the operation of the Main Street Program, including information regarding names of lenders and borrowers, amounts borrowed and interest rates charged, and overall costs, revenues, and other fees.
Under section 11(s) of the Federal Reserve Act, the FRB will also disclose information concerning the Main Street Program one year after the effective date of the termination of the authorization of the Main Street Program. This disclosure will include names and identifying details of each participant in the Main Street Program, the amount borrowed, the interest rate or discount paid, and information concerning the types and amounts of collateral pledged or assets transferred in connection with participation in the Main Street Program.
The SPV will cease participations on December 31, 2020 unless extended by the US Department of the Treasury and the FRB.
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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
David V. Chang
Orange County/Los Angeles
Steven L. Miller