Borrower eligibility
Foreign affiliation and significant U.S. operations
In order to qualify as an “eligible borrower” under the Program, section 4003(c)(3)(C) of the CARES Act requires and the April FAQs demonstrate that the borrower has to have been “created or organized in the United States or under the laws of the United States with significant operations in and a majority of their employees based in the United States.” The May FAQs have provided some additional information regarding the terms “created or organized in the United States or under the laws of the United States” and “significant operations in the United States”
To determine if a borrower has “significant operations” in the United States, the borrower’s business operations should be evaluated with its subsidiaries, but not its parent companies or sister affiliates. The May FAQs have given several examples wherein a borrower would be found to have significant operations in the United States. Specifically, when consolidated with its subsidiaries, if more than 50 percent of the borrower’s: (i) assets are located in the United States; (ii) annual net income is generated in the United States; (iii) annual net operating revenues are generated in the United States; or (iv) annual consolidated operating expenses (excluding interest expenses and any other expenses associated with debt service) are generated in the United States, then the borrower would be found to have significant operations in the United States.
For the avoidance of doubt, with respect to the requirement that a borrower must have been “created or organized in the United States or under the laws of the United States,” a borrower may be a subsidiary of a foreign company provided that the borrower itself was created or organized in the United States or under the laws of the United States, and the borrower meets the “significant operations” requirement, as described above. However, it is important to note that if a borrower is a subsidiary of a foreign company, the proceeds of a Program loan must only be used for the benefit of the borrower, its consolidated U.S. subsidiaries, and other U.S. business affiliates of the borrower. The proceeds of a Program loan may not be used for the benefit of a borrower’s foreign parents, affiliates, or subsidiaries.
Borrower’s participation in the Program
The April FAQs provided that while a borrower may receive more than one loan, a borrower may only participate in one of the Program’s facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), or the Main Street Expanded Loan Facility (MSELF). The May FAQs have clarified that an affiliated group of companies may only participate in one Program facility. Therefore, if an affiliate has previously participated, or has a pending application to participate, in a Program facility, the borrower may only participate in the Program by using the same facility accessed by its affiliate. As result, a borrower’s maximum loan size would be limited by its own leverage level, the leverage level of the affiliated group on a consolidated basis, and the size of any loan extended to other affiliates in the group.
Private equity fund and portfolio company eligibility
In order to be eligible for the Program, a business must not be an “ineligible business.” The May FAQs have clarified that this definition includes the modifications made by the Small Business Administration (SBA) regulations for purposes of the Paycheck Protection Program (the PPP) on or before April 24, 2020. As discussed in certain PPP interim final rules and FAQs, the SBA has determined that private equity funds are ineligible to receive PPP loans. Additionally, to determine its eligibility, a borrower’s employees and 2019 annual revenues must be aggregated with the same figures of the borrower’s affiliated entities in accordance with the affiliation test set forth in 13 C.F.R. 121.301(f) (2019). As described in the PPP, this affiliation test applies to private equity-owned businesses in the same manner as any other business subject to outside ownership or control.
Terms of the program
Priority and security requirements of the MSPLF and MSELF
The April FAQs provided that for both the MSPLF and the MSELF, the loan or the upsized tranche, respectively, must 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.” In connection with this requirement, the May FAQs have clarified that (i) “loans or debt instruments” means “debt for borrowed money and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, and all guarantees of the foregoing” and (ii) “mortgage debt” means “debt secured by real property” at the time of the (x) MSPLF loan’s or (y) MSELF upsized tranche’s origination, respectively.
In order to comply with the priority and security requirements during the term of the MSPLF loan or the MSELF upsized tranche, respectively, the May FAQs have provided that the loan documentation must: (i) ensure that the MSPLF loan or the MSELF upsized tranche does not “become contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments”; and (ii) contain certain lien covenants, negative pledges, exceptions, limitations, carve-outs, baskets, materiality thresholds, and qualifiers that are “consistent with those used by the lender in its ordinary course lending to similarly situated borrowers.”1 Additionally, the loan documentation for the MSELF upsized tranche must also ensure that such upsized tranche remains “secured on a pari passu basis by the collateral securing the underlying credit facility.”
