Federal Reserve Expands Scope of Main Street Lending Program and Announces New Details

By Frederic L. Smith Jr., Elizabeth M. Boone, Aron C. Beezley & J. Keith Windle of Bradley Arant Boult Cummings LLP

On April 30, the Federal Reserve announced substantial changes to the initial terms of its Main Street Lending Program originally released on April 9, 2020:

After receiving over 2,200 comment letters and consulting with investment banks and financial institutions about the initial terms, the Federal Reserve has now expanded the scope of available loan options and the pool of eligible borrowers.

Under the Main Street program, the Treasury Department will make a $75 billion equity investment in a special purpose vehicle (Main Street SPV) created by the Federal Reserve. The Federal Reserve will then use the proceeds of the Treasury Department’s equity investment to purchase participations in loans made by eligible lenders under the program. The Federal Reserve and the Treasury Department currently anticipate that the Main Street SPV will purchase up to $600 billion in loan participations. Loans made under the Main Street program by eligible lenders will be full-recourse term loans and may be secured or unsecured.

The program is intended to provide financing for eligible borrowers that were in sound financial condition before the COVID-19 pandemic and to enable them to maintain their operations and payroll until conditions normalize. The start date of the program has not yet been announced, but the Main Street SPV will stop purchasing loan participations on September 30, 2020, unless the program is extended.

With the addition of the “Priority” loan facility, there are now three loan facilities under the Main Street program:

• The Main Street “New” Loan Facility is intended to provide eligible borrowers with new loans originated after April 24, 2020.
• The Main Street “Priority” Loan Facility is intended to provide eligible borrowers that are more highly leveraged with new loans originated after April 24, 2020.
• The Main Street “Expanded” Loan Facility is intended to “upsize” existing term loans or revolving credit facilities made to eligible borrowers on or before April 24, 2020, and that have a remaining maturity of at least 18 months.

Borrowers may only participate in one of the three loan facilities. Additionally, borrowers are not eligible for the Main Street program if they participate in the Primary Market Corporate Credit Facility or have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act). However, receipt of Paycheck Protection Program funds does not prohibit borrowers from participating in the Main Street program.

Key Terms for Main Street Loan Facilities

Several key terms for each of the loan facilities are summarized in the following table:

Required Borrower Certifications and Covenants           

Eligible borrowers that obtain loans under the Main Street program will be required to make certain certifications and covenants:

• The borrower is prohibited from paying principal and interest on other debt unless the payment is mandatory and due (except that under the Priority facility, the borrower may, at the time of origination, refinance existing debt owed to another lender).
• The borrower is prohibited from cancelling or reducing any existing lines of credit.
• The borrower must have a reasonable basis to believe that it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file bankruptcy within such period.
• The borrower is required to follow the restrictions on executive compensation and the prohibitions on stock repurchases and making dividends and distributions in Section 4003(c)(3)(A)(ii) of the CARES Act (except that, in a significant change from the initial Main Street loan terms announced on April 9, borrowers that are S-corporations pass-through entities are permitted to make distributions to the extent reasonably required to cover its owners’ tax obligations with respect to the borrower’s earnings).
• The borrower must certify that it is eligible to participate in the facility in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act.

Required Lender Certifications and Covenants

Eligible lenders that make loans under the Main Street program will also be required to make certain certifications and covenants:

• The lender is prohibited from requesting that the borrower repay debt previously extended by the lender to the borrower unless the payments are mandatory and due, except in the case of default and acceleration.
• The lender is prohibited from cancelling or reducing any existing committed lines of credit to the borrower, except in the case of default.
• The lender must certify that its methodology for calculating the borrower’s adjusted 2019 EBITDA is the same methodology that the lender used for calculating EBITDA for the borrower (or other similarly situated borrowers) on or before April 24, 2020 (and with respect to the Expanded loan facility, the lender must use the same EBITDA calculation methodology it used when originating or amended the underlying loan on or before April 24, 2020).
• The lender must certify that it is eligible to participate in the facility in light of the conflicts of interest prohibitions in Section 4019(b) of the CARES Act.

SBA Rules Apply to Employee Count and Revenues

In the guidance issued on April 30, the Federal Reserve is now requiring that borrowers must apply SBA regulations when counting their employees and measuring 2019 revenues. Under the initial Main Street loan terms published by the Federal Reserve on April 9, there was no indication that SBA regulations would apply to Main Street loans. SBA affiliation rules and related SBA regulations have been the source of great confusion under the CARES Act Paycheck Protection Program. Absent further guidance or clarifications from the SBA, we anticipate that many of the same questions that have arisen in connection with Paycheck Protection Program loans will also arise under the Main Street Lending Program.

As noted in the above table, in order to be an eligible borrower, a business must meet at least one of the following two conditions: (1) The business has 15,000 employees or fewer, or (2) the business has 2019 annual revenues of $5 billion or less.

To count employees, a borrower must follow the framework set forth in the SBA’s regulations found at 13 CFR 121.106. The SBA regulations will require borrowers to count all full-time and part-time employees, excluding volunteers and independent contractors. Borrowers will also be required to count their own employees and the employees of their “affiliates” as determined by SBA affiliation rules at 13 CFR 121.301(f). In order to determine the applicable number of employees, the borrower should use the average number of persons employed by the borrower and its “affiliates” for each pay period over the 12 months prior to the origination of the Main Street loan.

To determine 2019 annual revenues, borrowers must aggregate their own revenues with the revenues of their affiliates (as determined under SBA affiliation rules). Borrowers may use either one of the following methods to determine 2019 revenues:

• Annual revenue under 2019 GAAP audited financial statements; or
• Annual receipts for 2019 as reported to the IRS (with the term “receipts” having the same meaning used by the SBA in 13 CFR 121.104(a)).

Because SBA affiliation rules apply, and because eligible borrowers must have a majority of their employees in the United States, many domestic entities who are affiliated with larger foreign companies may be ineligible to obtain loans under the Main Street program.

Borrowers Must Use “Commercially Reasonable” Efforts to Maintain Payroll and Retain Employees

Under each Main Street facility, borrowers are required to use commercially reasonable efforts to maintain payroll and retain employees while the Main Street loan is outstanding. There are currently no objective standards or tests for determining whether a borrower complies with this requirement. In its April 30 guidance, the Federal Reserve stated that an eligible borrower “should undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor.”  The Federal Reserve further stated that “[b]orrowers 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.”

We anticipate that further guidance and instructions will be issued by the Federal Reserve before the Main Street Lending program is officially launched. Bradley will continue to monitor and provide updates on the Main Street Lending Program. If you have questions on these latest updates to the Main Street Lending Program or how best to ensure compliance with the program’s requirements, please contact Frederic Smith, Elizabeth Boone, Aron C. Beezley or Keith Windle.

Reprinted with permission. Originally published by Bradley Arant Boult Cummings LLP. Copyright 2019.