The US federal government has taken significant actions to quell the economic fallout for businesses weathering the coronavirus (COVID-19) pandemic, including the Federal Reserve providing $600 billion through the Main Street Lending Program, intended to support US companies that were in sound financial condition before the COVID-19 crisis.
The Main Street Lending Program (MSLP) presents a unique opportunity for small and medium-sized businesses—15,000 or fewer employees or 2019 annual revenues of $5 billion or less—to obtain financing during COVID-19 through bank loans supported by the federal government. This LawFlash covers the salient terms and conditions of the Main Street Lending Program.
LATEST UPDATE: On November 25, the FRB published updated FAQs to provide the following guidance: (1) Lenders not yet registered with Main Street should initiate registration on or before December 4, 2020; (2) lenders should submit eligible loans to the Main Street SPV on or before December 14, 2020, in order to provide time for review of the loan documentation; and (3) the Main Street SPV will cease issuing commitment letters under the condition of funding model as of December 23, 2020.
The MSLP offers term loans to US businesses established prior to March 13, 2020 that either (1) employ 15,000 or fewer employees or (2) had $5 billion or less in annual revenue in 2019. To be eligible, a borrower must be “a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.”
In order to be eligible, borrowers must not have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act) and must not participate in the Primary Market Corporate Credit Facility. However, borrowers that have taken advantage of the Paycheck Protection Program or obtained an Economic Injury Disaster Loan may borrow Main Street loans. In the case of multi-borrower loans, each borrower must meet the borrower eligibility criteria.
Eligible lenders under the MSLP 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 under the MSLP.
Borrowers can participate in only one of the MSLP facilities:
If a borrower is the only business in its affiliated group that has sought funding through Main Street, its affiliated group’s debt and EBITDA are not relevant to determining whether such business can qualify, unless its subsidiaries are consolidated into its financial statements. However, if the borrower has an affiliate(s) that has previously borrowed or has an application pending through a Main Street facility, then the entire affiliated group’s debt and EBITDA are relevant to determining such borrower’s maximum loan size.
If an entity was established before March 13, 2020 and has no financial record of its own, but has clear predecessors or subsidiaries that can be referenced, the financial records of such predecessors or subsidiaries can be used to calculate adjusted 2019 EBITDA. This nuance potentially allows for M&A activity around the MSLP.
For MSNLF and MSPLF loans, a Main Street lender will require the borrower to adjust its 2019 EBITDA by using the methodology that such lender has previously required for EBITDA adjustments when extending credit to the borrower or, if the borrower is a new customer, similarly situated borrowers on or before April 24, 2020. “Similarly situated borrowers” are borrowers in similar industries with comparable risk and size characteristics.
For MSELF loans, a Main Street lender will require the borrower to adjust its 2019 EBITDA by using the methodology such lender required for adjusting EBITDA when originating or amending the underlying loan on or before April 24, 2020. If a Main Street lender has used multiple EBITDA adjustment methods with respect to the borrower or similarly situated borrowers (e.g., one for use within a credit agreement and one for internal risk management purposes), the lender should choose the most conservative method it has employed.
Co-borrowers may individually submit financial information and EBITDA calculations, however, the maximum loan size must be determined in reference to the adjusted 2019 EBITDA and existing outstanding and undrawn available debt of “the Borrower” (i.e., collectively, all of the co-borrowers). If a lender permits co-borrowers to submit aggregated financial information and EBITDA calculations, the lender should instruct the co-borrowers to use the lender’s typical practices to aggregate such information in a manner accounting for transactions between the co-borrowers and accurately reflecting the financial position of the co-borrowers and their ability to repay the loan (e.g., to avoid double counting of revenues, assets, or liabilities).
Lenders will be required to provide certain specifications and agree to a number of covenants.
A Main Street lender is expected to obtain the borrower-required certifications and covenants from each borrower at the time of origination (or upsizing, as applicable) of the Main Street loan. Lenders may rely on a borrower’s certifications and covenants, as well as any subsequent self-reporting by the borrower. Lenders will apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower (lenders are expected to conduct an assessment of each potential borrower’s pre-pandemic financial condition and post-pandemic prospects to determine whether the loan is approved). A Main Street lender ultimately determines whether an eligible borrower is approved for a loan under the MSLP. As such, businesses that otherwise meet the eligible borrower requirements may not be approved for a loan or may not receive the maximum allowable amount.
In addition to other certifications required by applicable statutes and regulations, the following certifications and covenants will be required of the borrower, among others:
Each co-borrower must submit its own Borrower Certifications and Covenants. If a borrower is acquired or otherwise merged into another business, the acquiring or resulting entity would generally assume all rights and obligations of the borrower, including the rights and obligations of the predecessor entity under a Main Street loan.
Borrowers should make “commercially reasonable efforts” to maintain payroll and retain their employees during the time the Main Street loan (or the upsized tranche of the Main Street loan, as applicable) is outstanding. Specifically, borrowers should undertake good-faith efforts to maintain payroll and retain employees, in light of their capacities, the economic environment, available resources, and the business need for labor. Borrowers that have already laid off or furloughed workers as a result of the disruptions from COVID-19 are eligible to apply for Main Street loans.
A borrower is required to provide a lender with its (a) 2019 financial records as required under section 4.A of the Borrower Certifications and Covenants and (b) most recent available financial data required per Table II of Appendix C to the FAQ (which vary by Main Street facility). Lenders may require other financial information as appropriate under their underwriting practices.
Dividends and Capital Distributions
In determining whether a transaction is a capital distribution or dividend payment, and therefore subject to the restrictions under section 4003(c)(3)(A)(ii) of the CARES Act, the borrower is required to review and consider the instructions to the Borrower Certifications and Covenants, the FAQs, and the purpose of and economic result of the transaction. Transactions that circumvent or evade these restrictions will be viewed as a violation of these restrictions.
