The Federal Reserve Bank has issued new orientation for the Main Street Loan Program (the Program) on May 27, 2020. In addition to an expanded set of Frequently Asked Questions (FAQs), the Federal Reserve has released forms and documents for use in connection with issued loans as part of the program with detailed instructions on their use. The new guidelines do not include the date the program will start.
The publication of many of the forms needed by the program is a welcome contrast to how the Paycheck Protection Program (P3) has been rolled out by the Treasury Department. The PPP was largely characterized by a lack of clear instructions as to the documentation of the loan and a lot of confusion over many details of the program, which were partly resolved by the continuous updating of the FAQs during the PPP. In contrast, the Main Street Loan Program guidelines include comprehensive forms of documents that are specific to the program, including forms that lenders must use to enroll in the program, participation agreement forms and ‘service agreement and related documents, and certification and commitment forms that must be provided by lenders and borrowers for each loan. Each lender is allowed to use their own form of loan agreement, but the new guideline specifies certain terms that must be included and also provides examples of provisions that can be changed 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 termsheets released by the Federal Reserve on April 30, there is new information worth noting.
Affiliated groups. The FAQs provide new guidelines for Affiliate Groups. First, there is clarification as to what it means for a borrower to have “significant US transactions”. To be eligible for a loan under the Program, a borrower must have significant operations in the United States, which may 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 FAQ states that a borrower can consolidate their subsidiaries, but not their parent or sister subsidiaries, to determine whether they pass this test.
The FAQ also sets out some limitations that impact Affiliates. The Main Street loan program has three facilities: the “new” facility, the “priority” facility and the “extended” facility. Each facility has different conditions and eligibility criteria. An Affiliated Business Group may only participate in one Main Street Facility, and the entire Group may only participate in one Main Street Facility or the Primary Market Business Credit Facility, which is another loan program authorized under the CARES Act. An affiliate group may have different loans under the same type of facility, but the total participation of all borrowers cannot exceed the maximum loan amount that the affiliate group as a whole is eligible to receive on a consolidated basis. .
Subsidiaries of foreign companies. The U.S. subsidiaries of a foreign company may be eligible borrowers under the Main Street facilities, but the loan proceeds may only be used for the benefit of the U.S. borrower, its consolidated U.S. subsidiaries, and others. Affiliates of the borrower that are US companies.
Private equity fund. FAQs contain unfavorable news for private equity funds and their portfolio companies. First, the private equity funds themselves will not be eligible for loans under the program. Based on the Small Business Administration (SBA) regulations regarding PPP loans, private equity funds are deemed to be primarily engaged in investing or speculating. This made them ineligible for PPP loans, and also made them ineligible for loans under the program. At the same time, the ASB membership rules will apply to companies in the portfolio of private equity funds. Therefore, if sufficient control exists, a holding company will need to aggregate the number of employees and the 2019 annual income of the holding company itself with those of the other holding companies of the private equity fund in order to determine whether it meets the Program’s annual employment and income limits (maximum of 15,000 employees and $ 5 billion in income). This can make it difficult for holding companies to stay within these limits. Since affiliate group members can only participate in one type of Main Street facility, although the limitations may be met on an aggregate basis, it may be difficult to determine which type of facility will be the most suitable. better to use, as it is likely that not all companies will qualify for the same type of facility and the private equity fund may not have sufficient control over each of the companies in its portfolio to dictate a uniform approach to choose a facility.
Unavailability of other credits. The borrower’s FAQs and certifications added a new certification requirement that was not previously disclosed. The Main Street Lending Program was established under regulations governing the Federal Reserve which allow the Federal Reserve, in an emergency, to extend loans to entities that are not deposit-taking institutions. One of the regulatory requirements is that participants in such a program should not be able to obtain adequate credit housing from other banking institutions. Consequently, a certificate to this effect has been included in the borrower’s certificates. The Federal Reserve has provided some leeway on this in the FAQs, which states that in order to perform the certification it is not necessary to show that no credit is available from other sources. Instead, certification can be made if the amount, price, or credit terms available from other sources are inadequate for the borrower’s needs in the current unusual and urgent circumstances. Borrowers are not required to prove that they have been denied credit by other lenders or to document that the amount, price or credit terms available elsewhere are inadequate. While this provision is not very specific, we believe it signals that the Federal Reserve does not intend to take a hard line on this certification. Yet, as we have seen with PPP, political pressure can lead to changes in the way certifications relating to the need for these types of emergency loans are perceived. It would be prudent for a borrower under the Program to understand what type of credit might be available to them and the terms on which they might be able to borrow in the current market. At a minimum, it may be helpful to contact your regular lenders to try to obtain indicative terms and keep a detailed summary of these conversations for your records. In addition, borrowers should ensure that the minutes and discussions of their governing body that authorize the entity to enter the Program clearly document the insufficiency of other sources of credit.
Advice to lenders. The new forms and accompanying instructions will be very helpful to lenders as they prepare to enroll in the program and begin making loans. In addition, the FAQs contain useful information on a number of topics, including the accounting and regulatory treatment of loans and the “know your customer” requirements for existing customers. Appendices to FAQs that detail specific covenants, events of default and financial reports that will be required for Program loans are a useful guide for lenders when preparing their loan documentation.
The Federal Reserve’s new guidelines demonstrate a measured and thoughtful approach to implementing the Main Street loan program. While some commentators have noted that the Federal Reserve’s cautious approach makes the program unlikely to be of much help to small businesses, we believe the professionalism demonstrated by the Federal Reserve’s actions to date may facilitate securing financing in an orderly fashion for mid-size and lower-mid-size companies facing financial difficulties as a result of the pandemic.