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Jun 23, 2020

Main Street Lending Program: Key Practical Points for Consideration

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MAIN STREET LENDING PROGRAM: KEY PRACTICAL POINTS FOR CONSIDERATION 

Overview

As part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted by the U.S. Congress and signed into law by the President in late March, the Federal Reserve has announced the Main Street Lending Program (the “Program”). Under the Program, the Federal Reserve will purchase participations in loans originated by eligible lenders, and pursuant to the most recent terms (as through June 20, 2020), the program will make available up to $600 billion in liquidity to eligible lenders that will provide direct loans to eligible businesses. The Program will be deployed through the Main Street New Loan Facility (“MSNLF”), the Main Street Expanded Loan Facility (“MSELF”) and the Main Street Priority Loan Facility (“MSPLF” and, together with MSELF and MSNLF, the “Program Facilities” and each a “Program Facility”).

To provide more direct and prioritized support to small businesses, the CARES Act also established a new Payroll Protection Program (“PPP”) under section 7(a) of the Small Business Act to provide small businesses with forgivable, low-interest, non-recourse loans to be used for traditional section 7(a) purposes and special designated purposes such as payroll, health care and rent. Unlike the Program Facilities, the PPP loans are fully guaranteed by the Small Business Administration (“SBA”) and are forgivable if they are used for the aforementioned purposes during either an eight-week period (if the loan was disbursed prior to June 5, 2020) or a 24-week period (if the loan was disbursed on or after June 5, 2020) and the borrower has maintained or re-hired recently laid off employees prior to the end of the applicable eight or 24-week period (provided that in no event will such period extend past December 31, 2020). Access to the Program Facilities and the PPP are not mutually exclusive, as both programs are intended to work together to provide both immediate and medium/long-term support to smaller businesses.

Businesses seeking to promptly access the facilities under the Program will need to work with counsel and lenders to carefully assess how eligible loans will integrate with existing capital structures. As such, this article will first provide a brief summary of the most recent terms of the MSNLF, MSPLF and MSELF, which will be followed by some guidance on practical issues that should be considered by borrowers and lenders that desire to participate in the Program Facilities.

Borrower Eligibility

While the PPP and the also newly-created Primary Market Corporate Credit Facility (“PMCCF”) are designed to provide immediate liquidity support for a range of small, medium and large businesses, the Federal Reserve has indicated the purpose of the Program is to support lending to small and medium-sized businesses that were in sound financial condition prior to the onset of the COVID-19 pandemic.

The Program is intended for certain businesses that meet the below characteristics:

  • businesses that are for-profit, legally-formed entities created or organized in the U.S. or under the laws of the U.S. prior to March 13, 2020, with significant operations in and a majority of its employees based in the United States;[1]
  • businesses that have not received support pursuant to section 4003(b)(1)-(3) of the CARES Act nor are they participating in the PMCCF or constitute businesses of the type listed in 13 CFR 120.110(b)-(j) and (m)-(s) (as modified and clarified by regulations implementing the PPP on or before April 24, 2020);[2] and
  • businesses that have either (i) 15,000 employees or fewer (based on the average total number of employees for each pay period over the 12-month period prior to the origination of the loan) or (ii) annual revenues (based on either the applicant’s audited financials under GAAP or annual receipts reported to the Internal Revenue Service) of no greater than $5 billion for 2019 (note these eligibility requirements are subject to the Small Business Act’s affiliation rules that generally require borrowers to aggregate their employees and revenues with those of its affiliates).

It is worth noting that despite the fact that the Program was expanded beyond its original formulation to include companies with higher revenue and employment thresholds, it will likely be unavailable to private equity and venture capital-backed companies due to the required application of the Small Business Act’s affiliation rules. In addition, since EBITDA is the key underwriting metric for determining the size of the loan available under one of the Programs, businesses that have in the past borrowed based on recurring revenues (because they have low or negative EBITDA) or on an “asset-based” basis may not be able to avail themselves of one of the Programs at this point in time.

