By Lindsey Berwick & John Wittenberg

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides emergency economic stimulus to small businesses and certain eligible recipients in response to the economic distress caused by the COVID-19 pandemic. The Coronavirus Economic Stabilization Act of 2020 (CESA) [Title IV, Subtitle A of the CARES Act] authorizes the U.S. Treasury Secretary to, among other things, establish and administer a program of loans, loan guarantees, and other investments to provide liquidity to eligible businesses related to losses incurred as a result of coronavirus.

On April 9, 2020, pursuant to CESA and Section 13(3) of the Federal Reserve Act (12 U.S.C. § 343(3)), together with the Treasury Secretary under the authority of Section 4003(b)(4) of the CARES Act, the Board of Governors of the Federal Reserve System (the “Board”) and the U.S. Treasury Department (the “Treasury”) established the Main Street Business Lending Program (the “Program”) that provides for up to $600 billion of new or expanded credit facilities to small and medium-sized businesses and nonprofit organizations that were in “sound financial condition” before the onset of the COVID-19 pandemic and issued original term sheets for each facility under the Program.

This update summarizes the terms of the Program as it stands today, describes the main terms and requirements under the Program, and outlines certain matters to be analyzed and considered with respect thereto. Please note this article replaces and supersedes our April 13, 2020, and June 18, 2020, articles on the Program.

Overview of the Program

Loan Facilities

The Program now offers five different loan facilities (individually, a “Facility,” and collectively, the “Facilities”):

1. Main Street New Loan Facility (MSNLF) [See MSNLF Term Sheet published July 28, 2020]
2. Main Street Priority Loan Facility (MSPLF) [See MSPLF Term Sheet published July 28, 2020]
3. Main Street Expanded Loan Facility (MSELF) [See MSELF Term Sheet published July 28, 2020]
4. **Nonprofit Organization New Loan Facility (NONLF) [See NONLF Term Sheet published July 28, 2020]
5. **Nonprofit Organization Expanded Loan Facility (NOELF) [See NOELF Term Sheet published July 28, 2020]

**On Friday, July 17, 2020, the Board authorized the establishment of the NONLF and the NOELF to provide greater access to credit for nonprofit organizations such as educational institutions, hospitals, and social service organizations; however, the Program is not yet accepting submission of NONLF or NOELF Loans for purchase of a participation interest.

Under each of the Facilities, the Federal Reserve Bank of Boston (FRB Boston) will lend to a special purpose vehicle (SPV), and the SPV will provide funding for each of the Facilities. The Treasury, using funds appropriated under Section 4027 of the CARES Act, will make an initial equity investment of $75 billion in the SPV, and the SPV will be able to purchase up to a total of $600 billion of participations from Eligible Lenders in Eligible Loans under the Facilities.

