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Federal Reserve Releases Additional Details on its Main Street Lending Program

June 3, 2020, Covington Alert

On May 27, 2020, the Federal Reserve Bank of Boston ("FRBB") posted a number of documents that provide important additional details about its Main Street Lending Program ("MSLP"), including updated FAQs, new required agreements and forms, and new lender and borrower guides. The following summary highlights key FAQ changes and summarizes each of the new MSLP forms, agreements, and other documents. These new developments reflect the Federal Reserve's continuing effort to operationalize the MSLP.

Updates to the MSLP Frequently Asked Questions

The updated FAQs contain extensive new details on how the FRBB will operate the MSLP and address or clarify a range of substantive issues regarding eligibility criteria and other key elements of the MSLP framework. We have prepared a blackline reflecting these changes against the initial MSLP FAQs published on April 30, 2020. Among other key new details, the FAQs now address the following:

  • Borrower restructurings and workouts. The FAQs explain how the Federal Reserve, acting through the MSLP special purpose vehicle ("SPV"), is likely to approach situations in which the borrower enters distress. In the event of restructuring or workout of an MSLP loan, the SPV may agree to changes to the loan terms such as reductions in interest (including capitalized interest), extended amortization schedules and maturities, and higher priority “priming” loans. In addition, pursuant to the Loan Participation Agreement (“LPA,” discussed further below), the SPV may sell or transfer its loan participation to a third party or may elevate its participation to an assignment in order to be in privity with the borrower. Importantly, the FAQs state that the SPV will make “commercially reasonable decisions to protect taxpayers from losses on Main Street loans” and “will not be influenced by non-economic factors.”
  • Explanation of key Federal Reserve policy decisions in structuring the MSLP. The FAQs provide an explanation of key policy decisions underlying the MSLP, including rationales for (i) greater risk retention by the lender for the Main Street Priority Lending Facility ("MSPLF") relative to the Main Street New Loan Facility ("MSNLF") and (ii) the greater maximum loan size in the upsized tranche of the Main Street Expanded Loan Facility ("MSELF") relative to the loan size of the other MSLP facilities.
  • Loan documentation. The FAQs clarify that the FRBB will not provide standard loan documentation; rather, each lender should instead use its own loan documentation, though this loan documentation must reflect the detailed requirements listed in a series of new appendices to the FAQs.
    • Appendix A lists the required terms in each lender’s MSLP loan documentation, which generally reflect the term sheet for each MSLP facility.
    • Appendix B outlines required covenants that must be included in the loan documentation, including covenants related to (i) security and priority of the loan, (ii) mandatory prepayment in the event of borrower material misstatement or breach, (iii) cross-acceleration triggered by an event of default if a different loan extended to the borrower by the lender or the lender’s commonly controlled affiliate is accelerated, and (iv) financial reporting requirements of the borrower.
    • Appendix C summarizes the financial reporting requirements to be required by mandatory covenant, including requirements that borrowers provide certain financial information to the lender on an annual and/or quarterly basis.
  • Seniority of loans under the MSPLF and MSELF. The FAQs clarify what it means for the MSPLF or MSELF loan to be "senior to or pari passu with" the borrower’s other loans or debt instruments (excluding mortgages) in terms of priority and seniority both at the time of origination and throughout the life of the loan. If the borrower has any other secured loans at the time of origination, the MSPLF or MSELF loan must also be secured and meet certain collateral requirements. If the borrower does not have any secured loans at the time of origination, the MSPLF or MSELF loan may be unsecured but must not be contractually subordinated to any other of the borrower’s loans or debt instruments.
  • Eligibility to act as MSELF new lender for upsized tranche. While the eligible lender need not have originated the loan, it must have purchased the interest in the loan before December 31, 2019, to be eligible for the MSELF upsized tranche. In addition, an upsized tranche of a loan that was originated as part of a multi-lender facility is eligible for the MSELF, provided that the eligible lender is one of the lenders that holds an interest in the underlying loan at the time of upsizing.
  • Significant operations in the United States. The FAQs list non-exhaustive principles for evaluating if the borrower meets this eligibility criterion. A borrower would meet this standard if greater than 50% of the borrower’s (i) assets are located in the United States, (ii) annual net income is generated in the United States, (iii) annual net operating revenues are generated in the United States, or (iv) annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) are generated in the United States. The evaluation would assess the business’s operations on a consolidated basis together with its subsidiaries, but not its parent companies or sister affiliates; accordingly, the FAQs clarify that a U.S. subsidiary of a foreign parent company is eligible for the MSLP provided that loan proceeds are not used for the benefit of foreign affiliates.
