The following documents were updated by the Federal Reserve Friday, July 31st: (1) Lender Registration Certifications and Covenants; (2) Loan Participation Agreement Transaction Specific Terms; (3) Loan Participation Agreement Standard Terms and Conditions; (4) Servicing Agreement; (5) Assignment-in-Blank; (6) Co-Lender Agreement Transaction Specific Terms; (7) Co-Lender Agreement Standard Terms and Conditions; (8) Main Street Lending Program Instructions for Lender Required Documentation; and (9) Main Street FAQs.
This post summarizes the material changes to the FAQs.
Material Changes to Main Street FAQs
- The Federal Reserve updated FAQ C.5: What does it mean for an MSPLF Loan to be “senior to or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt?”
FAQ C.5 was updated to state that a MSPLF Loan must be secured “because the Eligible Borrower has other debt that is not Mortgage Debt, then the Collateral Coverage Ratio for the MSPLF Loan at the time of its origination must be either (i) at least 200% or (ii) not less than the aggregate Collateral Coverage Ratio for all of the Borrower’s other secured Loans or Debt Instruments (other than Mortgage Debt).”
The Federal Reserve also included a document, providing examples of Collateral Coverage Ratio calculations. Click here to view those examples.
Additionally, the Federal Reserve added the following guidance to FAQ C.5: “For the avoidance of doubt, if an Eligible Borrower has no other secured debt (other than Mortgage Debt), the Collateral Coverage Ratio and pari passu requirements do not apply to the collateral that secured the MSPLF Loan.” (emphasis added.)
- FAQ L.11 provides information concerning how loan documents should be prepared if the Condition of Funding Model (loan is contingent on a binding commitment from the Main Street SPV that it will purchase a participation in the Main Street Loan) is used.
Q: FAQ L.11. If an Eligible Lender uses the Condition of Funding Model in Question L.4, how should loan documents be prepared to reflect the required maturity period, interest rate, deferral and accrual, principal amortization, and loan number?
A: If an Eligible Lender elects to use the Condition of Funding Model set out in question L.4, the credit agreement and other loan documents for a particular loan will need to be completed and executed prior to submission to the Portal and funding of the loan. The Federal Reserve suggests that Eligible Lenders refer to the following guidance for structuring loan documentation to comply with Program requirements when using this model:
- Maturity and Payment Dates: Eligible Lenders should select a maturity date that is five years from the date of the credit agreement (i.e., the Effective Date) to satisfy the five year maturity requirement. The Eligible Lender should also select a principal and interest payment schedule that is set based on the Effective Date. While the principal amount of the loan will be outstanding for slightly less than five years due to the delay in funding the loan, this will provide greater clarity to the Eligible Borrower, Eligible Lender, and other parties regarding a date certain for the loan’s maturity and dates of payment.
- Interest Rate: Eligible Lenders should identify the applicable reference rate (1 month or 3 month LIBOR) in the loan documents on the Effective Date and indicate in the Portal the calculated interest rate, based upon the reference rate plus 300 basis points. While the calculated rate may differ at the time of funding, identifying the applicable reference rate in the loan documents on the Effective Date provides clarity as to how the rate will be calculated.
- Interest Deferral, Accrual, and Capitalization: Eligible Lenders should measure interest deferral and set an interest capitalization schedule based on the Effective Date of the loan. However, the Eligible Borrower should not accrue interest until the loan is funded by the Eligible Lender.
- Lender Loan Number: It is preferred that the Lender create a “Lender Loan Number” at the time the credit agreement is written, even though the loan will not have been funded at that time. If an Eligible Lender is unable to provide a “Lender Loan Number” for the loan prior to funding, the Eligible Lender may use a temporary Lender Loan Number and subsequently update such number in connection with its submission of Eligible Borrower financial information on a quarterly basis, as required under the Servicing Agreement.
- The Cross Acceleration Provision in Appendix B was revised to further define “Indebtedness.” What has been added is underlined below.
In the “Event of Default” section: “(i) [the Borrower or any Subsidiary shall fail to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) in respect of any Indebtedness (other than Indebtedness under the Loan Documents) owing to the [ELIGIBLE LENDER] or any commonly controlled Affiliate of the [ELIGIBLE LENDER], in each case beyond the applicable grace period with respect thereto, if any; or (ii) the Borrower or any Subsidiary shall fail to observe or perform any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event occurs, the effect of which failure to make a payment, default or other event described in cause (i) or (ii) is to cause such Indebtedness to become due or to be repurchased, prepaid, defeased or redeemed (automatically or otherwise), or an offer to repurchase, prepay, defease or redeem such Indebtedness to be made, prior to its stated maturity; provided that clause (ii) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness, if such sale or transfer is permitted hereunder and under the documents providing for such Indebtedness and such Indebtedness is repaid when required under the documents providing for such Indebtedness; provided that, as used in this clause, the term “Indebtedness” shall mean all debt for borrowed money and any obligations evidenced by a bond, debenture, note, loan agreement or other similar instrument, and any guarantee of any of the foregoing.”
