Although the basic terms of the Main Street Loan Program (MSLP) to promote credit availability for small and mid-sized businesses have been public since late April, on May 27 the Federal Reserve (Fed) released an assortment of new documents (including updated FAQs) adding new details on the MSLP. The Fed’s document drop includes form certifications and updated FAQs that provide borrowers concrete tools to begin finalizing their assessments of eligibility and qualifying loan amounts.
The Main Street Program has been under construction since late March and will offer three lending facility products – the Main Street New Loan Facility (MSNLF), Main Street Priority Loan Facility (MSPLF) and the Main Street Expanded Loan Facility (MSELF). A brief comparison of the terms of each product is below.
The document release by the Fed brings us closer to the launch of the MSLP (promised by Fed Chairman Powell...any day now). Here are the key points in the new forms and FAQs:
Borrowers will have to certify and deliver forms containing each product’s terms and conditions to lenders as part of the loan documentation. Each form walks borrowers through the eligibility determination and maximum loan sizing calculations, in addition to the CARES Act certifications and covenants (discussed in further detail below). Much of the basic eligibility information, including the employee cap (15,000 or fewer) and revenue caps ($5 billion or less), remains consistent with prior disclosures, but the updated FAQs include provisions relating to the CARES Act requirements, EBITDA calculations and U.S. subsidiaries of foreign companies.
U.S. subsidiaries of foreign companies must meet the threshold eligibility requirements of under $5 billion in 2019 revenue or fewer than 15,000 employees based on an application of the affiliation rules in 13 CFR 121.301(f).2 However, welcome modifications to these rules provide new interpretations of two additional requirements favorable to U.S. subsidiaries of foreign multinationals.
First, borrowers are required to have “significant operations” in the U.S. newly-issued FAQ #E.8 provides a new interpretation of this term. A borrower meets this standard if, together with its subsidiaries (not parents or sister affiliates) it meets any one of the following metrics: Greater than 50 percent of its (i) assets are located in the U.S., (ii) annual income is generated in the U.S., (iii) annual net operating revenues are generated in the U.S., or (iv) annual consolidated operating expenses (excluding debt service) are generated in the U.S. This list is not exhaustive, and borrowers are allowed to apply these general principals when evaluating whether their operations meet the “significant operations” test.
Second, while employee counts are determined in accordance with SBA rules under 13 CFR 121.106 and borrowers are required to have a majority of employees in the U.S., the terms and conditions provide that borrowers may determine compliance with the majority of employees provision by looking at the borrower and its subsidiaries only — again excluding parents and sister affiliates. This should allow more U.S. subsidiaries of foreign multinationals to qualify as eligible borrowers.3
U.S. borrowers with foreign parents should also note new FAQ #E.9, which clarifies that loan proceeds are required to be used only for the benefit of the U.S.-eligible borrower.
FAQ #A.8 provides important clarity regarding which of the CARES Act “taxpayer protections” found in Section 4003(c) are required of eligible MSLP borrowers. In general, MSLP borrowers are required to:
Equally important are the CARES Act requirements that did not make it into the final borrower certifications. Taxpayer protection requirements in the final certifications have been watered down or effectively eliminated from the CARES Act text.4 Notably excluded are those in CARES Act Section 4003(c)(3)(D)(i) related to a borrower’s relationship with organized labor, including the prohibition on the abrogation of CBAs, and a commitment to neutrality in union organizing efforts. Also, the prescriptive requirements requiring borrowers to maintain 90 percent of employees have been replaced with the “commercially reasonable efforts to maintain payroll,” and the prohibition on “outsourcing or off-shoring” jobs has been dropped. Borrowers should review the applicable transaction-specific terms and conditions as well as FAQ #A.8 for further information on the required certifications and covenants.
Given that the maximum loan calculations are all tied to multiples of a borrower’s 2019 adjusted EBITDA (4x for MSNLF, and 6x for MSPLF and MSELF), the particular definition of the adjusted EBITDA metric that is applicable has been the subject of wide speculation. The FAQs provide some additional insight into the EBITDA calculation including:
On May 29, in an informational webinar for borrowers, the Federal Reserve Bank of Boston noted that while PPP borrowers are eligible for participation in the MSLP (see FAQ #E.7), PPP borrowers must include the full amount of their PPP loans in their calculation of existing and undrawn debt. Thus, PPP borrowers seeking to maximize their MSLP qualifying amounts may wish to seek PPP forgiveness before applying for an MSLP loan to avoid a reduction in eligible loan amounts.
The updated FAQs also added a number of useful appendices that provide a detailed look at the nuts and bolts of the facilities and what borrowers will see in loan documentation for the MSLP products. Appendix A provides a Loan Documentation Checklist, Appendix B provides Model Covenants and Appendix C provides Borrower Required Financial Information.
Borrowers interested in the MSLP program should review these appendices, particularly the Borrower Required Financial Information, which details the periodic reporting requirements that are the price of admission. Smaller borrowers are likely to find that some of them would require the tracking and calculation of metrics that they are not currently collecting or reporting on a quarterly basis. Borrowers will also want to review the specific Borrower Certificates and Covenants for each of the types of loans within the MSLP to verify that it can meet those standards for the type of loan sought. See FAQ #H.1 for links to the separate certifications for each of the MSNLF, MSPLF and MSELF.
The updated FAQs (#C.6) outlines the “MSPLF Priority and Security Requirement,” which prohibits contractual subordination of MSPLF loans to any other loans or debt instruments other than mortgage debt. It further outlines collateral coverage ratio requirements that may prove problematic for some borrowers as it requires either a) a 200 percent coverage ratio, or b) a coverage ratio equal to the aggregate collateral coverage ratio for all of the borrower’s other secured loans or debt instruments (other than mortgage debt).
So far, the SBA’s PPP has gotten most of the emergency economic relief attention, but when the MSLP finally launches, it could provide meaningful options for many small and mid-size businesses, including those frustrated or discouraged by the requirements of the PPP. We anticipate there will be more guidance from the Fed on MSLPs as we get closer to the date when applications are accepted.
1 Source: Materials provided by Federal Reserve Bank of Boston Webinar for Borrowers May 29.
2 The Federal Reserve has not adopted the revised affiliation rules applicable to PPP borrowers, discussed here.
3 This requirement achieves similar objectives to the PPP limitation on the calculation of payroll costs as inclusive of U.S. costs only, as described here.
4 The CARES Act contains taxpayer protections for direct loan programs in Section 4003(c)(3)(A)(ii), and requirements for the mid-sized business program in Section 4003(c)(3)(D)(i). However, it also contains broad language allowing the Secretary to interpret its mandate in Section 4003(c)(1)(A). We assume that the Secretary has interpreted these requirements to be undesirable or likely to create a barrier to widespread adoption of the program.
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