Lender Eligibility

To participate in the Program, each lender must meet certain eligibility requirements. To be eligible, such lender must be a U.S. federally insured depository institution (including any bank, savings association or credit union), a U.S. branch or agency of a foreign bank, a U.S. bank holding company, a U.S. savings and loan holding company, a U.S. intermediate holding company of a foreign banking organization or a U.S. subsidiary of any of the foregoing. As of the date of this writing, non-bank lenders (e.g., BDCs or other private capital providers) are not eligible to participate in the Program. However, the Federal Reserve has said that it is considering expanding the lender eligibility criteria in the future. In addition, an eligible lender will need to be eligible under the Program’s conflict of interest prohibitions as well as being able to certify that it is not insolvent.

Loan Deployment and Key Documentation

The Fed has provided guidance to lenders that want to make loans under one of the Programs that they should view the eligibility criteria in the term sheets as the minimum requirements for the Program, and lenders are expected to conduct a customary review and due diligence of the potential borrower’s financial condition at the time of the loan application based on their typical underwriting standards. Lenders will need to carefully assess the impact of the COVID-19 pandemic on such borrower and its business and consider its future prospects of being able to repay the loan on a current basis when determining whether a borrower should be granted a loan and at what size, notwithstanding that the provisions of the term sheets would permit such loan.

Lenders should use their own standard loan documentation with respect to Program Loans, which loan documents should be substantially similar to the loan documentation lenders use for similarly situated borrowers as adjusted to include Program required provisions. The Fed has provided model language for certain of the provisions it requires to be in loan documents (as well as a list of required financial information borrowers are required to deliver on an ongoing basis), but lenders are permitted to use their own provisions. In addition, as described below, borrowers and lenders will be required to make various certifications in connection with each loan.

Lenders will have two options for funding loans. A lender can extend a loan under the Program and then can seek to sell a participation in such loan to the SPV by submitting the required paperwork to the Fed within 14 days of making the loan. Once the Fed has determined that such loan was made in compliance with the Program requirements, the SPV would purchase its participation interest. The other way a lender could extend a loan under the Program is to enter into documentation for the loan with the borrower and make it contingent upon receiving a binding commitment from the SPV to purchase the participation. If such a commitment is received, the lender will be required to fund such loan within three business days of the date of such commitment letter and notify the SPV of the date the funding occurred (and the SPV will generally be able to advance funds to purchase its participation within one business day).

Operationally, each time an eligible lender sells a participation to the SPV, such lender will be required to enter into a loan participation agreement, a servicing agreement, an assignment-in-blank and a co-lender agreement with the SPV (in addition to making the required certifications, covenants, etc.).

The participation agreement (which also incorporates Standard Terms and Conditions) governs the funding and sale mechanics of a Program loan. In addition, the participation agreement also provides for the SPV’s transfer and voting rights. Except in certain limited circumstances, the SPV cannot transfer its participation in a loan without the consent of the lender prior to elevating its interest into an assignment of the loan. Following such elevation, the SPV may transfer its rights without the lender’s consent. In general, the lender is granted sole authority for most decisions and votes relating to the loan other than with respect to certain enumerated “Core Rights Acts.” Such Core Rights Acts include customary lender sacred rights that ordinarily require each lender’s consent (such as delaying the time to make payments and reductions in the principal and the rate of interest) as well as additional items relating to Program-mandated provisions (such as waivers of conditions precedent, amendments to mandatory prepayments relating to borrower certifications, adding restrictions on the ability of any lender to assign or pledge its rights or obligations under any loan document and amendments to periodic financial and notice reporting).

The servicing agreement sets forth the lender’s and the SPV’s rights in connection with the administration of the loan, as well as requiring the delivery of certain documentation and information by the lender to the SPV. The assignment in blank is to be used by the SPV to elevate its interest in a loan to become a lender of record. The co-lender agreement is executed in connection with bilateral facilities to provide mechanics for a multi-lender facility if the SPV elevates its participation interest to that of a lender of record.