  • Affiliated borrowers limited to one MSLP facility. The FAQs clarify that the limitation that a borrower cannot borrow from more than one MSLP facility, or from both the Primary Market Corporate Credit Facility (“PMCCF”) and a MSLP facility, extends to the borrower's affiliates. All affiliated borrowers must therefore participate in only one MSLP facility and, if a business has borrowed from the PMCCF, none of its affiliates can participate in the MSLP (and vice versa).
  • Total loan size for affiliated borrowers. The total loan size for an affiliated group’s total participation in a single MSLP facility cannot exceed the maximum loan size that the affiliated group is eligible to receive on a consolidated basis. The maximum loan size of an eligible borrower with affiliates therefore would be limited not only by its own leverage level, but also by the leverage level of the affiliated group on a consolidated basis and the size of any loan extended to other affiliates in the group. In effect, this limitation prevents any group of affiliated borrowers from receiving more than $25 million from the MSNLF or the MSPLF, or $200 million from the MSELF, in addition to the EBITDA-based limitations at the borrower and group levels.
  • Private equity funds. The FAQs expressly state that private equity funds are not eligible to receive MSLP loans, because the Federal Reserve has incorporated the SBA's Paycheck Protection Program (“PPP”) ineligibility regulations and guidance, which include speculative businesses, into the MSLP borrower eligibility criteria.[1]
  • Portfolio companies of private equity funds. The FAQs also note that portfolio companies of private equity firms may be eligible to participate in the MSLP, so long as the firms meet the generally-applicable MSLP eligibility criteria. However, the FAQs emphasize that the employee and revenue tests for determining the MSLP eligibility of any borrower, including such portfolio companies, must be calculated in the aggregate for the borrower and all of its affiliates (as determined under SBA affiliation rules).
  • Limitation on lender fees. Lenders are generally not permitted to charge the borrower any fee (e.g., servicing or other additional fees) other than the origination and transaction fees described in the term sheets. Lenders are permitted to charge only de minimis fees for services that are “customary and necessary in the lender’s underwriting of commercial and industrial loans to similar borrowers,” such as appraisal and legal fees.
  • EBITDA calculation methodology. The FAQs clarify that, if the lender has used a variety of methodologies for similarly situated borrowers (e.g., one for use within a credit agreement and one for internal risk management purposes), it should choose the most conservative method it has employed and select a single method used at a point in time in the recent past (and before April 24, 2020). The FAQs state that lenders may not “cherry pick” or apply adjustments used at different points in time or for a range of purposes. In addition, the FAQs define “similarly situated borrowers” as “similarly situated borrowers in similar industries with comparable risk and size characteristics.”When originating a MSNLF or MSPLF loan, lenders should document their process for selecting an adjusted EBITDA methodology and their rationale for identifying similarly situated borrowers.
  • Supervisory considerations. The FAQs address how the Federal Reserve will review lenders’ loans originated under the MSLP, including the calculation of EBITDA adjustments. While acknowledging the high degree of uncertainty in predicting the economic impact of COVID-19 generally and on individual borrowers, the FAQs state that (i) lenders should apply safe and sound credit risk management policies and practices throughout the life of MSLP loans, (ii) supervisors will approach MSLP loans in a manner consistent with their supervisory approach to other commercial and industrial loans and consistent with the Federal Reserve’s guidance on appropriate risk management practices under extraordinary circumstances as outlined in SR 17-14, Interagency Supervisory Examiner Guidance for Institutions Affected by a Major Disaster, and (iii) lenders should “evaluate and satisfy themselves with respect to a borrower’s ability to repay MSLP loans,” both with respect to the borrower’s credit history and financial performance prior to the crisis and its post-pandemic business prospects.
    • The FAQs separately state that lenders should factor into capital planning and stress testing, if applicable, only the portion of the MSLP loan that the lender has retained.
  • Debt and interest payments that are “mandatory and due.”  The FAQs clarify which borrower debt and interest payments would qualify as "mandatory and due" for purposes of the MSLP restrictions on repaying debt. In summary, payments on principal or interest may be made on the date that they are scheduled to be paid or on the occurrence of an event that automatically triggers mandatory prepayments; payments generally may not be made ahead of schedule. In addition, prepayments triggered by the incurrence of new debt (i.e., the MSLP loan) may only be made if such payments are de minimis or, in the unique case of the MSPLF (which alone permits the proceeds of an MSLP loan to be used to refinance existing loans owed to other lenders in limited cases), if such payments are made at the time that the MSPLF loan is originated.
  • Loan funding. Lenders may elect to fund loans to eligible borrowers and then sell the participation to the SPV, or lenders may extend a loan but make funding of the loan contingent on the SPV’s commitment to purchase the participation in the loan.

