The Federal Reserve recently expanded access to the Main Street Lending Program (MSLP) by fully opening the program to nonprofit organizations (NPOs) and accepting multi-borrower loan submissions. The Federal Reserve has also issued phased guidance to clarify a number of issues.
The Federal Reserve created the MSLP to support loans to small and medium-sized businesses and NPOs that were in good financial health before the start of the COVID-19 pandemic. As part of the MSLP, the Federal Reserve Bank of Boston (FRB Boston) formed MS Facilities LLC as a Special Purpose Vehicle (Main Street SPV) to purchase up to $ 600 billion in qualifying loan stakes. Previous McGuireWoods Customer Alerts (from May 1, May 29, June 12, June 18, July 6, July 17 and July 31) summarize the termsheets, guidelines and forms published and revised by the Federal Reserve for the MSLP.
The MSLP currently consists of five facilities: New Main Street Loan Facility (MSNLF), Main Street Senior Lending Facility (MSPLF), Main Street Extended Lending Facility (MSELF), New Loan Facility for Non-Profit Organization (NONLF) and the Non-Profit Loan Facility Extended Loan Facility for Organizations (NOELF).
Fully open non-profit establishments
September 4, 2020, FRB Boston announcement that the NONLF and the NOELF were fully operational and that the Main Street SPV is now accepting eligible loan submissions to NPOs. McGuireWoods previously summarized the NONLF and NOELF in customer alerts from June 18 and July 31. The FRB Boston has also issued phased guidance reflecting that the NONLF and NOELF are fully operational and clarifying the calculation of “total compensation” for the purposes of complying with compensation limits under restrictions that apply to loan programs. direct under section 4003 (c) (3) (A) (ii) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the restrictions of which are incorporated into the MSLP.
Lenders can now submit multi-borrower loans
On September 21, 2020, FRB Boston announced technical updates to the MSLP portal, through which lenders submit eligible loans for review and equity purchases by Main Street SPV, supporting loan structures involving multiple co-borrowers. Each borrower in a multi-borrower loan structure must meet the borrower’s eligibility criteria, and each borrower must complete and submit the applicable required borrower certifications and commitments. The Incremental Guidelines published by FRB Boston provide additional technical details and examples for completing and submitting MSLP legal documents and entering data into the MSLP Portal for Multi-Tender Loans.
Federal Reserve issues incremental guidelines
Since the end of July, FRB Boston has issued additional guidance for the MSLP, updating the FAQs for for-profit companies, FAQ for NPOs and instructions for the lender required documentation. The basic terms of the five MSLP installations remain largely unchanged, but the updated guidelines provide additional information on these terms and describe limitations and requirements that are not evident in the termsheets. Below are some key points of the updated guidelines, in addition to the updates mentioned above.
- Lender underwriting expectations are clarified. The updated guidelines emphasize that underwriting by the lender should consider a borrower’s pre-pandemic condition and post-pandemic outlook at the time of application, while also taking into account the deferral characteristics of a borrower. payment of MSLP loans. The updated guidelines further provide that federal supervisors will not criticize lenders for granting MSLP loans in accordance with program requirements, including when such loans are considered unsuccessful at the time of granting. whether these weaknesses stem from the pandemic and should be temporary or whether these loans are part of a prudent risk mitigation strategy from a lender to an existing borrower.
- Safe Harbor is created for limited ownership by lenders of borrowers’ interests. The updated guidelines now specify, for the purposes of borrower eligibility requirements, that ownership by the Eligible Lender and its affiliates of no more than 5% of the total outstanding holdings in the Borrower will not render the ineligible borrower.
- The application of direct lending restrictions to loans between borrowers and owners and employees is clarified. A borrower under the MSLP must agree to abide by the restrictions that apply to direct lending programs under section 4003 (c) (3) (A) (ii) of the CARES Act, which restrictions are incorporated into the MSLP. These restrictions include limits on distributions of capital and remuneration. The updated guidelines clarify how these restrictions apply to lending between an MSLP borrower and a person who is an owner or employee:
- Any loan made by a borrower to a homeowner after the granting of an MSLP loan will be presumed to be a distribution of capital unless the loan is “in good faith” (as defined below) and is repaid according to its terms. terms or the lender (i.e., the MSLP Borrower) exercises its rights as a creditor in the event of default. Such a loan is in good faith if (1) it is a written instrument with an indicated interest rate and maturity date; (2) it has terms that are at least as favorable to the lender (ie the MSLP borrower) as the conditions in the market for similar loans at the time of origination; (3) the lender (ie the MSLP borrower) has a reasonable expectation of repayment; (4) the debt is enforceable under state law; and (5) the lender (ie the MSLP borrower) has recourse in the event of default.