As described above, the ultimate decision to extend a loan to the applicant will rest with the eligible lender, which is expected to conduct an assessment of the financial condition and creditworthiness of the potential borrower. If the eligible lender decides to extend the requested loan to the applicant, the terms of such loan will be based on the terms set forth in the term sheet of the applicable Program Facility (each of which is summarized below), and the eligible borrower should expect that its participation in the Program will be publicly disclosed by the Federal Reserve.

The table below summarizes certain key terms of each of the MSNLF, the MSPLF and the MSELF.

Overview and Comparison of Certain Main Street Lending Program Facility Terms

 

MSNLF

MSPLF

MSELF

Eligible Loan

New term loan.

Note that if the eligible borrower had other loans outstanding with the eligible lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the lender’s supervisory rating system as of such date.

Same as MSNLF.

Existing term loan or revolving credit facility that the borrower has with the same lender that will be providing an upsize tranche loan under MSELF.

Note that in order to be eligible for an upsized tranche, the existing secured or unsecured term loan or revolving credit facility (i) must have been originated on or before April 24, 2020, (ii) must have a remaining maturity of at least 18 months (taking into account any adjustments made to the maturity of the loan after April 24, 2020, including at the time of upsizing made under the Program) and (iii) must have had an internal risk rating equivalent to a “pass” in the lender’s supervisory rating system as of December 31, 2019.

Term

Five years.

Same as MSNLF.

Same as MSNLF.

Rate

Adjustable rate of LIBOR (1 or 3 month) + 300 basis points.

Same as MSNLF.

Same as MSNLF.

Amount

Minimum loan size is $250,000.

Maximum loan size is the lesser of (i) $35 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed four times the borrower’s adjusted 2019 EBITDA.

Minimum loan size is $250,000.

Maximum loan size is the lesser of (i) $50 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times the borrower’s adjusted 2019 EBITDA.

Minimum loan size is $10 million.

Maximum loan size that is the lesser of (i) $300 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times the borrower’s adjusted 2019 EBITDA.

Existing Outstanding and Undrawn Available Debt

It includes all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, non-bank financial institution, or private lender, as well as any publicly issued bonds or private placement facilities, provided that no outstanding debt that is being refinanced under the MSPLF program will be considered as part of the existing outstanding and undrawn available debt. It also includes all unused commitments under any loan facility, excluding (i) any undrawn commitment that serves as a backup line for commercial paper issuance, (ii) any undrawn commitment that is used to finance receivables (including seasonal financing of inventory), (iii) any undrawn commitment that cannot be drawn without additional collateral and (iv) any undrawn commitment that is no longer available due to a change in circumstance. This calculation must be made as of the date of the loan application.

Same as MSNLF.

Same as MSNLF.

 

EBITDA Calculation

Adjusted 2019 EBITDA calculation is based on the methodology used by the lender to calculate EBITDA when extending credit to the borrower or to similarly situated borrowers on or before April 24, 2020.

Same as MSNLF.

Adjusted 2019 EBITDA calculation is based on the methodology previously used for adjusting EBITDA when originating or amending the underlying loan on or before April 24, 2020. Note that this may not include all EBITDA adjustments contained in the borrower’s existing loan documents.

Amortization

Principal is amortized with 15% due at the end of the third year, 15% due at the end of the fourth year and a balloon payment of 70% due upon maturity at the end of the fifth year.

Same as MSNLF.

Same as MSNLF.

Deferral

Principal payments are deferred for two years and interest payments are deferred for one year (unpaid interest will be capitalized).

Same as MSNLF.

Same as MSNLF.

Ranking; Collateral and Priority of Security

Secured/Unsecured

At the time of origination or at any time during the term of the loan, the loan is not contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments.

Secured/Unsecured

At the time of origination and at all times during the life of the loan, the outstanding loan is senior to or pari passu with, in terms of priority and security (if any), the borrower’s other loans or debt instruments (other than mortgage debt).

