United States: Federal Reserve Board Updates Terms For Pandemic-Relief Loans

The Federal Reserve Board has updated the terms of the previously announced Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF) and created a third type of loan, the Main Street Priority Loan Facility (MSPLF). In addition to the updated term sheets, the Federal Reserve Board published a document summarizing the frequently asked questions and providing an overview of the three loan facilities established under the Main Street Lending Program. The combined size of the MSNLF, the MSELF and MSPLF will be up to $600 billion.

Will the updated terms result in additional technology and life sciences companies becoming eligible for the Main Street Lending Program?

As noted in our prior alert, the initial term sheets for the MSNLF and MSELF provided that the maximum loan size was based on a formula that factors in a company's earnings before interest, taxes, depreciation and amortization (EBITDA) for 2019. This formula was particularly problematic for most private and newly public technology and life sciences companies, many of which are not EBITDA-positive.

Following the initial publication of the term sheets, the National Venture Capital Association (NVCA) submitted a comment letter to the Federal Reserve Board noting that the EBITDA test would result in "virtually all companies that are in their growth phases" being excluded from the Main Street Lending Program. The NVCA proposed that the EBITDA test be modified to instead look at the percentage of valuation (for private) or market capitalization (for public) for companies in their growth phases.

While the April 30, 2020 updates to the Main Street Lending Program may allow some additional technology and life sciences companies to participate in the program, especially more mature ones, the updated formula remains particularly problematic for these companies, especially earlier-stage ones, and many of them will continue to not qualify for a loan under the programs. The Federal Reserve Board did not ultimately adopt a proposed market capitalization-based test for determining eligibility under the program. Instead, the new term sheets updated the eligibility formula to look at a company's adjusted EBITDA for 2019. For the updated MSNLF and the new MSPLF programs, adjusted EBITDA will be calculated by the lenders based on the same methodology previously applied by the lender to the borrower or similarly situated companies on or before April 24, 2020. For the MSELF program, lenders will apply the same methodology used to calculate adjusted EBITDA when originating or amending the underlying loan on or before April 24, 2020. As a result of these changes, we would expect that technology and life sciences companies will now generally be able to exclude the impact of stock-based compensation for purposes of determining adjusted EBITDA and assessing eligibility for the Main Street Lending Program. It is unclear whether other non-cash and non-recurring charges, such as restructuring costs, will be allowed for purposes of calculating adjusted EBITDA. Because most private and newly public technology and life sciences companies are neither EBITDA nor adjusted EBITDA-positive, the updated formula remains particularly problematic for these companies.

What are the other key updates to the eligibility requirements and restrictions on participating borrowers under the Main Street Lending Program?

• Participation in Other Financial Assistance Programs. Businesses may participate in only one of the three facilities established under the Main Street Lending Program, and the newly released FAQs affirmatively state that businesses are eligible to participate in the Main Street Lending Program if they also received a loan under the Paycheck Protection Program. Businesses are ineligible to participate in any of the loan facilities established under the Main Street Lending Program if they have received support pursuant to Title IV of the Coronavirus Aid, Relief, and Economic Security Act (which supports companies involved in passenger air travel, air cargo and national security industries).
• "Sound Financial Condition" Prior to the COVID-19 Pandemic. Under the updated guidelines, borrowers no longer have to attest that they require financing due to exigent circumstances presented by the COVID-19 pandemic. The updated guidelines for the Main Street Lending Program exclude a specific list of "Ineligible Businesses." The guidelines require that the borrower have its primary operations and a majority of employees in the United States, be established prior to March 13, 2020, and be in "sound financial condition" prior to the onset of the COVID-19 pandemic. In order for an eligible borrower to receive an MSNLF or MSPLF loan, any existing loan that such borrower had with the eligible lender as of December 31, 2019, must have had an internal risk rating (based on the lender's risk rating system) equivalent to a "pass" in the Federal Financial Institutions Examination Council (FFIEC) supervisory rating system as of that date.
• Headcount and Revenue. Borrowers may have up to 15,000 employees (increased from the 10,000-employee limit in the prior term sheets) OR up to $5 billion in annual revenue for 2019 (increased from $2.5 billion in the prior term sheets). To determine how many employees a business has or its 2019 annual revenue, a business must aggregate its employees and revenue with the employees and revenue of its affiliated entities.
• Ability to Meet Financial Obligations for 90 Days. Borrowers must certify that, as of the date of the origination of the loan under the Main Street Lending Program, they have the ability to meet their financial obligations for at least the next 90 days and do not expect to file for bankruptcy during that time period.
• Retaining Employees. Borrowers are also required to make "commercially reasonable efforts" to maintain payroll and retain employees during the time that the loan or upsized tranche originating from the applicable Main Street Lending Program is outstanding.
• Refinancing Existing Debt. According to the FAQs, borrowers must refrain from repaying the principal balance of, or paying any interest on, any debt until the MSNLF loan, the MSPLF loan or the upsized tranche issued under the MSELF is repaid in full, unless the debt or interest payment is mandatory and due. Borrowers must also commit that they will not seek to cancel or reduce any of their committed lines of credit with the lender of the applicable facility under the Main Street Lending Program or any other lender. Under the new MSPLF, borrowers may use the proceeds of the loan to refinance existing debt owed by the borrower to a different lender (i.e., a lender that is not the lender of the MSPLF).

What are the terms of the updated facilities established under the Main Street Lending Program?

¹ NOTE: The eligible lender is required to pay these transaction fees to the special purpose vehicle created by the Federal Reserve Board in connection with the Main Street Lending Program, and the term sheets for the facilities confirm that the lender may pass these transaction fees on to the borrower.

How do borrowers prepare to apply?

The Main Street Lending Program will be in effect until September 30, 2020. Note that applications have not yet opened. The Federal Reserve is currently working on creating the infrastructure necessary to operationalize the Main Street Lending Program and directs potential borrowers to the webpage for the Main Street Lending Program, where it will post the official launch date. In the meantime, the term sheets and FAQs released by the Federal Reserve explicitly state that the Federal Reserve or Treasury may make adjustments to the terms and conditions of the Main Street Lending Program.

While companies wait for additional guidance from the Federal Reserve, potential borrowers can begin gathering the materials likely required to calculate adjusted EBITDA or contact eligible lenders to discuss how to approach these calculations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.