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The Main Street Business Lending Program – Updated Frequently Asked Questions

Finance Alert | June 2, 2020
By: Jennifer R. Santangelo, Ryan J. Udell, Maulin S. Vidwans, Adam J. Chelminiak and Patrick A. Haggerty

On May 27, 2020, the Federal Reserve Bank of Boston (FRBB)[1] released a significantly updated set of “Frequently Asked Questions” (Updated FAQs), offering additional insight into the details of the Main Street Business Lending Program (Main Street Program). On the same day, the FRBB also released several forms, agreements and instructions for Eligible Lenders and Eligible Borrowers pertaining to the Main Street Program. More information is available in our client alert that is dedicated solely to the FRBB’s release of those forms, agreements and instructions.

The Main Street Program was initially announced on April 9, 2020 and the release of the original set of “Frequently Asked Questions” (Original FAQs) was published on April 30, 2020. We invite our clients and friends to review our previously-published client alerts that outlined the basic terms of the Main Street Program and the Original FAQs.[2]

The subsequent release of the Updated FAQs aims to answer some of the most frequently asked questions and clarify or expand certain terms of the Main Street Program that were not answered in the Original FAQs.

The information provided below is intended to offer a curated synopsis of the new information provided in the Updated FAQs, focusing on those points of clarification that we believe may be particularly beneficial to our lender and borrower clients.

We anticipate that the Federal Reserve will officially launch the Main Street Program shortly.

SECTION 1: PURPOSE AND DESIGN

Can the principal amount of loans extended under the Main Street Program be reduced?

No. The Main Street Program is not a grant program and is subject to the prohibition on loan forgiveness in section 4003(d)(3) of the CARES Act. In the event of restructurings or workouts, the Main Street Program special purpose vehicle (SPV) may agree to reductions in interest (including capitalized interest), extended amortization schedules and maturities, and/or higher priority “priming” loans.

SECTION 2: BORROWER ELIGIBILITY

What does “significant operations in the United States” mean?

To determine if an Eligible Borrower has “significant operations” in the United States, the business’s operations should be evaluated on a consolidated basis together with its subsidiaries, but not its parent companies or sister affiliates. For example, an Eligible Borrower has significant operations in the United States if, when consolidated with its subsidiaries, greater than 50% of the Eligible Borrower’s:

  • assets are locations in the United States;
  • annual net income is generated in the United States;
  • annual net operating revenues are generated in the United States; or
  • annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) are generated in the United States.

This is a non-exhaustive list of examples that reflects the principles that should be applied by a potential borrower when evaluating its eligibility under this criterion.

Can a U.S. company that is a subsidiary of a foreign company qualify as an Eligible Borrower?

An Eligible Borrower must be created or organized in the United States or under the laws of the United States. For the avoidance of doubt, an Eligible Borrower may be a subsidiary of a foreign company, provided that the borrower itself is created or organized in the United States or under the laws of the United States, and the borrower on a consolidated basis has significant operations in and a majority of its employees based in the United States. However, an Eligible Borrower that is a subsidiary of a foreign company must use the proceeds of a Main Street Program loan only for the benefit of the Eligible Borrower, its consolidated U.S. subsidiaries and other affiliates of the Eligible Borrower that are U.S. businesses. The proceeds of a Main Street Program loan may not be used for the benefit of an Eligible Borrower’s foreign parents, affiliates or subsidiaries. Other forms of organization may be considered for inclusion as an Eligible Borrower under the Main Street Program at the discretion of the Federal Reserve.

Is a private equity fund eligible to borrow under the Main Street Program?

No. The Small Business Administration (SBA) has determined that private equity funds are primarily engaged in investment or speculation, and that such businesses are therefore ineligible to receive Main Street Program loans.

Is a portfolio company of a private equity fund eligible to borrow under the Main Street Program?

Yes. To determine eligibility, a business’s employees and 2019 annual revenues are calculated by aggregating the employees and the 2019 annual revenues of the business itself with those of the business’s affiliated entities in accordance with the affiliation test set forth in 13 CFR 121.301(f) . This affiliation test applies to private equity-owned businesses in the same manner as any other business subject to outside ownership or control.

For example, assume Business X seeks to borrow under the Main Street Program. Business X has fewer than 15,000 employees and its 2019 annual revenues were below $5 billion. However, Business Y owns more than 50% of the voting equity of Business X and Businesses A, B, C, and D. As a result, Businesses A, B, C, D, X, and Y are all affiliated entities. In order for Business X to be an Eligible Borrower under the Main Street Program, it must meet one of the following two conditions: (a) the aggregate number of employees of Business X and its affiliated entities must be 15,000 or fewer; or (b) the aggregate 2019 annual revenues of Business X and its affiliated entities must be $5 billion or less.