- The Federal Reserve provided information regarding making loans to multiple co-borrowers in FAQ L.12.
Q: Can a single Main Street loan be made to multiple co-borrowers?
A: While the Main Street SPV currently accommodates loans with one or more guarantors, the SPV is not accepting submissions of loans made to more than one co-borrower at this time. However, the Federal Reserve is in the process of adjusting the Portal and its operational capabilities to accommodate co-borrower arrangements. The Participation Agreement, Co-Lender Agreement, Assignment Executed-in-Blank, and Servicing Agreement posted on the FRB Boston’s website on July 31, 2020, have been drafted to accommodate co-borrower loans. Instructions for completing and executing these forms and agreements for co-borrower loans, making the required Borrower and Lender Transaction-Specific Certifications and Covenants with respect to co-borrower loans, and submitting co-borrower loans to the Portal, will be issued in the coming weeks.
- The Federal Reserve added FAQ F.4.
Q: Can an Eligible Borrower apply for a Main Street Loan through multiple Eligible Lenders?
A: An Eligible Borrower may submit applications for a Main Street Loan to more than one Eligible Lender. However, an Eligible Borrower is required to notify each Eligible Lender to which it submits an application of any other pending or accepted applications. This requirement is reflected in Section 5.E of the Borrower Certifications and Covenants.
If an Eligible Borrower’s application for a Main Street Loan is declined by an Eligible Lender, then the Eligible Borrower may apply through a different Eligible Lender.
- The following FAQs were added to Section H, Certifications and Covenants:
Q: How should an Eligible Borrower that is organized as a partnership, limited liability company, S corporation, or similar tax pass-through entity comply with restrictions on compensation and capital distributions under the direct loan restrictions with respect to payments made to owners of the Eligible Borrower?
A: All Eligible Borrowers must commit to comply with the repurchase, capital distribution, and compensation restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act. As described in the Borrower Certifications and Covenants, the restrictions on capital distributions apply to payments made with respect to common stock or equivalent interests in a partnership, limited liability company, business organized as a trust, or other legal entity. In addition, an Eligible Borrower is subject to limitations on compensation of any officer or employee whose total compensation exceeds $425,000 (see question H.12). In some cases, an employee or officer that is covered by the limitations on compensation may also be a shareholder, partner, or member of the Eligible Borrower. In complying with both sets of restrictions, the Eligible Borrower must distinguish between (i) compensation of the employee or officer and (ii) dividends and other capital distributions paid to owners, including the employee or officer. The discussion below provides guidance on distinguishing between stock- or equity-based compensation and capital distributions paid with respect to common stock or common stock equivalents.
- Corporations: As described in question H.12, Eligible Borrowers must calculate total compensation according to item 402(c) unless the Eligible Borrower meets the criteria and chooses to calculate total compensation according to the federal tax rules. Stock-based compensation, such as stock options, is included in total compensation according to methodology described in item 402(c) or the federal tax rules. The award of stock-based compensation would not be considered a capital distribution and, accordingly, would not be subject to restrictions on capital distributions. However, dividend payments made on such stock of the Eligible Borrower owned by the officer or employee would be prohibited under the restrictions on capital distributions, except in the case of dividend distributions made to the owner of an S corporation that are reasonably required to cover its owners’ tax obligations in respect of the Eligible Borrower’s earnings.
- Partnerships and Limited Liability Companies: As described in question H.12, Eligible Borrowers must calculate total compensation according to item 402(c) unless the Eligible Borrower meets the criteria and chooses to calculate total compensation according to the federal tax rules. An officer or employee may receive awards in connection with the performance of services in the form of an interest in the partnership or limited liability company, including a capital or profits interest. With respect to an award of a capital or profits interest in connection with services, the value of the award, if any, would be included in total compensation according to the methodology described in item 402(c) or the federal tax rules, as applicable. The award of an interest in a partnership or limited liability company would not be considered a capital distribution and, accordingly, would not be subject to restrictions on capital distributions. However, the Eligible Borrower would be prohibited from making a distribution with respect to a partnership or limited liability company interest, including a capital or profits interest, except to the extent reasonably required to cover its owners’ tax obligations in respect of the Eligible Borrower’s earnings.
