April 15, 2020 - Last week, the Federal Reserve Board announced the rollout of two corporate loan purchase facilities collectively called the Main Street Lending Program (“MSLP”).  The MSLP, authorized under section 13(3) of the Federal Reserve Act, would facilitate the lending of up to $600MM into small and middle market companies. While the LSTA fully supports the MSLP and its objectives, it notes that some of the terms in the MSLP facilities are problematic as a practical matter and believes that if the Federal Reserve were to make a number of important changes to the program, the facilities would be available to a much larger range of companies.

How does the program work? The Department of the Treasury will provide support to the MSLP by injecting $75 billion in equity to an SPV set up by the Federal Reserve using funding earmarked in Section 4003 of the CARES Act.  Loans under the MSLP would be made to “Eligible Borrowers” by “Eligible Lenders” (currently U.S. banks and other insured depository institutions) and the SPV would purchase participations of 95% of such loans.  The MSLP will consist of two separate facilities. The Main Street New Loan Facility (“MSNLF”), will authorize eligible banks to originate unsecured term loans of up to $25 million and the Main Street Expanded Loan Facility (“MSELF”) would authorize eligible banks to provide “add-on” loans of up to $150 million under existing term loan facilities (these loans would be secured by the same collateral as that which secures the existing term loan).

Who are Eligible Lenders?  U.S. insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies.  Not included in the definition of Eligible Lenders are private debt funds or, apparently, U.S. branches of foreign banks.

Who are Eligible Borrowers?  Companies created or organized in the U.S. with significant operations in the U.S. with up to 10,000 employees or up to $2.5 billion in 2019 revenues.  It is not clear how U.S. companies with foreign ownership are treated under the MSLP.

What is the interest rate on these loans?  The interest rate on MSLP loans will be SOFR plus 200-400 basis points.  There will also be some associated fees.

What are the terms of the MSNLF?  New loans to Eligible Borrowers that are unsecured in the amount of the lesser of (i) $25MM and (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the Eligible Borrower’s 2019 EBITDA. 

What are the terms of the MSELF?  “Upsize” to term loans already extended by an Eligible Lender to an Eligible Borrower existing as of 4/8/20.  If the existing loan is secured, the MSELF loan must be secured by the same collateral.  The maximum add-on loan size is the lesser of (a) $150MM, (b) 30% of the Eligible Borrower’s existing outstanding and committed but undrawn bank debt, and (c) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the Eligible Borrower’s 2019 EBITDA.

What are some of the other restrictions on and attestations that must be made by Eligible Borrowers? An Eligible Borrower must attest: that the loans are required because of circumstances presented by the COVID-19 pandemic; to compliance with the EBITDA leverage requirements; and that it will follow the restrictions on compensation, stock repurchases and capital distribution under Section 4003(c)(3)(A)(ii) of the CARES Act.  Eligible Borrowers: cannot use the process to repay other debt; cannot repay debt of equal or lower priority with an exception for mandatory prepayments; cannot cancel or reduce any outstanding lines of credit; and must make reasonable efforts to maintain payroll and retain its employees during the term of the loan.

What are some of the principal challenges, questions and practical barriers presented by the MSLP facilities?  (1) Private direct lenders are excluded as Eligible Lenders and term loans from private direct lenders are not eligible term loans for the purposes of the MSELF thereby shutting out a significant portion of the middle market who rely on these sources of capital. (2) Given the very different terms it is difficult to understand how an “upsize” to an existing term loan would work.  (3) Since the MSELF contemplates the issuance of debt that is equal in seniority to and shares collateral with existing debt, will Eligible Borrowers need consents and intercreditor arrangements?  Will consents be forthcoming?  (4)  If there is no bank as part of a borrower’s existing term loan syndicate, is the loan eligible for an MSELF add-on loan?  (5) Is a maximum maturity of four years workable or would it raise “weighted average life” and maturity requirements under existing credit agreements?  (6) Will MSLP loans be required to amortize or pay current interest?  Will interest be PIK-able? (7)  How is EBITDA to be calculated? Is it meant to be adjusted EBITDA that contemplates add-backs?  How many companies will actually be eligible for MSLP loans if EBITDA is not adjusted? (8)  Will borrowers be able to repay revolving credits in the normal course under the terms of the MSLP? (9)  Will distributions to holding companies of borrowers organized as “pass-throughs” be permitted in order to pay taxes, fees, etc.

What is the LSTA doing?  The LSTA has been engaged with representatives of the Federal Reserve and Treasury and recently submitted a term sheet that anticipated some of the challenges that we are currently observing in the proposed MSLP facilities.  The term sheet also proposed a series of practical options that would facilitate loan programs structured under the CARES Act.  We expect to file a comment letter on Thursday, April 16th, that identifies many of the challenges outlined above and suggest some important solutions.  We will highlight the comment letter in next week’s newsletter.  For additional information on the MSLP please contact Elliot Ganz or Tess Virmani.

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