On May 27, 2020, the Federal Reserve Bank of Boston released additional guidance in the form of revised Frequently Asked Questions (“FAQs”), along with forms and agreements, on the Main Street Lending Program (available here). The Federal Reserve Bank of Boston will administer the program, which is designed to support small and medium-sized businesses by providing credit during the COVID-19 pandemic. The Main Street Lending Program includes the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility.
The newly released guidance and program materials address many important issues for participants in the Main Street Lending Program, including borrower eligibility, loan terms and conditions, and certifications and covenants that borrowers and lenders must sign. The Federal Reserve (“Fed”) is working to operationalize the program, and funds are not available yet. With the detailed guidance and documentation available, potential borrowers should assess their eligibility, consider the program requirements and certifications, and start working with their banks to prepare their applications.
- Borrowers must be U.S. businesses – created or organized in the United States or under the laws of the United States, with significant operations and a majority of employees based in the United States. An eligible borrower may be a subsidiary of a foreign company, so long as it meets these criteria. A Main Street loan may not be used for the benefit of a borrower’s foreign parents, affiliates or subsidiaries.
- Private equity funds are not eligible for the Main Street Lending Program because their engagement in “investment or speculation” makes them “ineligible businesses” under SBA rules. A portfolio company may be eligible if it satisfies the affiliation test (based on SBA rules).
- To be eligible for the Main Street Lending Program, a borrower must have fewer than 15,000 employees or 2019 annual revenues under $5 billion. Under the applicable affiliation rules, a business must combine its number of employees and its 2019 annual revenues with those of any affiliated entities to determine eligibility. The FAQs provide illustrative examples to help potential borrowers apply the affiliation rules.
- An affiliated group of companies can participate in only one of the three Main Street lending facilities. The affiliated group’s total participation in a single facility cannot exceed the maximum loan size that the affiliated group is eligible to receive on a consolidated basis.
- There is no separate, unique application for the Main Street Lending Program. Lenders are instructed to use their own loan documentation, adjusted as necessary to reflect the specific requirements of the program. Similarly, lenders are not required to use the model covenants provided in the guidance. They are permitted to use variations that serve the same substantive purpose and are substantially similar to covenants that the lenders use in ordinary course lending to similarly situated borrowers.
- Borrowers cannot participate in both the Main Street Lending Program and the previously established Primary Market Corporate Credit Facility. Borrowers also must not have received support through the loan programs for air carriers and certain national security businesses. A borrower under the Paycheck Protection Program can also receive a loan under the Main Street Lending Program, provided it meets the Main Street eligibility requirements.
- An appendix to the new FAQs provides a table showing the required components under each of the three Main Street lending facilities.
The guidance provides further details explaining, among other things, the required ranking of Main Street loans, methods of determining EBITDA for Main Street loan eligibility, and covenants and certifications to be included in Main Street loans.
All three of the Main Street facilities require borrowers to certify that they are “unable to secure adequate credit accommodations from other banking institutions.” This test is drawn from existing Fed regulations requiring lending banks to “obtain evidence” that borrowers are unable to secure adequate credit from other lenders. Under the Fed regulations, such evidence can be based on the specific economic conditions to be addressed by the program, a written certification from an authorized officer of the borrower, or other evidence from program participants or other sources.
The Main Street guidance explains that the certification test “does not mean that no credit from other sources is available to the borrower.” The borrower is not required to document that its applications for credit have been denied by other lenders or that the terms of available credit are inadequate. Rather, consistent with the Fed regulations, the borrower can certify that the amount, price, or terms of credit available from other sources are inadequate for borrower’s needs during the current unusual and exigent circumstances. The new guidance on the Main Street Lending Program also explains, however, that if the Fed determines that a borrower has made a material misstatement in its certifications, it will notify the lender to trigger a mandatory prepayment requirement. Borrowers should therefore maintain such documentation in anticipation of future audits or other challenges to the veracity of their certifications, including cases brought under the False Claims Act.