Secured/Unsecured

At the time of upsizing and at all times while the upsized tranche is outstanding, the upsized tranche is senior to or pari passu with, in terms of priority and security (if any), the borrower’s other loans or debt instruments (other than mortgage debt).

Prepayment

Prepayment permitted without penalty.

Same as MSNLF.

Same as MSNLF.

Restrictions on Repayment of Other Debt

The borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the new loan is repaid in full, unless the debt or interest payment is mandatory and due.

Note that borrowers may still be able to (i) repay a line of credit (including a credit card) in the normal course of business, (ii) incur inventory or equipment financing or similar debt in the ordinary course of business (so long as such debt is secured by newly acquired property and is otherwise lower priority) and (iii) refinance debt that is maturing no later than 90 days from the date of such refinancing.

Same as MSNLF except that a borrower may also refinance existing debt owed to a lender that is not the lender making the MSPLF loan at the time the MSPLF loan is originated.

Same as MSNLF.

Restrictions on Existing Lines of Credit

The borrower must commit that it will not seek to cancel or reduce any of its committed lines of credit with the lender or any other lender.

Note that borrowers may still be able to (i) reduce or terminate uncommitted lines of credit, (ii) allow existing lines of credit to expire in accordance with their terms and (iii) reduce availability under existing lines of credit in accordance with existing terms as a result of changes in borrowing bases or reserves in asset-based or similar structures.

Same as MSNLF.

Same as MSNLF.

Restrictions on Compensation, Stock Repurchases and Capital Distributions

The restrictions under section 4003(c)(3)(A)(ii) of the CARES Act will apply except with respect to distributions made by S-corporations or other tax pass-through entities to the extent reasonably required to cover their owners’ tax obligations in respect of such entities’ earnings.

Same as MSNLF.

Same as MSNLF.

Participation Amount Retained by Lender

Lender must retain 5% of the loan until the earlier of (x) the maturity date or (y) the date when the Federal Reserve sells all of its participation.

Same as MSNLF.

Lender must retain (i) 5% of the upsized tranche until the earlier of (x) the maturity date or (y) the date when the Federal Reserve sells all of its participation, along with (ii) its interest in the existing term loan or revolving credit facility until the earliest of (x) the maturity of such term loan or credit facility, (y) the maturity of the upsized tranche or (z) the date when the Federal Reserve sells all of its participation.

Transaction Fee

100 bps of the principal amount of loan paid by the borrower or the lender to the Federal Reserve.

Same as MSNLF.

75 bps of the principal amount of the upsized tranche paid by the borrower or the lender to the Federal Reserve.

Origination Fee

Up to 100 bps of the principal amount of loan paid by the borrower to the Federal Reserve.

Same as MSNLF.

Up to 75 bps of the principal amount of the upsized tranche paid by the borrower to the Federal Reserve at the time of upsizing.

Annual Servicing Fee

25 bps of the principal amount of the Federal Reserve’s participation paid by the Federal Reserve’s SPV to the lender.

Same as MSNLF.

25 bps of the principal amount of the Federal Reserve’s participation in the upsized tranche paid by the Federal Reserve’s SPV to the lender.

 

Borrower and Lender Certifications

To qualify for the Programs, both borrowers and lenders are required to make certain covenants (some of which survive for 12 months following the date such loan is no longer outstanding) and make a number of certifications relating to it being an “eligible borrower” under the Program as described above. Below are some of the key certifications that may have a restrictive effect on a borrower’s business and operations or a lender’s willingness to make a loan.

