Federal Reserve Releases Additional Information on the Main Street Lending ProgramAugust 11, 2020
On July 28, 2020, the Federal Reserve extended the expiration of the Main Street Lending Program facilities through December 31, 2020. On July 31, 2020, the Federal Reserve released a revised set of Frequently Asked Questions relating to the Main Street facilities for for-profit borrowers (available here) and revised form documentation for the Main Street Lending Program (available here). On August 6, 2020, the Federal Reserve released a revised set of Frequently Asked Questions relating to the Main Street facilities for nonprofit borrowers (available here).
Under the Main Street Lending Program, which was established under Section 13(3) of the Federal Reserve Act, the Federal Reserve Bank of Boston will lend money on a recourse basis to a special purpose vehicle (the “SPV”). This SPV will then purchase up to $600 billion in loans from five facilities: the Main Street New Loan Facility (the “MSNLF”), the Main Street Priority Loan Facility (the “MSPLF”), the Main Street Expanded Loan Facility (the “MSELF”), the Nonprofit Organization New Loan Facility (the “NONLF”) and the Nonprofit Organization Expanded Loan Facility (the “NOELF”). The Treasury Department will invest $75 billion in the SPV from funds appropriated under Title IV of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
Under the MSNLF and the MSPLF, eligible lenders may originate new term loans to eligible for-profit borrowers, while eligible lenders may upsize term loans or revolving credit facilities entered into on or before April 24, 2020 under the MSELF. The MSNLF, MSPLF and MSELF are fully operational, and more information about these facilities is available here.
Under the NONLF, eligible lenders may originate new term loans to eligible nonprofit borrowers, while eligible lenders may upsize term loans or revolving credit facilities entered into on or before June 15, 2020 under the NOELF. The Federal Reserve is in the process of creating the infrastructure to operationalize the NONLF and the NOELF, and is not yet accepting submissions of NONLF or NOELF loan participations for purchase. Our prior client alert summarizing the terms of these facilities is available here.
The Federal Reserve will post updates to the Main Street Lending Program, including the official launch date of the NONLF and NOELF, on its website, and has made additional resources available on the Federal Reserve Bank of Boston’s website.
A discussion of certain clarifications and additional details about the Main Street Lending Program from the recently released materials is included below.
- Multiple Applications: An eligible borrower may submit applications for a Main Street loan to more than one eligible lender, provided such borrower notifies each lender of its other pending or accepted applications. If an eligible borrower’s application is declined by an eligible lender, such borrower may apply to the Main Street Lending Program through a different eligible lender.
- Co-Borrowing: The Federal Reserve expects to accommodate co-borrower arrangements, as reflected in the revised documentation for the Main Street Lending Program released on July 31, 2020. The Federal Reserve expects to make available in the coming weeks instructions for completing the forms and agreements, and making the required certifications, for co-borrower loans and for submitting co-borrower loans.
- Personal Guarantees: The Main Street Lending Program does not require personal guarantees. However, an eligible lender may require such a guarantee as part of its underwriting process. Any personal guarantees made in connection with a Main Street loan must extend to the entire loan, and cannot apply only with respect to the lender’s participation.
- Hedging: Eligible borrowers may hedge interest rate risk associated with Main Street loans. Eligible lenders may hedge interest rate risk and credit risk associated with a Main Street borrower’s industry, but cannot engage in borrower-specific hedging.
- Sole Proprietorships: Sole proprietorships are not eligible to participate in the Main Street Lending Program.
- Successors: In general, if a Main Street borrower is acquired or merges into another business or organization, the successor would assume all rights and obligations under the Main Street loan. As with any indebtedness, Main Street borrowers should ensure that such transaction complies with the terms of their loan agreements and that they obtain all requisite consents and waivers.
- Payments to Owners: Until twelve months after its Main Street loan or upsized tranche is repaid, a borrower must comply with certain restrictions imposed by the CARES Act on employee compensation, equity repurchases and redemptions, and dividends and other capital distributions. Recognizing that certain employees and officers of an eligible borrower may also be owners, the Federal Reserve recently provided guidance for distinguishing between compensation paid to officers and employees, and dividends and other capital distributions paid to owners, including instances where owners are also officers or employees.
- For corporations, stock-based compensation must be included when determining total compensation of an officer or employee. Moreover, while awards of stock-based compensation are not considered capital distributions, dividend payments made on such stock owned by officers or employees are prohibited (unless made to an owner of an S-corporation and reasonably required to cover such owner’s tax obligations in respect of such eligible borrower’s earnings).
- For partnerships and limited liability companies, the value of any awards of partnership or limited liability company interests, including capital or profits interests, to officers or employees in connection with their services must be included when determining total compensation. Moreover, while awards of partnership or limited liability company interests are not considered capital distributions, distributions with respect to such partnership or limited liability company interests are prohibited (unless reasonably required to cover an owner’s tax obligations in respect of such eligible borrower’s earnings).
- For corporations, partnerships and limited liability companies, interests in an eligible borrower that provide for mandatory or preferential dividends payments or other distributions are subject to the CARES Act restrictions on distributions unless both the interest and the obligation to pay dividends or distributions existed as of March 27, 2020.
- ESOPs: As noted above, Main Street borrowers must comply with certain CARES Act restrictions on equity repurchases and redemptions, and on dividends and other capital distributions. Recognizing that shares of an eligible borrower’s common stock may be held by an employee stock ownership plan (“ESOP”), the Federal Reserve has provided guidance on how such restrictions apply to ownership interests held by an ESOP.
- Restrictions on repurchases and redemptions do not apply to equity securities of non-public companies, or to repurchases or redemptions required under a contractual obligation in effect as of March 27, 2020. As a result, an ESOP that holds shares of a non-public company may make repurchases allocated to an employee’s ESOP account upon such employee’s retirement or termination, for example.
- Restrictions on dividend and other capital distributions apply with respect to an eligible borrower’s common stock or equivalent interest held by an ESOP. However, such restrictions do not apply if both the equity interest and the obligation to pay dividends or distributions existed as of March 27, 2020.
We are here to help answer specific questions and offer advice on your options. Please contact any member of our Corporate & Business Group to discuss.