- Any loan made by a borrower to a homeowner prior to the granting of an MSLP loan will be presumed to be a distribution of capital if the loan is canceled or discharged, in whole or in part, or if the lender (i.e. say the borrower MSLP) does exercise its creditor rights.
- The repayment by an MSLP borrower of a loan made to them by an owner would not be considered a distribution of capital if the loan is in good faith and the repayment is made when it is compulsory and due. In addition, an MSLP borrower may, at the time of granting an MSLP loan, use the proceeds of that loan to prepay existing debt outstanding and owed to lenders other than the MSLP lender (including repayment a loan from an owner who is not the MSLP lender).
- For the purposes of compensation limits under the Direct Loan Restrictions, an MSLP borrower must determine whether a loan made to an employee of the borrower, or a full or partial forgiveness or discharge of such a loan, would be considered. as compensation for that employee. according to the rules applicable for the calculation of the indemnity.
- A transaction that circumvents or escapes the direct lending restrictions will be considered a violation of those restrictions.
- The use of cash balances and deferred drawing balances is permitted but limited. The updated guidelines provide that lenders and borrowers may agree to include cash security deposits, offsetting balances, cash reserve accounts or cash escrow accounts at the time of origination or during the term. an MSLP loan under the loan conditions, subject to certain limits.
- The Federal Reserve does not encourage requiring a borrower to maintain cash balances that are limited to serving as collateral or paying principal or interest on an MSLP loan when it is required and due. But the updated guidelines indicate that lenders and borrowers can agree to include these features at the origin or during the term of an MSLP loan as part of the loan conditions if these conditions are a normal part of the practice. lender underwriting for borrowers in the same situation and not exceed 15% of the outstanding balance of the MSLP loan.
- MSLP lenders and borrowers may also agree to place a portion of the proceeds of an MSLP loan in an account held with the lender in order to delay withdrawal from such funds until certain conditions relating to the borrower’s operations are met. fulfilled. These conditions may include, for example, the requirement that the borrower provide documents or other evidence that the loan proceeds are used to finance activities or purchases agreed in advance by the borrower, or that the loan proceeds are used to finance activities or purchases agreed in advance by the borrower. The borrower agrees to provide additional collateral to secure the MSLP loan which is not originally available. Any such restriction must be substantially similar to a condition imposed on borrowers in a similar situation by the lender as part of its ordinary underwriting. MSLP lenders cannot use these features to ensure that funds are available for mandatory and due payments on a borrower’s other debt, except in the case of an authorized refinancing of existing debt under of the MSLPF. All of these conditions should be included in the original loan agreement and should be fully transparent to the borrower.
Adoption of MSLP is small but growing
FRB Boston fully opened the MSLP to for-profit businesses on July 6, 2020. As of September 16, 2020, Main Street SPV held approximately $ 1.445 billion in qualifying loan interests, or approximately 0.24% of the current maximum size of the MSLP.
On September 8, 2020, the Federal Reserve released transaction specific details for MSLP loans settled with Main Street SPV through August 31, 2020. Please note that this information reflects the following:
- Thirty-nine lenders have made and settled 118 eligible loans with a total principal amount of approximately $ 1.129 billion (for approximately $ 1.072 billion in purchased equity).
- Half of all settled MSLP loans (59 out of 118) were made by a single lender. The total principal amount of these settled loans was approximately $ 331.6 million.
- Settled MSLP loans have been made to eligible borrowers in 26 different states in the United States.
- The MSLP loans settled were concentrated in the MSNLF (58 loans settled, for a total principal amount of approximately $ 306.2 million) and the MSLPF (58 loans settled, for a total principal amount of approximately 740.7 million dollars). millions of dollars). Only two MSELF loans had been settled, for a total principal amount of $ 82.1 million.
- The average and median principal amounts of all settled MSLP loans were approximately $ 9.57 million and $ 4.11 million, respectively. The average and median principal amounts of all settled MSNLF loans were approximately $ 5.28 million and $ 2.75 million, respectively, with a range of $ 265,000 to $ 35 million. The average and median principal amounts of all settled MSPLF loans were approximately $ 12.77 million and $ 5.88 million, respectively, with a range of $ 518,000 to $ 50 million. The principal amounts of the two MSELF loans settled were $ 71.05 million and $ 11 million.
- On average, the SPV Main Street purchased stakes in qualifying loans within 12 days of origination, with a range of 3 to 34 days and a median of 9.50 days.