New Loan Documentation and Instructions

In addition to these FAQ updates, the FRBB also posted a number of loan documents and an instructional guide providing completion instructions (e.g., required signatories) for each loan document. The full set of documents is available here; each individual document is described and linked below.

Highlights for lenders. Of the documents released, a lender must execute the LPA, which includes transaction-specific terms, the Servicing Agreement, the Assignment-in-Blank, and, if the loan agreement with the borrower lacks customary syndicated loan facility provisions, the Co-Lender Agreement (the “CLA”). A lender also must make certifications and agree to certain covenants, which are specific to the particular lending facilities. While the obligations of a lender appear to be similar to those in a standard loan syndication, three elements of the documents are noteworthy.

  • First, although the FRBB has not (and will not) provide standard documents for the loan between the lender and the borrower, the lender must provide certain certifications to the relevant MSLP facility that require specific provisions to be included in the loan agreement that cover mandatory and optional prepayment, cross-default and cross-acceleration, and financial reporting, as discussed above.
  • Second, as the servicer of a loan, the lender is required periodically to obtain a substantial amount of information from a borrower for the SPV. Although financial reporting requirements are common in commercial lending arrangements, the scope of the SPV’s interest is wide-ranging.
  • Third, the SPV and the lender generally have very limited rights to transfer their interests in a loan, but the SPV may sell, assign, or transfer all or part of its participation or may cause an ownership interest in the loan to be transferred to the SPV or a third party through an elevation and assignment if the borrower’s ability to repay comes into question, if either the lender or the borrower enters receivership or any kind of insolvency proceeding, or in certain other circumstances.

Highlights for borrowers. Borrowers must execute one or two documents depending on the structure of the borrower. All borrowers must sign the Assignment-in-Blank. If the borrower is a holding company and all or substantially all of its assets consist of equity interests in other entities, the borrower must certify that “Selected Subsidiaries” guarantee the loan on a joint and several basis. Additionally, as a consequence of the lender’s servicing obligations, the borrower will need to provide to the lender on a periodic basis extensive information about its financial condition.

A summary of the specific documents is as follows:

  • Lender Registration Certifications and Covenants. A lender will use this form to register with the SPV. This form includes the certifications and covenants that relate to the statutory and regulatory limitations on the MSLP, including section 13(3) of the Federal Reserve Act, the CARES Act, and Regulation A. The form also includes a lender covenant to abide by the term sheet for the relevant facility.
  • Lender Wire Instructions. This form contains the wire instructions for the transmission of funds between the SPV and the lender.
  • Loan Participation Agreement – Transaction Specific Terms. The LPA itself serves largely to identify the particular loan participation being transferred and related administrative matters such as wiring instructions and notices. The substance of the loan participation is in a separate document, the Standard Terms and Conditions, which is incorporated by reference in the LPA.

    The LPA, through its standard terms and conditions, limits the ability of both the SPV or the lender to transfer its interests. In certain circumstances, the SPV may wish to transfer all or part of its participation in a loan (known as a “pre-elevation transfer”) or to have an ownership interest in the loan assigned to itself or a third party (known as an “elevation”). These transactions are at the SPV’s option – but only in the context of certain circumstances, which relate primarily to the borrower’s ability (or inability) to repay according to the original terms of the loan agreement. The SPV also may undertake one of these transactions if either the borrower or the lender enters bankruptcy, receivership, or similar proceedings. The details of these transactions, known collectively as “specified permitted transfers,” are set forth in the standard terms and conditions of the LPA.
  • Certification and Covenants:  While there are separate sets of certifications and covenants for the three different facilities – linked here to each set for the borrower (MSNLF, MSELF, MSPLF) and lender (MSNLF, MSELF, MSPLF) – these sets have common elements and, where they differ, generally reflect underlying differences in the term sheets for those facilities. The certifications must be made by an authorized officer of the lender and are made to the SPV, the FRBB, the Federal Reserve Board, and the Secretary of the Treasury. A lender must certify to the receipt of certifications and covenants from the borrower (but not to the accuracy) of various terms of the loan, collateral, the loan’s place in the borrower’s debt structure, compliance with sizing requirements (as well as other provisions in the term sheets), and the terms of the participation with the SPV. Importantly, the lender must certify to the EBITDA methodology that it used and to the presence of specific provisions in the loan agreement that cover mandatory and optional prepayment, cross-default and cross-acceleration, and financial reporting. Additionally, the MSELF covenants must cover liens and negative pledges, and the form for these covenants is provided in Appendix B to the FAQs.
  • Servicing Agreement. The term sheet provides for a servicing fee, and this agreement memorializes the annual servicing fee of 25 basis points that the SPV will pay to the lender. In consideration, the lender agrees to provide “enhanced reporting services,” which involve delivery of detailed information about the borrower on an annual or quarterly basis (depending on the specific information required). The lender is not liable for the accuracy and completeness of the information (other than as a result of gross negligence, fraud, willful misconduct, or a material breach of a duty or obligation under the agreement). However, the lender must arrange for the collection of the information – which may well include information that the lender would not otherwise require in connection with the administration of the loan. The lender is not permitted to transfer or assign its servicing rights.
  • Assignment-In-Blank. The Assignment-in-Blank is an advance consent by the lender and the borrower (as well as the administrative agent if applicable) to a specified permitted transfer. In some cases, timing may well be of the essence for the SPV to make a transfer.
  • Co-Lender Agreement – Transaction Specific Terms. In the event that the SPV will be the only entity purchasing a syndication in the underlying loan – i.e., that loan agreement lacks customary syndicated loan facility provisions – the lender must enter into the CLA with the SPV, which covers such provisions. Mirroring the general structure of the LPA, the CLA itself is a form document that identifies a particular sale transaction and incorporates Standard Terms and Conditions, which contain provisions comparable to those in a syndicated loan facility addressing administration of the loan and its participations.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Financial Services practice below.


[1]           An SBA PPP rule specifically clarified that hedge funds and private equity firms are not eligible for the PPP.  See 85 Fed. Reg. 23450 at 23451 (Apr. 28, 2020). 

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