The Federal Reserve Bank issued new guidance for the Main Street Lending Program (the Program) on May 27, 2020. In addition to an expanded set of Frequently Asked Questions (FAQs), the Federal Reserve posted forms and documentation to be used in connection with loans made under the Program together with extensive instructions on their use. The new guidance does not include the date on which the Program will start.
The publication of many of the forms needed for the Program is a welcome contrast to the manner in which the Paycheck Protection Program (PPP) was rolled out by the Treasury Department. The PPP was largely characterized by a lack of clear instruction as to loan documentation and much confusion about many of the specifics of the program, which were partly addressed by ongoing updating of the FAQs during the course of the PPP. By contrast, the guidance for the Main Street Lending Program includes full forms of documents that are unique to the Program, including forms to be used by lenders to register for the Program, forms of participation agreement and servicing agreement and related documents, and forms of certifications and covenants that must be provided by lenders and borrowers for each loan. Each lender is allowed to use its own form of loan agreement, but the new guidance specifies certain terms that must be included and also provides sample provisions that can be modified and included in a lender’s loan documentation.
While much of the information released by the Federal Reserve consists of documentation that implements terms that were already contained in the term sheets that were released by the Federal Reserve on April 30, there is some new, noteworthy information.
Affiliated Groups. The FAQs provide new guidance regarding affiliated groups. First, there is clarification on what it means for a borrower to have “significant operations in the United States.” To be eligible for a loan under the Program, a borrower must have significant operations in the United States, which can mean 50% or more of (i) its assets located in the United States; (ii) its annual net income generated in the United States; (iii) its annual operating revenues generated in the United States; or (iv) its annual consolidated operating expenses (other than debt service) generated in the United States. The FAQs state that a borrower may consolidate its subsidiaries, but not its parent company or sister subsidiaries, to determine whether it meets this test.
The FAQs also set out some limitations that impact affiliated companies. The Main Street Lending Program consists of three facilities—the “New” facility, the “Priority” facility and the “Expanded” facility. Each facility has different terms and eligibility criteria. An affiliated group of companies can only participate in one Main Street facility, and the entire group can only participate in either a Main Street facility or the Primary Market Corporate Credit Facility, which is another lending program authorized under the CARES Act. An affiliated group can have different loans under one type of facility, but the total participation of all borrowers cannot exceed the maximum loan size that the affiliated group as a whole is eligible to receive on a consolidated basis.
Subsidiaries of Foreign Companies. U.S. subsidiaries of a foreign company can be eligible borrowers under the Main Street facilities, but the proceeds of the loan can only be used for the benefit of the U.S. borrower, its consolidated U.S. subsidiaries and other affiliates of the borrower that are U.S. businesses.
Private Equity Funds. The FAQs contain unfavorable news for private equity funds and their portfolio companies. First, private equity funds themselves will not be eligible for loans under the Program. Based upon Small Business Administration (SBA) regulations with respect to PPP loans, private equity funds are deemed to be primarily engaged in investment or speculation. This made them ineligible for PPP loans, and also makes them ineligible for loans under the Program. At the same time, SBA affiliation rules will apply to the portfolio companies of private equity funds. Therefore, if sufficient control exists, a portfolio company will have to aggregate the number of employees and 2019 annual revenues of the portfolio company itself with those of the private equity fund’s other portfolio companies to determine whether it meets the employment and annual revenue limitations of the Program (maximum of 15,000 employees and $5 billion in revenue). This may make it difficult for portfolio companies to remain within those limitations. Since affiliated group members can only participate in one type of Main Street facility, even if the limitations can be met on an aggregated basis it may be difficult to determine which type of facility will be best to use, since it is likely that not all portfolio companies will be able to qualify for the same type of facility and the private equity fund may not have sufficient control over each of its portfolio companies to dictate a uniform approach to choosing one facility.
Unavailability of Other Credit. The FAQs, and the Borrower Certifications, added a new certification requirement that had not previously been disclosed. The Main Street Lending Program has been established under regulations governing the Federal Reserve that allow the Federal Reserve, in the case of an emergency, to extend credit to entities that are not depositary institutions. One of the requirements of the regulations is that participants in such a program must be unable to secure adequate credit accommodations from other banking institutions. Accordingly, a certification to that effect has been included in the Borrower Certifications. The Federal Reserve has provided some leeway on this in the FAQs, which state that in order to make the certification it is not necessary to show that no credit is available at all from other sources. Instead, the certification may be made if the amount, price or terms of credit available from other sources are inadequate for the borrower’s needs during the current unusual and exigent circumstances. Borrowers are not required to show that they have been denied credit by other lenders or to document that the amount, price or terms of credit available elsewhere are inadequate. While this provision is not very precise, we believe it signals that the Federal Reserve is not intending to take a hard line on this certification. Still, as we saw with the PPP, political pressure may lead to changes in how certifications relating to the need for these types of emergency loans are viewed. It would be prudent for a borrower under the Program to have an understanding of what kind of credit might be available to it and the terms on which it might be able to borrow in the current market. At a minimum, it may be helpful to contact your usual lenders to try to get indicative terms and keep a detailed summary of those conversations in your files. In addition, borrowers should ensure that their governing body’s minutes and discussions that authorize the entity to enter into the Program clearly document the inadequacy of other credit sources.
Guidance for Lenders. The new form documents and their accompanying instructions will be very useful to lenders as they prepare to register for the program and commence making loans. In addition, the FAQs contain helpful information on a number of topics, including accounting and regulatory treatment of the loans and “know your client” requirements for existing clients. Appendices to the FAQs that detail specific covenants, events of default and financial reporting that will be required for Program loans are a useful guide to lenders as they prepare their loan documentation.
The new guidance from the Federal Reserve demonstrates a measured and thought-out approach to implementing the Main Street Lending Program. While some commentators have noted that the Federal Reserve’s cautious approach makes it unlikely that the Program will be of much help to small businesses, we believe the professionalism demonstrated by the Federal Reserve’s actions to date may make it easier to get funding in an orderly manner to mid-market and lower-mid-market companies that are facing financial difficulties due to the pandemic.