SECTION 3: TERMS AND CONDITIONS

How can an Eligible Borrower determine if its existing loans have an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Counsel’s (FFIEC) supervisory rating system on December 31, 2019?

If an otherwise Eligible Borrower applies for a loan at an Eligible Lender with which it has an outstanding loan, the Eligible Lender will make the determination of whether the borrower’s existing loans have an internal risk rating that meets the requirements in the Main Street Program term sheets. The Eligible Lender will also assess the potential borrower’s financial condition at the time of the application.

Can a Lender charge a Borrower additional fees above the Main Street Program origination fee and/or an interest rate above LIBOR + 300 basis points?

Eligible Lenders are allowed to charge Eligible Borrowers a one-time origination fee as set out in the Main Street Program term sheets. In addition, Eligible Lenders may also require Eligible Borrowers to pay the transaction fee, which the Eligible Lenders must in turn pay to the Main Street Program SPV. Eligible Lenders are not permitted to charge Eligible Borrowers any additional fees, except de minimis fees for services that are customary and necessary in the Eligible Lender’s underwriting of commercial and industrial loans to similar borrowers, such as appraisal and legal fees. Eligible Lenders should not charge servicing fees to Eligible Borrowers.

Main Street Program loans must have an interest rate of LIBOR (1 month or 3 month) + 300 basis points.

What methodology should be used to adjust EBITDA if an Eligible Lender has used a range of methods in the past with respect to a single Eligible Borrower or similarly situated borrowers?

An Eligible Lender should require the Eligible Borrower to adjust its 2019 EBITDA by using the methodology that the Eligible Lender has previously required for EBITDA adjustments when extending credit to the Eligible Borrower or, if the Eligible Borrower is a new customer, similarly situated borrowers on or before April 24, 2020. If an Eligible Lender has used multiple EBITDA adjustment methods with respect to the Eligible Borrower or similarly situated borrowers (e.g., one for use within a credit agreement and one for internal risk management purposes), the Eligible Lender should choose the most conservative method it has employed. In all cases, the Eligible Lender must select a single method used at a point in time in the recent past and before April 24, 2020. The Eligible Lender may not “cherry pick” or apply adjustments used at different points in time or for a range of purposes. The Eligible Lender should document the rationale for its selection of an adjusted EBITDA methodology.

For purposes of adjusting EBITDA, how does an Eligible Lender identify “similarly situated borrowers”?

Similarly situated borrowers are borrowers in similar industries with comparable risk and size characteristics. Eligible Lenders should document their process for identifying similarly situated borrowers when they originate a Main Street New Loan Facility (MSNLF) loan or a Main Street Priority Loan Facility (MSPLF) loan.

Why is the Federal Reserve allowing adjustments to EBITDA for purposes of the Main Street Program when it has noted supervisory concerns with these adjustments in the past? Is there a limit to how much EBITDA can be adjusted?

The FRBB suggests that it is normal industry practice for lenders and borrowers to agree to adjust a borrower’s EBITDA to accommodate differences in business models across industries and to accommodate one-time events that may positively or negatively impact a borrower’s earnings.

While the Main Street Program term sheets do not include limits on how much EBITDA can be adjusted, there are features of the Main Street Program that are designed to limit excessive risk-taking. First, EBITDA adjustments must be of the type the Eligible Lender has previously (and recently) required for the Eligible Borrower or similarly situated borrowers. The Eligible Lender should document the rationale for its selection of an adjusted EBITDA methodology.

In addition, the EBITDA-based leverage requirements should be viewed as minimum requirements for the Main Street Program. Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the borrower’s application.

Finally, the Program requires that a Main Street Program loan have an internal risk rating from the Eligible Lender equivalent to a “pass” in the FFIEC’s supervisory rating system as of December 31, 2019. Loans that were criticized in the past for excessive adjustments would not be eligible for the Main Street Program.

SECTION 4: LENDER INFORMATION

Can multiple affiliated Eligible Lenders participate in the Main Street Program?

Yes. Multiple affiliated entities may register as Eligible Lenders under the Main Street Program.

Will standard loan documents be provided for Main Street Program loans or should Eligible Lenders use their own loan documentation?

Each participating Eligible Lender should use its own loan documentation in relation to Main Street Program loans. Such documentation should be substantially similar, including with respect to required covenants, to the loan documentation that the Eligible Lender uses in its ordinary course lending to similarly situated borrowers, adjusted only as appropriate to reflect the requirements of the Main Street Program. Appendix A contains a checklist of the items that must be reflected in the loan documentation in order for the Main Street Program SPV to purchase a participation in a loan. Appendix B includes certain model covenants that Eligible Lenders can elect to reference when drafting their loan documentation in order to satisfy the Appendix A requirements. Appendix C includes a list of the financial information that Eligible Lenders must require Eligible Borrowers to provide on an ongoing basis until the loans mature.