Borrower Certifications and Agreements

In order to obtain a Program loan, a borrower must certify and agree, among other things:

  • Unavailability of Credit—the borrower must confirm that it is unable to obtain adequate alternative financing from other sources. This does not mean that no alternative is available, but that if alternatives are available, that they are inadequate due to amount, price or the terms of credit;
  • Solvency—the borrower must certify that it is not insolvent;
  • Limit on Repaying Debt—limits the ability of the borrower to pay the principal of, or interest on, any debt except mandatory amounts when due (or refinancing debt that is maturing no later than 90 days from the date of such refinancing) and regular payments on revolving lines of credit;
  • Maintain Payroll—requires commercially reasonable efforts to maintain payroll and retain employees during the term of the loan;
  • Limits on compensation—strict requirements limiting the increase of or additional bonuses to salaries between $425,000 and $3,000,000;[3]
  • Limits on repurchases of equity securities—the borrower is restricted from repurchasing its own shares and the shares of its parent company; [4] and
  • Limits on distributions—the borrower must agree not to pay dividends or make other capital distributions on common stock.[5]

In general, the lender is required to collect the required certifications and covenants from the borrower at the time of originating the loan. Lenders are not required to independently verify the borrower’s certifications or actively monitor ongoing compliance with covenants, but if such lender becomes aware of a breach or of a material misstatement during the term of the loan, the lender is required to notify the Federal Reserve Bank.

Lender Certifications and Agreements

In connection with each Program loan, the lender must certify and agree, among other things:

  • EBITDA Requirement for Borrower—the lender must certify that the borrower (and/or its affiliates) meets the relevant financial covenant set out under the relevant Program terms and that the method of calculation of EBITDA is in accordance with methods previously used by such lender for that borrower or is typically used by the lender for similarly situated borrowers;
  • Lien Certification—if a loan under the MSPLF is secured, the lender must certify that the Collateral Coverage Ratio is at least 200% or else not less than the Collateral Coverage Ratio for the borrower’s secured debt (other than mortgage debt). If the loan is under the MSELF, the lender must certify that any collateral securing the underlying credit facility at the time of the loan secures both the underlying facility and the new loan;
  • Eligible Loan Not Subordinated—the lender must certify at the time of origination that the eligible loan is not and will not become through the action, consent or facilitation of the lender, contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments;
  • Existing Debt—the lender must certify that it will not cancel or reduce any existing committed lines of credit to the borrower except in the case of events of default or require payments of principal of, or interest on, any such existing debt unless such payments is mandatory and due or in the case of default and acceleration;
  • Material Breach of Certain Borrower Certifications and Covenants—the lender must certify that the eligible loan documentation contains a provision triggering a mandatory prepayment upon the lender’s receipt of notice that the borrower has materially breached its certifications or covenants;
  • Cross Acceleration Provisions—the lender must certify that the eligible loan documentation contains a provision triggering an event of default or acceleration if the borrower has defaulted on any other loans made by the lender (or its affiliates); and
  • Financial Reporting Covenant—the lender must certify that the eligible loan documentation contains a financial reporting covenant requiring the Borrower to deliver the required financial information and calculations in accordance with the relevant Program requirements.

Restrictions and Limitations of Existing Credit Agreements

Any borrower seeking to take advantage of the facilities under the Program will need to perform an analysis to assess how any loan under the Program Facilities will integrate with existing debt structures. Contractual issues related to everything from restrictions on additional debt and liens to prohibitions on distributions should be assessed carefully to determine the appropriateness of a credit solution under the Program. The below non-exhaustive list is intended to provide a quick review of key items that should be considered prior to any borrowing under the Program Facilities.

General Restrictions on Debt and Lien Incurrence; Sizing Considerations

Although most covenants only restrict the ability of a borrower to incur more debt, the general covenant structure of a borrower’s debt agreements should be assessed in totality to determine interactions with any loan incurred under one of the Program Facilities. For example, at the outset, restrictions on the incurrence of debt and liens (if applicable) that are contained in existing debt agreements will have to be assessed to determine potential requirements for waivers or lender consents if there is not sufficient capacity under the existing covenants to incur debt under one of the Program Facilities. Similarly, borrowers will have to perform calculations and analysis as to whether the additional debt will cause any issues with respect to compliance with any existing financial covenants. Borrowers should also make a strategic assessment to determine if consumption of capacity under existing debt and lien incurrence baskets will cause financing challenges in the future by restricting future incurrence capacity under the current debt facilities.

