April 21, 2020 - As we recently noted, the Federal Reserve Board announced the rollout of two corporate loan purchase facilities collectively called the Main Street Lending Program (“MSLP”). The MSLP is intended to facilitate the lending of up to $600MM to small and middle market companies. (We highlighted this program and the issues they raised in a webinar, a replay of which is available here). Last week, the LSTA submitted a comment letter in connection with the MSLP. The bottom line: The LSTA strongly supports the MSLP facilities established by the Federal Reserve that are intended to inject liquidity into American companies. We note, however, that in order for the MSLP to achieve its goal, it is essential that the facilities reflect current market standards and circumstances so that the program will be accessible as a practical matter to as many of the intended recipients as possible. Specifically, we recommend that the facilities: (i) incorporate more flexible terms to recognize that most eligible borrowers are constrained by existing debt agreements; (ii) reconsider the proposed EBITDA and leverage-based test which may exclude many otherwise qualifying borrowers from the MSLP, (iii) give lenders more discretion to use their judgment and expertise to determine appropriate terms and conditions for these loans, recognizing that lenders will retain exposure to these loans; and (iv) broaden the base of eligible lenders to include non-U.S. and non-bank institutions either directly or as part of a syndicate with other eligible lenders.
Following is a deeper dive into some of the issues raised in the LSTA’s comment letter:
Existing debt arrangements. Since most borrowers have existing indebtedness that prohibit the incurrence of additional debt and/or liens subject to specified exceptions, MSLP should accommodate these constraints. Accordingly, affording eligible lenders and borrowers maximum flexibility to negotiate the terms of the loans will be critical to their success. For example, where a small or medium-sized operating company cannot access new loans because of restrictions in their existing debt documents, the MSLP could allow the loan to be made to a direct or indirect holding company.
EBITDA issues. Requiring all borrowers to comply with an EBITDA-based leverage test could exclude many from the MSLP. Some borrowers, such as nonprofits and early-stage growth companies, simply do not have positive EBITDA and, for many others, a standardized EBITDA test could give a distorted view of true cash flow and therefore leverage. Instead, we propose relying on the lender and the borrower to agree upon appropriate metrics consistent with a borrower’s existing debt agreements and market conventions.
Tailoring other terms and conditions. Similarly, the MSLP should give lenders more discretion to determine other appropriate terms and conditions for the loans they originate. Since lenders will retain a 5% interest in the loans, we propose that they be given more discretion to make prudent decisions based on their credit expertise and knowledge of the borrower and its capital structure. For example, the appropriate interest rates, whether interest should PIK, amortization after the one year deferral period, and collateral are all matters that the lender will be best positioned to tailor to a borrower’s particular circumstances.
Eligible Lenders. The current term sheets for MSLP limit the universe of eligible lenders to U.S. banks and savings companies, but exclude U.S. branches of foreign banks non-bank lenders, such as private debt funds which provide significant capital to U.S. companies. The LSTA encourage the inclusion of a broader range of lenders as eligible lenders.
Existing Financings under the Main Street Expanded Loan Facility (“MSELF”). MSELF requires a loan to be structured as an increase to a term loan provided by an eligible lender. This excludes borrowers that do not currently have term loans, such as companies with only a revolving credit facility, borrowers that have term loans provided by non-bank institutions that are not eligible lenders as currently defined, and borrowers whose financing has been syndicated to non-bank term loan lenders. This exclusion will have a particularly significant impact on the many small to mid-sized companies that rely on direct lenders as a critical source of funding.
We propose making MSELF available to borrowers who have any existing indebtedness so long as the MSELF loan itself is provided by eligible lenders. We also request clarification that MSELF is not limited to “upsizing” an existing tranche of a term loan but can be provided as separate, incremental tranches of existing facilities by eligible lenders. Because of the differing terms between those of the existing debt and those of the “upsize”, the existing credit agreements will not allow for the expansion to be an increase of the existing loan tranche, rather it will need to be structured as a separate tranche.
Maximum Loan Size and EBITDA/Leverage Attestations.
The proposed criteria for determining the maximum loan size in the MSLP will significantly limit borrowers’ ability to access needed funds. In particular, the requirement that each borrower must attest that it satisfies proposed EBITDA leverage tests may disqualify many companies. Notably, EBITDA is not defined in the MSLP term sheets. If the intention is to define and use EBITDA uniformly and narrowly, it would preclude many borrowers from satisfying the leverage tests and accessing loans and inconsistent with market standards which do not use a uniform EBITDA metric to measure risk. Instead, customary debt agreements typically tailor the definition of EBITDA to eliminate non-cash and other items to establish a more accurate picture of cash flow available to service debt for each particular borrower’s business. Other borrowers, such as nonprofits and early-stage growth companies, simply do not have positive EBITDA and an EBITDA-based leverage metric is typically not used to measure creditworthiness.
We believe the Main Street Program should permit lenders to use an EBITDA definition that is consistent with that used in the borrower’s existing credit agreements or commonly used in the borrower’s industry for purposes of calculating the maximum loan amount of an eligible loan and the leverage test. Furthermore, for companies for whom an EBITDA-based metric is not appropriate, we propose permitting lenders to use alternative creditworthiness metrics that are customary in that company’s industry. Even with the proposed modifications to the EBITDA metric noted above, the leverage tests (4x for the Main Street New Loan Facility (“MSNLF”) and 6X for the MSELF) are likely too restrictive for many otherwise eligible borrowers. Accordingly, we propose permitting lenders to extend loans to such companies that exceed those levels if the lender, based on its judgment and expertise, is comfortable doing so.
Most companies will have limited debt and lien capacity under their existing debt agreements, so they may not be able to borrow under the MSLP without a waiver or consent from their existing lenders or bondholders. Obtaining a waiver or amendment to permit the incurrence of additional loans may be challenging in many situations so to address these challenges, we request that where a company’s existing debt agreements do not permit them to incur additional secured debt, the MSELF permit an upsized tranche to be unsecured even if the existing loan is secured.
In addition, we further propose permitting companies to incur MSLP loans at a holding company level on a secured basis if their existing debt documents do not permit them to incur any additional debt at the operating company. We believe that structure would be consistent with the goals of the program, i.e. providing much needed liquidity while safeguarding taxpayer funds.
Tenor and Amortization. Many credit agreements require new debt to have a maturity outside the maturity of the existing debt so the four-year maturity term may violate the weighted average life and maturity requirements in their existing credit agreements. We propose relying on eligible lenders’ judgment and expertise and permitting eligible loans to have tenors of up to seven years. This would provide borrowers and lenders with flexibility to address different scenarios and allow for staggered maturities for the Main Street program loans. In addition, the current term sheets do not specify the amount of amortization following the one year deferral period. We similarly propose relying on the borrower and lender to determine the appropriate amortization following the one year deferral period.
Prepayment/Repayment of Other Debt. The MSLP would limit prepayment of equal or lower priority debt, with the exception of mandatory principal payments, until the MSLP loans are repaid. We request clarification that this restriction does not prohibit the repayment of existing debt (of whatever priority) at maturity. We also request clarification that this restriction does not apply to a company’s ability to repay draws and reborrow from revolving credit facilities in the normal course as long as the size of the facility is not reduced. The LSTA expects to have ongoing conversations with the Federal Reserve with the goal of helping to establish a Main Street Loan Program that has the best chance to inject significant liquidity into American companies. Please contact Tess Virmani or Elliot Ganz with any questions or comments.