Program Basics

• Purpose: The purpose of the Program and the Facilities is to facilitate lending to small and medium-sized U.S. businesses and nonprofit organizations by Eligible Lenders to mitigate the adverse economic effects of the COVID-19 pandemic. It is intended to help companies and nonprofit organizations that were financially sound before the pandemic maintain their operations and payroll until conditions normalize. Loan proceeds from any of the Facilities may not be used to benefit foreign parents, affiliates, or subsidiaries, or to refinance or accelerate payment of existing debt, except (i) at the time of origination of a loan under the MSPLF if the debt was owed to a different, unaffiliated lender, or (ii) under the limited exception for mandatory and due debt and interest payments after the origination of the subject Program loan.
• Eligible Lenders: Institutions eligible to lend under the Program include:
  • • U.S. federally insured depository institutions, including banks, savings associations, and credit unions;
    • U.S. branches or agencies of foreign banks;
    • U.S. bank holding companies;
    • U.S. savings and loan holding companies;
    • U.S. intermediate holding companies of foreign banking organizations; and
    • U.S. subsidiaries of any of the foregoing.
• Eligible Borrowers: To be an “Eligible Borrower” under the Program, the for-profit business or nonprofit organization must satisfy each of the respective requirements:
  • For-Profit Businesses:^[1]
    • Established before March 13, 2020;
    • Not eligible under 13 CFR 120.110(b)-(j) and (m)-(s),^[2] as modified by regulations implementing the Paycheck Protection Program (PPP);
    • With either (1) 15,000 employees or fewer or (2) 2019 annual revenues of up to $5 billion (additional information for determining compliance with these numbers is available in the For-Profit FAQs);
    • Created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States;
    • That have not also participated in, and will commit that it will not seek to participate simultaneously in, another Facility under the Program or the Primary Market Corporate Credit Facility (a facility established by the Federal Reserve under section 13(3) of the Federal Reserve Act (FRA), using equity committed by the Treasury Secretary, to support bond and loan issuances (PMCCF));^[3]
    • That have not received support from a program established by the Treasury under Subtitle A of Title IV of the CARES Act; and
  • Nonprofits:^[4]
    • In continuous operation since January 1, 2015 (i.e., was established on or before January 1, 2015 and has been engaged in activities in furtherance of its tax-exempt purpose since then);
    • Not eligible under 13 CFR 120.110(b)-(j) and (m)-(s),^[2] as modified by regulations implementing the Paycheck Protection Program (PPP);
    • With either (1) 15,000 employees or fewer or (2) 2019 annual revenues of up to $5 billion (additional information for determining compliance with these numbers is available in the Nonprofit FAQs);
    • With at least 10 employees (at the time of origination of the Facility and with its affiliated entities);
    • With an endowment of less than $3 billion (as of the date of origination);
    • With total “non-donation revenues” (gross revenues minus donations^[5]) equal to or greater than 60% of expenses for the period from 2017 through 2019;
    • Satisfying each of the following ratios:
      • a ratio of (i) adjusted 2019 EBIDA to (ii) unrestricted 2019 operating revenue, greater than or equal to 2%;
      • a ratio, expressed as a number of days, of (i) liquid assets at the time of origination to (ii) average daily expenses over the previous year, equal to or greater than 60 days;
    • Organized under the laws of the United States;
    • That have not also participated in, and will commit that it will not seek to participate simultaneously in, another Facility under the Program or the PMCCF;
    • That have not received support from a program established by the Treasury under Subtitle A of Title IV of the CARES Act; and
    • That are able to make all the applicable certifications and covenants required under the Program. [See NONLF Certifications & Covenants and NOELF Certifications & Covenants]
  • Affiliation: To determine the number of employees or 2019 revenues, the employees and revenues of the business or nonprofit organization must be aggregated with the employees and revenues of its affiliated entities in accordance with the affiliation test set forth in 13 CFR 121.301(f).
  • Multiple Facilities: Businesses that have received loans under the Small Business Administration’s Paycheck Protection Program (PPP) or Economic Injury Disaster Loan (EIDL) program, are permitted to borrow under the Program if they are otherwise Eligible Borrowers. An Eligible Borrower may only participate in one of the Facilities; however, an Eligible Borrower may receive more than one loan under a single Facility type, provided that: the sum of MSNLF loans cannot exceed $35 million; the sum of MSPLF loans cannot exceed $50 million; the sum of MSELF upsized tranches cannot exceed $300 million; the sum of the NONLF loans cannot exceed $35 million; and the sum of the NOELF upsized tranches cannot exceed $300 million.
• Timing: Unless the Federal Reserve and Treasury extend the Program, the SPV will cease purchasing participations in Program loans on December 31, 2020. However, FRB Boston will continue to operate the SPV after such date until the loan participations held by the SPV mature or are sold.

Loan Terms

The following table identifies the key terms and features of the Facilities:

Required Certifications and Covenants

To participate in the Program, both Lenders and Borrowers must make certain certifications and covenants which vary by Facility and are available below.