Q: How do the capital distribution and repurchase restrictions apply to ownership interests held by Employee Stock Ownership Plans (ESOPs)?
A: Eligible Borrowers must commit to comply with the repurchase, capital distribution, and compensation restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act. In some cases, shares of common stock of the Eligible Borrower may be held by an employee stock ownership plan (ESOP). The bullets below discuss how the restrictions on stock repurchases and capital distributions would apply to ownership interests held by the ESOP.
- Restrictions on repurchases and redemptions. In general, and as discussed in the Borrower Certifications and Covenants, an Eligible Borrower is restricted from repurchasing or redeeming an equity security issued by the Eligible Borrower or its parent company if such equity security is listed on a national securities exchange. Restrictions would therefore not apply to a repurchase or redemption of an equity security not listed on a national exchange. For example, an ESOP that holds shares of a non-public company that has an obligation to repurchase any shares allocated to the employee’s ESOP account upon the employee’s retirement or termination of employment would not be prohibited under these restrictions from making such repurchases. In addition, the restrictions on repurchases and redemptions do not apply to repurchases or redemptions required under a contractual obligation that was in effect as of March 27, 2020.
- Restrictions on capital distributions. Eligible Borrowers are also subject to restrictions on dividends and other capital distributions made with respect to common stock or equivalent interests in a partnership, limited liability company, business organized as a trust, or other legal entity. The rules regarding restrictions on capital distributions would apply to a corporation that maintains an ESOP that holds shares of the company stock. The restrictions on dividends and other capital distributions do not apply to repurchases or redemptions, which are governed by the separate restriction in CARES Act section 4003(c)(3)(A)(ii)(I), discussed immediately above. A dividend or other capital distribution with respect to an Eligible Borrower’s common stock or an equivalent interest held by an ESOP would be subject to restrictions on capital distributions, unless both the equity interest and the obligation to pay dividends or distributions existed as of March 27, 2020.
Q: Do certifications and covenants apply to successors?
A: An Eligible Borrower also must commit to comply with certifications and covenants included in the Borrower Certifications and Covenants, including repurchase, capital distribution, and compensation restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act. If a Borrower is acquired or otherwise merged into another business, the acquiring or resulting entity would generally assume all rights and obligations of the Borrower, including the rights and obligations of the predecessor entity under a Main Street loan.
Q: How do the compensation, capital distribution, and stock repurchase restrictions apply to an organization in which more than one entity borrows from the Main Street Lending Program?
A: The restrictions on compensation, stock repurchase, and capital distributions apply to the Eligible Borrower. Accordingly, if two affiliates borrow from the Main Street Lending Program each would be subject to the restrictions on compensation, capital distributions, and stock repurchases. Note that some restrictions also affect affiliates that are not borrowers. For example, the calculation of total compensation includes salary, bonuses, awards of stock, and other financial benefits received by an officer or employee from the Eligible Borrower and its affiliates. In addition, the Eligible Borrower may be restricted from repurchasing shares of its parent(s) if those shares are traded on a national exchange, as explained further in the Borrower Certifications and Covenants. For additional information on aggregation rules for other criteria (e.g., employees and revenues) see questions E.5 and E.10.
- FAQ I.13 was added to Section I, Lender Information.
Q: Can an Eligible Lender that is a depository institution pledge its 5% of a Main Street loan to a Federal Reserve Bank as collateral?
A: An Eligible Lender that is a depository institution may pledge its 5% of a Main Street loan, provided that the loan meets the collateral eligibility requirements of its local Federal Reserve Bank. General acceptance criteria for loans can be found in the Federal Reserve Collateral Guidelines. A depository institution should contact its local Reserve Bank to discuss specific questions regarding collateral eligibility or pledging procedures. The “Federal Reserve Collateral Guidelines” and toll-free phone numbers and other contact information of each Reserve Bank can be found on www.frbdiscountwindow.org.
- In FAQ K.4, the Federal Reserve clarified what it meant by supervisory expectations regarding appropriate risk management practices under extraordinary circumstances, which are outlined in SR 17-14.
FAQ K.4 now provides that the supervisory approach for assessing the safety and soundness of institutions given the ongoing impact of the COVID-19 pandemic is outlined in SR 20-15.
The citation to SR 20-15 replaced the previous citation to SR 17-14. SR 20-15 adapts the principles of SR 17-14 more directly for the current pandemic.
After August 14, 2020, Eligible Lenders and Eligible Borrowers must use the updated July 31st forms provided on the Federal Reserve of Boston’s website.