Federal Reserve’s Main Street Lending Program Throws Lifeline to Nonprofits

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.

NONLF & NOELF—GENERAL LOAN TERMS

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.

WHO CAN BORROW?

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

• an endowment of no more than $3 billion;
• a ratio (expressed as a number of days) of liquid assets (defined for purposes of this requirement as unrestricted cash and investments that can be accessed and monetized within 30 days) at the time of the loan origination or upsizing to average daily expenses over the previous year, equal to or greater than 60 days (i.e., a minimum of 60 days' cash on hand);
• a ratio of adjusted 2019 earnings before interest, depreciation, and amortization (EBIDA) to unrestricted 2019 operating revenue greater than or equal to 2% (i.e., a 2% operating margin); and
• at the time of loan origination or upsizing, a ratio of (1) unrestricted cash and investments to (2) existing outstanding and undrawn available debt, plus the amount of any loan under the applicable Nonprofit Main Street Loan, plus the amount of any CMS Accelerated and Advance Payments (made available under the CARES Act), that is greater than 55%.

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. 

WHO CAN LEND?

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.

NONPROFIT MAIN STREET FACILITIES

• Nonprofit Organization New Loan Facility. Loan sizes for NONLF loans (i.e., term loans originated after June 15, 2020) will range from $100,000 up to a maximum amount that is the lesser of (1) $35 million or (2) the borrower’s average 2019 quarterly revenue. NONLF loans may not be, at the time of origination and during the term of the loan, contractually subordinated in terms of priority to the borrower’s other loans or debt instruments. NONLF loans may be secured or unsecured. If the borrower had other loans outstanding with the lender as of December 31, 2019, such loans must have had an internal risk rating to the underlying loan equivalent to a “pass” in the Federal Financial Institutions Examination Council's (FFIEC’s) supervisory rating system as of that date.
• Nonprofit Organization Expanded Loan Facility. Loan sizes for the upsized tranche of NOELF loans (i.e., loans originated on or before June 15, 2020 with remaining maturity of at least 18 months) will range from $10 million up to a maximum amount that is the lesser of (1) $300 million or (2) the borrower’s average 2019 quarterly revenue. NOELF loans may be secured or unsecured term loans or revolving credit facilities. The lender may extend the maturity of an existing loan or revolving credit facility at the time of upsizing in order for the underlying instrument to satisfy the 18-month remaining maturity requirement. At the time of upsizing and at all times the NOELF loan is outstanding, it must be senior to or pari passu with—in terms of priority and security—the borrower’s other loans or debt instruments, other than mortgage debt. The lender must have assigned an internal risk rating to the underlying loan equivalent to a “pass” in the FFIEC’s supervisory rating system as of December 31, 2019.

NONPROFIT MAIN STREET LOAN TERMS

• Five-year maturity
• Interest rates equal to LIBOR (one or three months) plus 300 basis points
• Principal payments deferred for two years, and interest payments deferred for one year (unpaid interest will be capitalized); prepayment of loan permitted without premium or penalty
• Principal amortization of 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year

CERTIFICATIONS & COVENANTS

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:

1. Borrower will not repay principal or interest on any other debt (other than mandatory principal or interest payments that are due) until the Nonprofit Main Street Loan is fully repaid.
2. Borrower will not seek to cancel or reduce any of its committed lines of credit with the lender of the Nonprofit Main Street Loan or any other lender.
3. Borrower has a reasonable basis to believe that, as of the date of origination or upsizing, as applicable, and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that period.
4. Borrower will comply with the employee compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act, a brief summary of which can be found here.
5. No member of Congress, head of an executive department, the US president or vice president, or family member of any of these individuals has a controlling interest in the borrower.

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:

1. Lender will not request that the proceeds of the loan be used to repay debt extended by the lender to the borrower, or any interest (other than mandatory principal or interest payments, or in the case of default or acceleration) until the Nonprofit Main Street Loan is fully repaid.
2. Lender will not cancel or reduce any existing committed lines of credit outstanding to the borrower, other than in an event of default.
3. The methodology required to be used by the borrower for calculating the borrower’s adjusted 2019 EBIDA and operating is the methodology it has previously used when extending credit to the borrower or similarly situated borrowers (or originating or amending the underlying facility, in the case of an NOELF loan) on or before June 15, 2020.
4. No member of Congress, head of an executive department, the US president or vice president, or family member of any of these individuals has a controlling interest in the lender.

FEES

• Origination Fee: If the initial principal amount of a NONLF loan is $250,000 or greater, lenders are permitted to charge borrowers an origination fee of 1% of the principal amount of the loan at the time of origination. If the initial principal amount of the NONLF loan is less than $250,000, borrowers will pay an origination fee of up to 2% of the principal amount of the loan. Lenders are permitted to charge borrowers of NOELF loans an “upsizing” fee of 0.75% of the principal amount of the loan.
• Transaction Fee: If the initial principal amount of a NONLF loan is $250,000 or greater, lenders are required to pay the SPV a transaction fee of 1% of the principal amount of such loan at the time of origination. No transaction fee will be imposed if the initial principal amount of the NONLF loan is less than $250,000. Lenders are required to pay the SPV a transaction fee of 0.75% of the principal amount of any NOELF loan at the time of upsizing. Such fees may be passed on to the borrower.
• Servicing Fee: If the initial principal amount of a NONLF loan is $250,000 or greater, the SPV will pay a lender 0.25% of the principal amount of its participation per annum for loan servicing. If the initial principal amount of a NONLF loan is less than $250,000, the SPV will pay a lender 0.50% of the principal amount of its participation. The SPV will pay a lender of NOELF loans 0.25% of the principal amount of its participation per annum for loan servicing.

The SPV will pay lenders 0.25% of the principal amount of the participation in Nonprofit Main Street Loans per annum for loan servicing.

DISCLOSURES & REPORTS

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.

FACILITY TERMINATION

The SPV will cease participations on December 31, 2020 unless extended by the US Department of the Treasury and the FRB.

ADDITIONAL GUIDANCE

• Nonprofit Organization New Loan Facility Term Sheet
• Nonprofit Organization Expanded Loan Facility Term Sheet
• Main Street for Nonprofits Frequently Asked Questions
• View a list of MSLP lenders that are currently accepting applications from new customers.

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Benjamin W. Stango

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