• Lender Certifications and Covenants (Facility Specific)
  • MSNLF Lender Certifications and Covenants
  • MSPLF Lender Certifications and Covenants
  • MSELF Lender Certifications and Covenants
  • NONLF Lender Certifications and Covenants
  • NOELF Lender Certifications and Covenants
• Borrower Certifications and Covenants (Facility Specific)
  • MSNLF Borrower Certifications and Covenants
  • MSPLF Borrower Certifications and Covenants
  • MSELF Borrower Certifications and Covenants
  • NONLF Borrower Certifications and Covenants
  • NOELF Borrower Certifications and Covenants
• Notable Certifications and Covenants. Interested borrowers and lenders should consult the FRB Boston’s MSLP website for the most up-to-date information concerning the Borrower and Lender Certifications and Covenants. The following are some (but not all) of the notable certifications and covenants required under the Program.
  • Restrictions on the Eligible Borrower’s Ability to Repay Existing Debt
    • The Eligible Borrower may not repay the principal balance of, or pay any interest on, any debt until the Facility is repaid in full unless the debt or interest payment is mandatory and due.^[9]
      • Payment of interest or principal on outstanding debt on (or after) the payment due date is permissible, provided that the payment due date was scheduled prior to the date of origination of the Facility. Payment of interest or principal on such debt ahead of schedule during the life of the Facility is not permissible, unless required by a mandatory prepayment clause as specifically permitted under the Program.
      • For future debt incurred by the Eligible Borrower in compliance with the terms and conditions of the Facility, principal and interest payments are “mandatory and due” on their scheduled dates or upon the occurrence of an event that automatically triggers mandatory prepayments.
      • If an Eligible Borrower has an existing debt arrangement that requires prepayment of more than a de minimis amount upon the incurrence of new debt, the Eligible Borrower cannot receive an MSNLF Loan, an MSELF upsized tranche, an NONLF or an NOELF upsized tranche unless such requirement is waived or reduced to a de minimis amount by the relevant creditor.
    • Under the MSPLF only, the Eligible Borrower may refinance the Eligible Borrower’s existing debt to a lender that is not the Eligible Lender or one of its affiliates.
    • The Eligible Borrower may not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender; however, this does not prohibit (i) the reduction or termination of uncommitted lines of credit, (ii) the expiration of existing lines of credit in accordance with their terms, or (iii) the reduction of availability under existing lines of credit in accordance with their terms due to changes in borrowing bases or reserves in asset-based or similar structures.
    • The following are permissible:  (i) repayment of a line of credit (including a credit card) in accordance with the Eligible Borrower’s normal course of business usage for such line of credit (this includes partial repayment of an Eligible Borrower’s existing line of credit with the Eligible Lender); (ii) taking on and paying additional debt obligations required in the normal course of business and on standard terms, including inventory and equipment financing, provided that such debt is secured only by the newly acquired property (e.g., inventory or equipment), and, apart from such security, is of equal or lower priority than the applicable Facility; and (iii) refinancing debt that is maturing no later than 90 days from the date of such refinancing (Eligible Lenders and Eligible Borrowers are expected to act in good faith with respect to this requirement and in light of the goals of the Program).
  • Restrictions on Compensation, Stock Repurchase, and Capital Distributions
    • The Eligible Borrower must comply with the compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act.
      • Restrictions on compensation affect certain employees and officers with total compensation over $425,000.
      • Certain restrictions on repurchases of equity securities apply to Borrowers that have, or have a parent company that has, equity securities that are listed on a national securities exchange.
      • Until 12 months after the date on which the Eligible Loan is no longer outstanding, the Eligible Borrower must agree not to pay dividends or make other capital distributions (including discretionary dividend payments) with respect to the common stock equivalents (including common stock in a corporation and equivalent interests in a partnership, limited liability company, a business organized as a trust or other legal entity) of the Eligible Borrower, except as provided below.
        • Preferred stock or any other equity interest in a Borrower that provides for mandatory or preferential payment of dividends or other distributions shall be subject to these restrictions unless both the equity interest and the obligation to pay dividends or distributions existed as of March 27, 2020.
        • Dividends and other capital distributions do not include repurchases or redemptions.
        • A Borrower that is an S corporation or other tax pass-through entity may make distributions in respect of its common stock equivalents to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings. Such distributions shall be subject to an annual reconciliation, with any surplus or deficiency to be deducted from or added to distributions, as applicable, in the following year.
  • Unavailability of Credit Elsewhere. The Eligible Borrower must certify that it is unable to secure adequate credit accommodations from other banking institutions or that the amount, price, or terms of credit available from other sources are inadequate for the Eligible Borrower’s needs during the current unusual and exigent circumstances.
  • Insolvency.  The Eligible Borrower must certify that, as of the origination (or upsize) date of the Facility, it reasonably believes that, after giving effect to the Eligible Loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that period.
• Verification of Certifications and Covenants.  As noted in the FAQs, Eligible Lenders are required to collect the required certifications and covenants from each Eligible Borrower at the time of origination or upsizing. Eligible Lenders may rely on an Eligible Borrower’s certifications and covenants, as well as any subsequent self-reporting by the Eligible Borrower. Eligible Lenders are not expected to independently verify the Eligible Borrower’s certifications or actively monitor ongoing compliance with covenants required for Eligible Borrowers under the Main Street term sheets. If an Eligible Lender becomes aware that an Eligible Borrower made a material misstatement or otherwise breached a covenant during the term of an MSNLF Loan, MSPLF Loan, MSELF upsized tranche, NONLF Loan, or NOELF upsized tranche, the Eligible Lender should notify the FRB Boston. If the Board determines that the borrower made a material misstatement in certifications, or materially breached covenants, relating to CARES Act, the FRA, or the Board’s Regulation A, the Board will notify the Eligible Lender to trigger a mandatory prepayment of the Facility along with any accrued and unpaid interest thereon.

