Treasury, Federal Reserve Release Final Main Street Facility Term Sheets

As previously reported, in response to the coronavirus (COVID-19) pandemic, the Federal Reserve and the U.S. Department of the Treasury unveiled two lending programs – the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF) – to provide credit to "main street." (See Holland & Knight's previous alert, "Federal Reserve Board, Treasury Department Unveil New and Expanded Credit Facilities," April 10, 2020.) After a comment period which closed on April 16, 2020, the Federal Reserve and Treasury Department implemented some of the feedback received and further refined the programs and provided guidance to market participants in implementing the programs. This April 30, 2020, release of information includes a) a set of responses to Frequently Asked Questions for the MSLP (FAQs); b) revised term sheets for the MSELF and the MSNLF; c) a new term sheet for the Main Street Priority Loan Facility (MSPLF); and d) a comparison to the previous term sheets for the MSNLF and the MSELF. The Revised Term Sheets address many concerns raised by Holland & Knight and other market participants, but impose new guidance and limitations that could limit the overall effectiveness and participation in these programs. 

Notably, the Revised Term Sheets make clear that 1) borrowers must be EBITDA positive (although qualifying EBITDA adjustments are applicable) and qualify as eligible borrowers (i.e., not be treated as ineligible under most U.S. Small Business Administration regulations applicable to Paycheck Protection Program or PPP loans), 2) lenders must undertake a financial condition assessment of qualifying borrowers, rather than rely on borrower certifications, and 3) lenders must hold their portion of the loans through maturity (or the earlier sale by the Treasury/Federal Reserve of its loan participation).

Below is a brief summary of certain material clarifications and new terms contained in the FAQ and the Revised Term Sheets.

Clarifications

"Eligible Lenders"

• Eligible Lenders include U.S. federally insured depository institutions (banks, savings associations and credit unions), a U.S. branch or agency of a foreign bank, U.S. bank holding company, a U.S. savings and loan holding company, a U.S. intermediate holding company of a foreign banking organization or a U.S. subsidiary of any of the foregoing.
• Private credit funds and non-bank lenders, while not eligible, can continue to participate in loans (other than the "Main Street loans" themselves) made to the Eligible Borrower.
• According to the FAQ's, the Federal Reserve is considering expanding the definition of "Eligible Lenders."

"Eligible Borrowers"

• Borrowers are eligible if they have either not more than a) 15,000 employees (up from 10,000) or b) $5 billion in 2019 revenues (up from $2.5 billion)
• Must have existed prior to March 13, 2020
• Cannot be any of various "ineligible businesses" under SBA guidelines as modified by the Paycheck Protection Program (which includes most landlords, casinos and speculative businesses), and
• Borrowers must be EBITDA positive in 2019, however, the Revised Term sheets make clear that Borrowers can take advantage of EBITDA add-backs to demonstrate positive EBITDA

Terms of Participations of Tranche to the Federal Reserve/Treasury

• Eligible Lender must retain both its 5 percent portion of the applicable tranche (15 percent for the MSPLF) and its interest in the Underlying Loan (if tranche is under the MSELF) until maturity of the applicable tranche (or if the government sells all of its loan participation).
• This would prohibit lenders from further participating their holds and may cause lenders to rethink program participation or sell loans in advance of putting an upsized tranche in place.

Modifications

Eligible Existing Loan Terms

• Both secured and unsecured loans quality (MSELF term sheet previously silent on point)
• Revolving loans also now qualify (previously only term loans could qualify)
• Loans must have been originated on or before April 24, 2020 (previously April 8, 2020), and
• Loans under the MSELF must have a remaining maturity of at least 18 months – taking into account any adjustments made after April 24, 2020, including at the time up the upsizing

Upsize or New Tranche Terms

• Principal and Interests deferred for one year, unpaid interest will be capitalized
• MSELF and MSPLF Amortization schedule of 15 percent end of Year Two and Year Three with a balloon payment at maturity
• MSNLF Amortization schedule of one-third each year beginning the end of Year Two
• Interest is Libor (1 or 3 month) plus 300 basis points (rather than SOFR plus 250-400 basis points)
• MSELF Minimum loan size is $10 million (rather than $1 million)
• MSNLF and MSPLF Minimum loan size is $500,000 (rather than $1 million)
• MSELF Maximum loan size is the lesser of 1) $200 million (revised from $150 million), 2) 35 percent (up from 30 percent) of borrower's outstanding, undrawn available debt that is pari passu with the Eligible Loan, or 3) an amount that when added to the Borrower's existing and undrawn available debt does not exceed six times adjusted 2019 EBITDA – EBITDA is calculated using methodology in place on or before April 24, 2020 (previously no guidance on EBITDA formulation)
• MSNLF and MSPLF Maximum loan size remains the lesser of 1) $25 million, or 2) an amount that when added to the Borrower's existing and undrawn available debt does not exceed four times adjusted 2019 EBITDA – EBITDA is calculated using methodology for similarly situated borrowers (which may permit a borrower to negotiate specific add-backs used in its existing facilities if the add-backs are customary in the borrower's industry)

New "Transaction Fee"

• in addition to imposing a 75 basis points origination fee, a 75 basis point transaction fee is owed, which Eligible Lenders may require borrowers pay

The Revised Term Sheets Impose New Lender Risk Assessments and Conditions

• Loan Classification Requirement: An Eligible Loan must carry an internal risk rating equivalent to a "pass" in the Federal Financial Institutions Examination Council's supervisory rating system as of Dec. 31, 2019
• Eligible Lenders must conduct an assessment of each potential borrower's "financial condition" at the time of the application; no objective guidance as to how to conduct that assessment, but Borrowers must certify that they can meet their financial obligations for at least 90 days and do not expect to file bankruptcy during that same time period
• Eligible Lenders must commit to not reducing any committed lines of credit absent an event of default

MSPLF Summary

• The MSPLF is substantially similar to the MSNLF
• Key differences include:
• Eligible loans will be senior to or pari passu with, in terms of priority and security, other debt (other than mortgage loans) (rather than not being contractually subordinated)
• Eligible lenders must retain 15 percent of each eligible loan (rather than 5 percent)
• Eligible loans will amortize as follows: 15 percent at the end of Years Two and Three, with a balloon payment at maturity, and
• Loans may be used to refinance existing debt, not debt to the lender originating the MSPLF (borrowers should check existing loan covenants to confirm whether any existing lender consent is needed to borrow under the MSPLF).
• The announcements specifically contemplate further revisions for nonprofit companies and asset-based loans for participation in the MSELF facility.

Conclusion

Holland & Knight will provide updates on responses from the Federal Reserve or the Treasury Department, as well as any changes to term sheets and guidance, as soon as the information becomes available. For questions regarding these new and expanded facilities, please contact the authors.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.