SECTION 5: LOAN PARTICIPATION

What role will the Main Street Program SPV play in the event an Eligible Borrower enters distress?

Prior to an Eligible Borrower entering distress, the Main Street Program SPV will rely on the Eligible Lender to service each Main Street Program loan in accordance with the standard of care set out in the Loan Participation Agreement and in light of the duties of the Eligible Lender under the Servicing Agreement.

Once an Eligible Borrower misses a mandatory and due payment on the Program loan (beyond the applicable grace period), or the Eligible Borrower or Eligible Lender enters into bankruptcy or other insolvency proceedings, the Main Street Program SPV will have the option to elevate its participation to an assignment to be in privity with the Eligible Borrower. However, the Federal Reserve does not expect the Main Street Program SPV to use this right as a matter of course. Rather, the Federal Reserve would expect Eligible Lenders to follow market-standard workout processes and to exercise the standard of care set out in the Loan Participation Agreement Transaction Specific Terms and Standard Terms and Conditions (i.e., to exercise the same duty of care in approaching such proceedings as it would exercise if it retained a beneficial interest in the entire loan).

In general, the Federal Reserve expects that the Main Street Program SPV generally would not expect to elevate and assign except in situations where (i) the economic interests of the Eligible Lender and the Main Street Program SPV are misaligned, or (ii) the loan amount is relatively large in comparison to other loans in the Main Street Program SPV’s portfolio of participations.

How will the Main Street Program SPV approach decision-making with respect to its voting rights under the Loan Participation Agreement or Co-Lender Agreement?

The FRBB reiterates that the Main Street Program is an emergency lending program, not a grant program. The Main Street Program SPV will make commercially reasonable decisions to protect taxpayers from losses on Main Street Program loans and will not be influenced by non-economic factors when exercising its voting rights under the Loan Participation Agreement or the Co-Lender Agreement Transaction Specific Terms and Standard Terms and Conditions, including with respect to a borrower that is the subject of a workout or restructuring.

SECTION 6: REGULATORY TREATMENT

How will Main Street Program loans be treated for supervised firms subject to stress testing?

The capital planning guidance issued by the Federal Reserve in 2015 (SR 15-18 and SR 15-19) includes supervisory expectations for capital planning and stress testing for certain supervised firms. Such firms should continue to reference that guidance when evaluating Main Street Program loans for capital planning and stress testing purposes. Eligible Lenders subject to capital planning guidance should evaluate only the retained portion of Main Street Program loans for capital planning and stress testing purposes, as the sale of participations to the Main Street Program SPV will be structured as “true sales.”

The supervisory stress test methodology to assign losses to and revenues stemming from different types of exposures is publicly available and described in “Dodd-Frank Act Stress Test 2020: Supervisory Stress Test Methodology.”

Are Main Street Program loans for existing customers considered new accounts for Financial Crimes Enforcement Network (FinCEN) Rule Customer Due Diligence (CDD) purposes? Are lenders required to collect, certify, or verify beneficial ownership information in accordance with the rule requirements for existing customers?

FinCEN has provided the following guidance to the Federal Reserve Board with respect to this question: If the Main Street Program loan is being made to an existing customer and the necessary information was previously verified, you do not need to re-verify the information. Furthermore, if Eligible Lenders for purposes of the Program have not yet collected beneficial ownership information on existing customers, such institutions do not need to collect and verify beneficial ownership information for those customers applying for new Main Street Program loans, unless otherwise indicated by the Eligible Lender’s risk-based approach to Bank Secrecy Act compliance.

The Updated FAQs provide significant and helpful guidance to lenders and borrowers alike. We will continue to update clients and friends on such further guidance under the Main Street Program as it becomes available.

If you have questions or would like more information, please contact Jennifer Santangelo (santangeloj@whiteandwilliams.com; 215.864.7199), Ryan Udell (udellr@whiteandwilliams.com; 215.864.7152), Maulin Vidwans (vidwansm@whiteandwilliams.com; 215.864.6369), Adam Chelminiak (chelminiaka@whiteandwilliams.com; 215.864.7078) or Patrick Haggerty (haggertyp@whiteandwilliams.com; 215.864.6811).

As we continue to monitor COVID-19, White and Williams lawyers are working collaboratively to stay current on developments and counsel clients through the various legal and business issues that may arise across a variety of sectors. Read all of the updates here.

[1] The Main Street Program is administered by the FRBB, which has established a special purpose vehicle (SPV) to purchase loan participations from Eligible Lenders across the U.S.

[2] Please review our previously published client alerts for a detailed description of the requirements for qualification as either an “Eligible Lender” or an “Eligible Borrower.”

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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