The Federal Reserve Board issued initial guidance regarding its Main Street Lending Program, as authorized under the Coronavirus Economic Stabilization Act (Title IV of the CARES Act), on April 9, 2020, which was modified and supplemented by the frequently asked questions (FAQs) published on April 30, 2020. On May 27, 2020, the Federal Reserve Bank of Boston, which the Federal Reserve System tasked with administering the Main Street Lending Program, released a further updated set of FAQs and published form documentation to assist with the documentation of each loan participation. The new guidance both modified and supplemented the previous guidance issued on the three facilities―the Main Street New Loan Facility, the Main Street Expanded Loan Facility and the Main Street Priority Loan Facility.
This Alert supplements our prior program summaries by identifying noteworthy new guidance with respect to the facilities. This Alert does not restate or summarize provisions of the Main Street Lending Program that remain unchanged and that we covered in prior Alerts about the program.
Noteworthy FAQ Updates
The new FAQs provide some additional guidance and clarifications to the Federal Reserve's prior publications. We have highlighted a few noteworthy updates below.
What are the priority implications for eligible borrowers with existing debt obligations?
Since the initial announcement of the Main Street Lending Program, lenders have been concerned about the priority of the program's loans with respect to any existing debt obligations of eligible borrowers. Under prior guidance, the Federal Reserve provided that New Loan Facility loans must not be contractually subordinated in terms of priority to any other loans or debt instruments. In other words, New Loan Facility lenders may not agree to be subordinate in the right of payment to other debt of the eligible borrower, or agree that the loan will be junior in priority in bankruptcy to the eligible borrower's other unsecured loans or debt instruments. That being said, a New Loan Facility secured loan may be in a second lien position with respect to collateral as a matter of law due to timing of perfection.
However, priority concerns for existing lenders were less clear with respect to the Priority Loan Facility and Expanded Loan Facility. Prior iterations of the FAQs indicated that, under the Priority Loan Facility and Expanded Loan Facility programs, the eligible loan and the upsized tranche, respectively, "must be senior to or pari passu with, in terms of priority and security, the eligible borrower's other loans or debt instruments, other than mortgage debt." The updated FAQs further clarify that Priority Loan Facility and Expanded Loan Facility loans may not be subordinated in the right of payment to other debt of the eligible borrower (except mortgage debt) and that if the collateral package is the same, then "the lien upon such collateral securing the [Priority Loan Facility] Loan must be and remain senior to or pari passu with the lien(s) of the other creditor(s) upon such collateral."
In light of the foregoing, eligible borrowers with existing debt on their books will need to approach their existing lenders to discuss subordination and intercreditor arrangements. Of course, most loan facilities contain prohibitions against a borrower incurring additional debt. As such, borrowers with existing debt would almost always need to involve their current lenders regardless of the priority rules under the Main Street Lending Program.
How should eligible lenders adjust EBITDA if they used multiple methods in the past?
The updated FAQs also provided additional guidance for eligible lenders in terms of calculating adjustments to an eligible borrower's EBITDA. Prior guidance provided that an eligible lender should use a methodology it previously used for adjusting EBITDA. Under the updated FAQs, the Federal Reserve clarified that if an eligible lender has used multiple different methods in the past with respect to a single borrower or similarly situated borrowers, the eligible lender should utilize the most conservative method it has previously employed, but should not "cherry pick" adjustments used at different points in time or for nonsimilar purposes. Further, the FAQs define "similarly situated borrowers" as "borrowers in similar industries with comparable risk and size characteristics." Given the judgment that eligible lenders must exhibit when adjusting EBITDA, the Federal Reserve encourages eligible lenders to document the rationale for selection of an adjusted EBITDA methodology and for identifying similarly situated borrowers.
The Federal Reserve also provided additional information on qualifying as an "Eligible Borrower." Prior guidance indicated eligible borrowers had to have significant operations in the United States. While nonexhaustive, the updated FAQs provide that a borrower has significant operations in the U.S. if, when consolidated with its subsidiaries (not including parent companies or sister affiliates), it has greater than 50 percent of its (i) assets located in the U.S., (ii) annual net income generated in the U.S., (iii) annual net operating revenues generated in the U.S., or (iv) annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) generated in the U.S.