Additional Considerations

• Loan Classification: All Eligible Borrowers must have been in “sound financial condition” prior to the onset of the COVID-19 pandemic.  If the Eligible Borrower had other loans outstanding with the Eligible Lender on December 31, 2019, these loans must have had an internal risk rating on that date equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date. If an existing loan was originated or purchased by an Eligible Lender after December 31, 2019, the Eligible Lender should use the internal risk rating given to that loan at origination or purchase, as applicable, to determine if the loan satisfied has an internal risk rating equivalent to a “pass” as of such date for purposes of upsizing.
• Assessment of Borrower’s Financial Condition; Underwriting: Eligible Lenders must assess the borrower’s financial condition at the time the borrower submits an application. Pursuant to the FAQs, Eligible Lenders should apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower. An Eligible Lender may require additional information and documentation in making this evaluation and will ultimately determine whether an Eligible Borrower is approved for a Program loan in light of these considerations. Businesses that otherwise meet the Eligible Borrower requirements may not be approved for a loan or may not receive the maximum allowable amount.
• Guarantees:  Personal guarantees are not required under Program terms. However, an Eligible Lender may require a guarantee as part of its own underwriting process. As with collateral providing security for a Program loan, guarantees must extend to the entire loan such that the SPV and Eligible Lender share losses on a pari passu basis.
• Insolvency: The Program may not involve the extension of credit to a business that is insolvent or to a business that is borrowing for the purpose of on-lending the proceeds to a business that is insolvent (pursuant to Federal Reserve Act Section 13(3) and related regulations under 12 CFR 201.4(d)(5)). Under the applicable regulations, a business is “insolvent” if it is subject to a bankruptcy proceeding or other similar insolvency proceeding or is generally not paying undisputed debts as they come due during the 90-day period preceding participation in the Program. As noted above, the Borrower Certifications include a certification by the Eligible Borrower to satisfy this requirement.
• SPV Purchase of Loan Participations: The SPV will purchase at par value a 95% participation in the Eligible Loan (or, in the case of the MSELF and the NOELF, 95% in the upsized tranche of the Eligible Loan) on the following terms:
  • The Eligible Lender must retain 5% of the Eligible Loan (or, in the case of the MSELF and NOELF, 5% of the upsized tranche) until the earlier of loan maturity (or, in the case of the MSELF and NOELF, maturity of the upsized tranche) or the SPV’s sale of all of its participation.
  • The SPV and the Eligible Lender will share the risk in the Eligible Loan (or, in the case of the MSELF and the NOELF, the upsized tranche) on a pari passu basis. With respect to the MSELF and the NOELF, the Eligible Lender must also retain its interest in the underlying Eligible Loan until the underlying Eligible Loan matures, the upsized tranche of the Eligible Loan matures, or the SPV sells all of its 95% participation, whichever comes first. Any collateral securing the Eligible Loan (at the time of upsizing or on any subsequent date) must secure the upsized tranche on a pro rata basis.
  • The Eligible Lender must complete the sale of the participation to the SPV expeditiously after the origination of the Eligible Loan (or, in the case of the MSELF and NOELF, after the Eligible Loan’s upsizing).
  • The sale of the participation to the SPV must be structured as a “true sale.”

