On May 27, 2020, the Federal Reserve Bank of Boston released updated guidance on the Main Street Lending Program (“MSLP”) indicating that the program is close to becoming formally operationalized and open to accepting loans. In particular, the Federal Reserve published several forms for both borrowers and lenders detailing, among other things, application instructions, covenants and required certifications, a pro-forma bank participation agreement, loan servicing agreement, and additional Frequently Asked Questions. These documents are available on the Boston Federal Reserve’s Website.
While the new MSLP documents generally memorialize the program terms, conditions, and required attestations outlined in the facility term sheets previously released by the Federal Reserve on April 30, there are several additions and clarifications. Some of the more notable areas the potential borrowers should be aware of are highlighted below.
Lack of Adequate Credit Elsewhere
The May 27th guidance from the Federal Reserve elaborates on a requirement for earlier CARES Act Title IV loans that the borrower attest that they have investigated other options for credit on the open market. According to the Federal Reserve, this attestation can be made by borrowers who, after their review of liquidity options, have determined that other sources of credit, such as a small business or private commercial loans, are inadequate due to characteristics like amount, price, or terms of credit available during the current circumstances. Borrowers are not required to demonstrate that applications for credit had been denied by other lenders or otherwise document that the amount, price, or terms of credit available elsewhere are inadequate.
Determination of Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
While the Federal Reserve had previously announced that adjusted EBITDA would be a metric used to determine maximum loan size, there was uncertainty regarding how EBITDA would be calculated under these loan facilities. Based on this latest guidance, the methodology a lender requires a borrower to use when calculating its adjusted 2019 EBITDA must be a methodology the lender previously required to be used for adjusting EBITDA when extending credit to the borrower or to similarly situated borrowers on or before April 24, 2020. For the Main Street Expanded Loan Facility (“MSELF”) eligible loans, the methodology a lender requires a borrower to use when calculating its adjusted 2019 EBITDA must be the methodology the lender previously required when originating or amending the underlying loan on or before April 24, 2020.
Affiliation Rules
Further clarification has been provided by the Federal Reserve regarding how affiliation rules apply to the Main Street Loan facilities. The affiliation rules applicable for the MSLP are those referenced in 13 CFR 121.301(f), which are the same used to determine eligibility for the SBA’s Paycheck Protection Program. Affiliation rules apply for the determination of eligibility (i.e., 2019 consolidated revenue of less than or equal to $5 billion or employee headcount of no more than 15,000) and loan amount maximums. Maximum loan amounts available under each facility apply collectively to the borrower and its affiliates. In other words, while more than one affiliate may qualify for an MSLP facility, the aggregate loan values issued to each affiliate cannot exceed the maximum amounts of $25 million (Main Street New and Priority Laon Facilities) and $200 million (MSELF).
Financial Reporting
All three Main Street facilities will contain a financial reporting covenant requiring the borrower to report certain financial and debt information quarterly and annually to the lender.
Breach Consequences
Breaches of loan certifications or covenants will trigger immediate demand for repayment of the full outstanding principal and accrued interest.
It is important to note that the MSLP is continuously evolving so it is important to monitor the Federal Reserve’s website for the latest program updates and details.
To learn more about the MSLP and financial resources available to business owners, check out our dedicated “Financial Resources For Employers Impacted By COVID-19” section of Rea & Associates’ COVID-19 Resource Center.
Contact: Doug Houser, CPA, MBA, CEPA, principal & director of construction & real estate services