Further, as described above, the Program Facilities provide for specified limitations on the loan sizing. It is important to note that EBITDA determinations for purposes of sizing the loans under the Program Facilities will not be tied to any contractual agreements or EBITDA definitions that may exist among the relevant borrowers and lenders, but rather to each lender’s internal underwriting criteria. This may have the effect that certain borrowers that are used to being able to add back substantial amounts to their EBITDA pursuant to bespoke EBITDA credit agreement provisions may find themselves being able to access smaller loans than they would otherwise expect. It is also noteworthy that existing undrawn lines of credit (subject to certain exceptions, e.g., for commercial paper backstops or receivables financing) will have to be included in the leverage calculation for purposes of loan sizing which again may result in unexpected reductions to Program Facilities available loan amounts.

Borrowers should also be aware that the Fed has provided for certain restrictions relating to the repayment and termination of any debt other than loans incurred under the Program Facilities, except for loans under the MSPLF, which, as mentioned above, are permitted to be used by the borrower to refinance existing debt owed to a lender that is not the eligible lender at the time the MSPLF loan is made. Generally, borrowers will be restricted from making payments of principal and interest on other debt unless such payments are mandatory and due; provided that a borrower will be permitted to refinance debt that is maturing no later than 90 days from the date of such refinancing. While this should allow servicing of other debt in the ordinary course, borrowers should keep in mind that as a practical matter, loans under the Program Facilities will need to be repaid first during any deleveraging efforts, which in certain circumstances may increase the borrowers’ overall borrowing costs (e.g., if any other debt has a higher rate of interest than the Program Facilities). Further, the Program Facilities do not permit the borrower to cancel or reduce any of its committed lines of credit with any lender. However, the Federal Reserve has advised that this covenant does not prohibit the reduction or termination of uncommitted lines of credit in the normal course of business, the expiration of existing lines of credit in accordance with their terms or the reduction of availability under existing lines of credit in accordance with their terms due to changes in borrowing bases or reserves in asset-based or similar structures. The intent behind this prohibition is most likely ensuring that borrowers maintain as many liquidity sources as possible while the Program Facilities loans are outstanding; this could result in borrowers being required to maintain in place (and pay associated fees) lines of credit they do not have any plans to utilize.

Incremental Incurrence

For those borrowers seeking to make use of the MSELF, one of the more likely paths a borrower would elect to follow to expand any specific loan would be through the incremental facility provisions of the relevant credit agreement. The specific terms of the MSELF should be reviewed in light of existing constraints related to incremental facilities. Borrowers should consider the effect of an expansion facility on key contractual constraints related to maturity/amortization or even, potentially, MFN provisions. For example, many credit agreements will not permit incremental facilities that mature earlier, or have a shorter weighted average life to maturity, than the existing facilities. Given the relatively short maturity and substantial required amortization of the MSELF, this could prevent borrowers from incurring loans under the MSELF under their existing credit agreements absent existing lenders’ consent or applicable exceptions contained in the existing credit documents. In addition, borrowers should review most favored nations (MFN) provisions in their existing debt instruments to confirm that no MFN provisions are triggered (which could result in an increase of the rate of interest on the underlying loans in certain prescribed circumstances). Further, mechanics related to the implementation of the upsized loan should be reviewed to ensure that any consent rights or requirements for documentation (e.g., amendments) are satisfied prior to making use of any loan under the MSELF.

Capital Distributions

The capital distribution restrictions that apply to any loan under the Program Facilities are relatively stringent and may set tighter constraints than existing provisions in the borrower’s debt documents. Except for tax distributions, loans under the Program Facilities would prohibit the payment of dividends or making of capital distributions with respect to any of the eligible borrower’s common stock while the loan is outstanding and for 12 months thereafter. A borrower would also be prohibited from the repurchase of any of its equity securities (or those of its parent company) while the loan is outstanding and for 12 months thereafter, except as required by existing contractual obligations. As of this writing, the Fed has not expanded these restrictions or provided further guidance on any other potential distribution exemptions that may be part of the normal course of business. While the exception for tax distributions is certainly helpful, there may be other ordinary course distributions that may be relevant depending on the particular borrower’s structure (e.g., making distributions for overhead expenses and the like to any parent company) that would not be permitted under the existing guidelines.