For Eligible Lenders subject to the federal banking agencies’ capital rule, the regulatory capital treatment of the Eligible Loan (and any credit risk mitigation treatment associated with any collateral securing the Eligible Loan) applies only to the 5% interest retained by the Eligible Lender.

• • If the Eligible Lender funded an Eligible Loan before seeking to sell a participation to the SPV, the full amount of the loan would be treated as a loan by the Eligible Lender to the relevant Eligible Borrower and would count towards the Eligible Lender’s lending limit until such time as the SPV purchases the participation.
  • If the Eligible Lender enters into a loan agreement to extend an Eligible Loan to an Eligible Borrower for which the funding of the loan is contingent on the Eligible Lender receiving a binding commitment from the SPV to purchase a participation, then, upon the Eligible Lender satisfying certain funding and notice requirements under the Program, the Eligible Lender need only include the retained percentage of the loan when calculating its lending limit to the Eligible Borrower.^[18]

Credit unions that participate in the Program are subject to any capital requirements implemented by the National Credit Union Administration.

• Retention of Employees: Each Eligible Borrower must make commercially reasonable efforts to maintain its payroll and retain its employees, in light of its capacities, the economic environment, its available resources, and the business need for labor while the Eligible Loan is outstanding. However, borrowers that have already laid off or furloughed employees due to COVID-19 disruptions are nevertheless eligible to apply for one of the Facilities.
• Existing Loan Covenants: Eligible Borrowers should carefully review the documents evidencing existing loans that will remain outstanding after the closing of the Program loan to ensure that the Program loan is permitted under the terms of such documents. If such documents prohibit or limit additional indebtedness and/or liens, the Eligible Borrower may need to obtain the prior written consent of the existing lender(s) to procure the Program loan.
• Federal Reserve Disclosure Relating to Program Loans: The Federal Reserve plans to publish, at least monthly, the following with respect to the Program:
  1. names of all Program lenders;
  2. names of Program borrowers;
  3. amounts borrowed;
  4. interest rates charged; and
  5. overall costs, revenues, and fees of the Program.
• Multiple Loan Applications: An Eligible Borrower may submit applications for a Program loan to more than one Eligible Lender. However, an Eligible Borrower is required to notify each Eligible Lender to which it submits an application of any other pending or accepted applications. If an Eligible Borrower’s application for a Program loan is declined by an Eligible Lender, the Eligible Borrower may apply through a different Eligible Lender.
• Program Forms and Agreements: Each participating Eligible Lender is instructed to use its own loan documentation to document the Facilities. Such documentation should be substantially similar, including with respect to required covenants, to the loan documentation that the Eligible Lender uses in its ordinary course lending to similarly situated borrowers, adjusted only as appropriate to reflect the requirements of the Program as more particularly set forth in the appendices to the relevant FAQs.

More to Come

The Board and Treasury Secretary have reserved the right to make adjustments to the terms and conditions summarized above.  JW will continue to monitor developments and any further guidance issued by the Federal Reserve and the Treasury Secretary.

As noted in prior articles, the facts, laws, and regulations regarding COVID-19 are developing rapidly and frequently changing. Since the date of publication, there may be new or additional information not referenced in this update. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at the JW Coronavirus microsite.

This update is not intended to provide legal advice, and no legal or business decision should be based on its contents. Please consult with your legal counsel for guidance.

JW Contacts

For specific assistance or more information concerning these loan programs, please contact John Wittenberg or Lindsey Berwick.

Meet John

John D. Wittenberg represents and counsels a wide variety of clients in all aspects of commercial real estate (office, retail, and industrial). John’s practice includes the representation of banks and other financial institutions, as well as equity sponsors and borrowers, on complex business transactions and a broad range of transactional matters. Over the course of his career, John has represented clients on acquisitions and dispositions of commercial real estate, commercial leases (office, retail and industrial), sale-leasebacks, and commercial development transactions.

Related Resources:

• JW Coronavirus Insights & Resources microsite »
• JW Fast Takes Podcasts & Webinars »

Please note: This article and any resources presented on the JW Coronavirus Insights & Resources site are for informational purposes only, do not constitute legal or medical advice, and are not a substitute for legal advice from qualified counsel. The laws of other states and nations may be entirely different from what is described. Your use of these materials does not create an attorney-client relationship between you and Jackson Walker. The facts and results of each case will vary, and no particular result can be guaranteed.