The updated FAQs also clarify whether a U.S. company that is a subsidiary of a foreign company can qualify as an eligible borrower. In short, such a company can qualify so long as the borrower itself is created or organized in the U.S. and, on a consolidated basis, the borrower has significant operations in the U.S. However, such a borrower may not use the proceeds of a Main Street Lending Program loan for the benefit of foreign parents, affiliates or subsidiaries of an eligible borrower.
Lastly, while private equity funds are ineligible to receive a loan under the Main Street Lending Program, private equity portfolio companies can qualify, although, practically, such companies will seldom meet the requirements in light of the strict affiliation rules applicable to businesses that are subject to outside ownership or control.
When are a borrower's existing debt and interest payment considered "mandatory and due"?
Under the previous guidance, the Federal Reserve clarified that an eligible borrower may not repay any debt of equal or lower priority until the Main Street Lending Program loan is paid in full, except for any mandatory principal or interest payments. The current guidance clarifies when such payment is deemed mandatory. An existing debt payment of principal and interest is deemed "mandatory and due" if (a) the future payment due date was scheduled prior to April 24, 2020, and (b) resulting from the occurrence of an event of default or acceleration that automatically triggers prepayments under a contract executed prior to April 24, 2020―provided that if such prepayment was triggered by the incurrence of new debt, it can only be paid "if such prepayments are de minimis, or under the [Priority Loan Facility] at the time of origination of [a Priority Loan Facility] Loan." With respect to future debt incurred by the borrower in accordance with the terms and conditions of the Main Street Lending Program loan, principal and interest payments are "mandatory and due" on their scheduled dates or upon the occurrence of an event that automatically triggers a mandatory prepayment.
Can a lender charge additional fees or set the interest rate above those set by the Federal Reserve?
The current guidance also seeks to clarify the fees and interest rates that an eligible lender may charge an eligible borrower. Under the previous guidance, eligible lenders are required to pay the Main Street SPV a transaction fee of (a), with respect to New Loan Facility and Priority Loan Facility loans, 100 basis points of the principal amount of the New Loan Facility or Priority Loan Facility loan at the time of origination, or (b), with respect to Expanded Loan Facility loans, 75 basis points of the principal amount of the Expanded Loan Facility Upsized Tranche at the time of upsizing, and eligible lenders may pass on these fees to the borrowers. In addition, eligible lenders may charge eligible borrowers a one-time origination fee in the maximum amount of (x), with respect to New Loan Facility and Priority Loan Facility loans, 100 basis points of the principal amount of the New Loan Facility or Priority Loan Facility loan at the time of origination, or (y), with respect to Expanded Loan Facility loans, 75 basis points of the principal amount of the Expanded Loan Facility Upsized Tranche at the time of upsizing.
Under the current guidance, the Federal Reserve confirms that eligible lenders may also charge de minimis fees for services that are customary and necessary in similar transactions, such as appraisal and attorneys' fees. Unlike the origination and transaction fees, however, the Federal Reserve did not specify whether there is a ceiling for such de minimis fees. Eligible lenders should note that they are prohibited from charging servicing fees to eligible borrowers.
In addition, the current guidance confirms that the interest rate for any Main Street Lending Program loan must be a variable interest rate equal to either one-month or three-month LIBOR plus 300 basis points.
In addition to the expanded list of FAQs, the Federal Reserve also published numerous legal forms and agreements for eligible lenders and eligible borrowers who participate in the program, including instructions for completing the lender required documentation. In connection with the sale of each loan participation by an eligible lender to the Main Street SPV, the eligible lender must enter into a loan participation agreement, a servicing agreement, an assignment-in-blank and, if necessary, a co-lender agreement using the forms published by the Federal Reserve. In addition, at the time a loan participation is sold to the Main Street SPV, the eligible lender must make, and require the eligible borrower to make, certain certifications and covenants by completing and submitting the appropriate specific lender certifications and covenants and specific borrower certifications and covenants documentation, which can be found on the Federal Reserve's website.
Eligible lenders should be aware that while the Federal Reserve will not provide form loan agreements, each loan agreement prepared by an eligible lender must comply the program terms and include the items set out in the document checklist, a form of which is attached to the FAQs as Appendix A. Moreover, such loan agreement should be substantially similar to the documents the eligible lender uses in the ordinary course with substantially similar borrowers.
The Federal Reserve has not yet announced a firm date for the program's commencement. Nevertheless, the start of the Main Street Lending Program is certainly much closer based on the more detailed information contained in the Federal Reserve's most recent updates to the FAQ and the publication of its form documents and agreements.
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Originally published by Duane Morris, on June 2020
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