Total compensation includes salary, bonuses, awards of stock, and other financial benefits provided by the borrower and its affiliates to an officer or employee of the borrower, but does not include benefits paid in connection with a termination of employment (e.g., severance pay). A borrower that is a public company, or is a consolidated subsidiary of a public company, must calculate total compensation according to the methodology set out in item 402(c) of Regulation S-K (item 402(c)) (17 CFR 229.402(c)(2)). A borrower that is not a public company may choose to calculate total compensation (1) by using item 402(c) or (2) in a manner consistent with the federal tax rules, if the borrower meets certain criteria outlined by the Federal Reserve Bank of Boston. A borrower that has chosen to use the federal tax rules may later be required to switch to using item 402(c) if (1) such borrower later becomes a public company or (2) such borrower’s officers or employees that were not Significant Deferred Compensation Recipients later become Significant Deferred Compensation Recipients (exception: a borrower that had gross revenues of less than or equal to $10,000 for its 2019 fiscal year is exempt unless it becomes a public company).
For a deeper analysis on the restrictions on compensation, stock repurchase, and capital distributions, read our White Paper on the MSLP.
The SPV will purchase a 95% participation in Main Street loans generated under each of the three facilities under the MSLP. The sale of a participation to the SPV will be structured as a “true sale” and must be completed expeditiously after the applicable loan’s origination or upsizing. You should, therefore, understand that the federal government will have a role in decisionmaking in the term of the MSLP by way of its participation arrangements with the eligible lender.
The SPV will purchase participation in eligible loans under the MSLP until December 31, 2020, unless the facility is extended. The Federal Reserve Bank of Boston will continue to fund the SPV.
Who might borrow under this program?
Small to mid-size corporate borrowers (including, potentially, private equity portfolio companies) with 2019 adjusted EBITDA that were in sound condition prior to the COVID-19 pandemic.
If I am owned by private equity, am I eligible to borrow?
Possibly. To determine eligibility as a borrower, you need to calculate your eligibility relative to the 15,000 employees/$5 billion 2019 revenue tests, taking into account all of your affiliates, as defined under existing SBA regulations.
Who may lend under this program?
Commercial banks, savings associations, and credit unions. Direct lenders and non-bank lenders are not eligible lenders under the MSLP.
Why would you borrow under this program?
While the program has numerous covenants and certifications that may be more onerous than traditional middle-market loans, it has an attractive interest rate of LIBOR + 300, two-year principal amortization deferral, and one-year interest payment deferral.
How much leverage can I have on my business and borrow an MSLP loan?
The MSLP sets maximum loan amounts based, in part, on a borrower’s leverage multiple. A leverage multiple is a ratio that compares a company’s free cash flow to its debt load and can be used to judge the financial health of a company. Main Street Priority Loans and Main Street Expanded Loans come in at a 6.0x leverage multiple, versus 4.0x for Main Street New Loans.
What is EBITDA?
EBITDA is a commonly applied measure of the adjusted earnings of a business. In context of the MSLP, lenders may apply adjustments to EBITDA for the borrower consistent with what they have applied before for that borrower, or for other similarly situated borrowers.
Do I need to have 2019 adjusted EBITDA in order to borrow?
Yes. This program is not available for borrowers with no 2019 adjusted EBITDA. However, if an entity established before March 13, 2020 has no financial record of its own, but has clear predecessors or subsidiaries that can be referenced, the financial records of such predecessors or subsidiaries can be used to calculate adjusted 2019 EBITDA.
If I do not have adjusted EBITDA for 2019, but I have assets such as accounts receivable and inventory to collateralize an “ABL” loan, am I eligible?
No. This program is not available for borrowers with no 2019 adjusted EBITDA. However, if an entity established before March 13, 2020 has no financial record of its own, but has clear predecessors or subsidiaries that can be referenced, the financial records of such predecessors or subsidiaries can be used to calculate adjusted 2019 EBITDA.
Can I lay off employees and still borrow an MSLP loan?
Yes, within reason. There is a commercially reasonable efforts standard on retention of employees.
If I am a foreign company, can I borrow an MSLP loan?
No. Only US businesses may borrow under the MSLP. However, a foreign parent company’s US subsidiary may be eligible.
What does it mean to be pari passu with other debt?
MSLP loans may not be contractually subordinated to other debt. This means that, when it comes to the right to be repaid, an MSLP loan must be at least pari passu, or equal in rank, with other debt. The same is true for lien priority of the MSLP loan relative to other loans in a borrower’s capital structure.
Can I use an MSNLF or MSELF loan to pay off other debt?
No. Only the proceeds of an MSPLF loan are permitted to refinance other debt on funding, so long as the other debt is not with the eligible lender originating the MSPLF loan.
Can I use the funds from an MSLP loan for M&A?
There is no use-of-proceeds restriction on the use of MSLP funds for M&A activity. However, the retention of employees covenant, the lien and payment priority requirements, and limitations on refinancing of other debt during the MSLP loan term would make this a challenging proposition for many M&A deals.
Can I voluntarily prepay other debt during the term of the MSLP loan?
Generally, no. Borrowers are prohibited from repaying principal balance or interest on any debt until the Main Street loan is repaid in full, unless the debt or interest payment is “mandatory and due.” Borrowers may continue to pay interest or principal payments on outstanding debt on or after the payment due date, so long as the payment due date was scheduled before the date of origination of a Main Street loan. Borrowers may also refinance debt that is maturing no later than 90 days from the date of such refinancing (such refinancing may not be done at origination of the MSLP loan, unless it is a qualifying MSPLF refinancing).
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