Jun 1, 2020

Main Street Lending Program: FAQ provided. Powell says program is “days away” from providing loans.

FAQ Blocks

As we had reported previously, on April 30, 2020, the Federal Reserve updated and revised term sheets for three programs, the Main Street New Loan Facility, the Main Street Expanded Loan Facility and the Main Street Priority Loan Facility, which comprise their joint “Main Street Lending Program” that is intended to provide additional financing for small-and medium sized businesses impacted by the ongoing COVID-19 pandemic.

On May 27, 2020, the Federal Reserve Bank of Boston provided further updates in connection with the Main Street Lending Program. The update included a revised version of the Main Street Lending Program Frequently Asked Questions (FAQ) document, as well as legal forms and agreements for eligible borrowers and eligible lenders to participate in the program.

The new updates seemed to shy away from previous press reports that the Federal Reserve would be making Main Street Program loans directly to borrowers, and only to envision loans through eligible lenders.  Indeed, the FAQ says “To obtain a loan under the Program, an Eligible Borrower must submit an application and any other documentation required by an Eligible Lender to such Eligible Lender.  Eligible Borrowers should contact an Eligible Lender for more information on whether the Eligible Lender plans to participate in the Program and to request more information on the application process.”

In terms of timing of commencement of the Main Street Lending Program, CNBC reported on May 29, 2020 that the Fed Chairman Jerome Powell said the central bank is “days away” from providing loans through its Main Street program for small-and medium-sized businesses.

The FAQs principally provided more clarification and guidance on previously announced rules, including topics of loan securitization, loan prioritization and affiliation.  On the other hand, there are a few substantive clarifications in these updates.

For example, with respect to the issue of eligibility of international companies, the FAQ clarifies that the requirement that a borrower have “significant operations in the United States” means that its operations should be evaluated on a consolidated basis together with its subsidiaries, but not its parent companies or sister affiliates. For example, an eligible borrower has significant operations in the United States if, when consolidated with its subsidiaries, greater than 50% of its assets are located in the United States, or greater than 50% of its annual net income, annual net operating revenues, or annual consolidated operating expenses are generated in the United States.

The FAQ also clarified that a subsidiary of a foreign company is eligible as a borrower, provided, that they must use the proceeds of a Main Street Lending Program loan only for the benefit of the eligible borrower, its consolidated U.S. subsidiaries, and other affiliates of the eligible borrower that are U.S. businesses. The proceeds of a Main Street loan may not be used for the benefit of an eligible borrower’s foreign parents, affiliates or subsidiaries.

Another clarification in the FAQ is that an affiliated group of companies can participate in only one Main Street Lending Program facility, and cannot participate in both a Main Street facility and the Primary Market Corporate Credit Facility.  While this had previously been reported, the clarifications specify that if an affiliate has previously participated, or has a pending application to participate, in a Main Street facility, the business can only participate in the Main Street Lending Program by using the same Main Street facility accessed by its affiliate. For example, if an eligible borrower’s affiliate has participated in the Main Street New Loan Facility (MSNLF), then the eligible borrower would only be able to participate in the MSNLF and would be prohibited from participating in the Main Street Priority Loan Facility (MSPLF) and Main Street Expanded Loan Facility (MSELF). In no case could the affiliated group’s total participation in a single Main Street facility exceed the maximum loan size that the affiliated group is eligible to receive on a consolidated basis (e.g., $25 million for MSNLF and MSPLF).

We had previously reported that an “Ineligible Business” as defined in the law and SBA regulations would not be permitted to apply, and the FAQ further clarifies that the SBA has determined that private equity funds are primarily engaged in investment or speculation, and that such businesses are therefore ineligible to receive PPP loans or Main Street Lending Program loans.  Portfolio companies of private equity companies, however, are eligible, subject to meeting the eligibility criteria after taking into account the affiliation test that views a borrower and its affiliates collectively in terms of eligibility.

In summary, the Federal Reserve seems to be making necessary steps to launch the Main Street Lending programs.  We will continue to provide updates on the Main Street Lending Program as developments arise and once the Program becomes operational.  You can see our Comparison Chart for Main Street New Loan Facility, the Main Street Expanded Loan Facility and the Main Street Priority Loan Facility here, or see all of our CARES Act and COVID-19 resource center content here.

Do not hesitate to contact us for more information on the Main Street Lending Program.

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