Security Interests

New loans under the MSNLF will have some flexibility as to priority, as the only requirement is that such loans not be “contractually subordinated in terms of priority” to other existing debt. While the Fed guidelines do not specify with absolute certainty what “contractually subordinated” means in this context, it appears that this refers to payment priority and will not restrict lien subordination (e.g., incurring loans under the MSELF as second lien debt behind existing first lien debt) and incurring unsecured loans under the MSELF if the borrower has existing secured debt. On the other hand, loans and upsizes under the MSPLF and MSELF, respectively, are required to be senior to or equal with, in terms of payment priority and security, the borrower’s other loans or debt instruments (other than mortgage debt). Notably, all loans may be senior or unsecured; however, the MSELF loans must be secured by the same collateral package, if any, as the underlying loan.

The requirement that both the MSPLF and MSELF loans be pari passu with any existing secured debt will trigger the need to ascertain any limitations on the incurrence of pari passu debt and liens and related procedural requirements. The easiest approach here would be, in the case of the MSELF, structuring the new loans as a new incremental tranche under the existing credit agreement. However, in the case of the MSPLF and loans under the MSELF structured as “side-car” facilities, a pari passu intercreditor agreement will most likely be required. Some credit agreements include the basic framework for incurrence of additional pari passu secured debt, including mechanics for pari passu intercreditor agreements, but the requirement to enter into an intercreditor agreement with the existing lenders could significantly delay the borrower’s ability to access the new financing, as well as significantly increase the expense to the borrower to obtain such financing. In scenarios where credit agreements do not include specific mechanics for additional pari passu debt, amendments and/or consents from the existing lenders may be required, which could further increase the delay caused by putting a pari passu intercreditor agreement in place.

Certifications and Covenants

Eligible borrowers should make a detailed assessment of where in the debt document to include the required certifications and covenants. The required certifications and covenants are somewhat general, and there has been little detailed guidance to assist in narrowing the potentially wide interpretations that could apply to such certifications and covenants. As such, borrowers may want to spend some time determining the optimal location for these requirements to avoid the risk of inadvertently breaching a covenant or certification and causing a cascade of events and/or accelerations throughout the debt instruments.

MSELF participants should be especially vigilant in assessing eligibility of syndicate participants in any upsize. Inadvertent inclusion of an existing syndicate member that happens to be an ineligible lender could trigger an event of default (as the MSELF upsize will be in direct violation of the program requirements), making the loan ineligible for purchase by the SPV and causing cross-actions throughout the debt facilities.

Footnotes

[1]  It should be noted that as of this writing the Federal Reserve is considering expanding the Program to include not-for-profit businesses.
[2]  Some examples include a wide range of businesses primarily engaged in lending, insurance services, gambling, speculation (e.g., oil wildcatting), etc.
[3]  Exceptions apply for those employees subject to a collective bargaining agreement.
[4]  Exceptions apply for contractual obligations to repurchase or purchase shares that were in effect prior to March 27, 2020.
[5]  Exceptions apply for S corporations and other pass-through entities to make tax distributions.

Authors and Contributors

Michael Chernick

Partner

Finance

+1 212 848 5281

+1 212 848 5281

New York

Tomasz Kulawik

Partner

Finance

+1 202 508 8041

+1 202 508 8041

Washington DC

Mohamed El-Sayed

Associate

Finance

+1 212 848 5114

+1 212 848 5114

New York

Lisseth A. Rincon Manzano

Associate

Finance

+1 212 848 4419

+1 212 848 4419

New York

Practices

Regional Experience

Key Issues