If, at the time of origination, the borrower has any other secured loans or debt instruments (other than mortgage debt), then the MSPLF loan or the MSELF upsized tranche must be secured. However, as of the date of origination, if the borrower does not have any secured loans or debt instruments (other than mortgage debt), then the MSPLF loan or the MSELF upsized tranche may be unsecured, provided that such unsecured MSPLF loans or MSELF upsized tranches are not contractually subordinated in terms of priority to any of the borrower’s other unsecured loans or debt instruments.
If the MSPLF loan is secured, then the collateral coverage ratio2 at the time of the origination of such MSPLF loan must be either (1) at least 200 percent or (2) not less than the aggregate collateral coverage ratio for all of the borrower’s other secured loans or debt instruments (other than mortgage debt). If the same collateral is to be used to secure the MSPLF loan that also secures any of the borrower’s other loans or debt instruments (other than mortgage debt), then the lien upon such collateral must remain senior to or pari passu with the lien(s) of the other creditor(s) upon such collateral.
If the MSELF upsized tranche is secured, then it must be secured by the collateral securing any other tranche of the underlying credit facility on a pari passu basis. Lenders and borrowers may agree to add new collateral to secure the loan (including the MSELF upsized tranche on a pari passu basis) at the time of upsizing. If the underlying credit facility includes both term loan tranche(s) and revolver tranche(s), the MSELF upsized tranche must share collateral on a pari passu basis with the term loan tranche(s) only. Secured MSELF upsized tranches must not be contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments.
Use of proceeds
The April FAQs provided for certain debt repayment covenants for all three Program facilities, in that borrowers must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the MSNLF loan, MSELF upsized tranche, or the MSPLF is repaid in full, unless the debt or interest payment is “mandatory and due.” With respect to debt that predates a Program loan, the May FAQs have clarified that principal and interest payments are “mandatory and due”: (1) on the future date upon which such payments were scheduled to be paid as of April 24, 2020, or (2) upon the occurrence of an event that automatically triggers mandatory prepayments under an agreement for indebtedness, provided that the borrower executed such agreement prior to April 24, 2020, except that any such prepayments triggered by the incurrence of new debt may be paid only: (1) if such prepayments are de minimis; or (2) under the MSPLF, at the time of origination of an MSPLF loan. It should be noted that if a borrower has an existing debt arrangement that requires more than a de minimis prepayment amount upon the incurrence of new debt, the borrower would not be eligible to receive an MSNLF loan or an MSELF upsized tranche unless such requirement is waived or reduced to a de minimis amount by the relevant creditor.
For the avoidance of doubt, borrowers and lenders may participate in the Program and may continue to pay and request payment of interest or principal on outstanding debt on (or after) the payment due date, provided that the payment due date must have been scheduled prior to April 24, 2020. Additionally, borrowers may not pay, and lenders may not request, interest or principal payments on such debt ahead of schedule during the term of the Program loan, unless required by a mandatory prepayment clause as specifically permitted above. With respect to future debt incurred by the borrower in compliance with the terms and conditions of the Program loan, principal and interest payments are “mandatory and due” on their scheduled dates or upon the occurrence of an event that automatically triggers mandatory prepayments.
Lender considerations
Fees
As provided in the Program’s term sheets, lenders are permitted to charge borrowers a one-time origination fee. Additionally. lenders may also require borrowers to bear the cost of the transaction fee, which the lenders are required to pay to the Program special purpose vehicle (SPV). However, the May FAQs have clarified that lenders may not charge the borrower any additional fees (not including customary and necessary de minimis fees for services in connection with the lender’s underwriting, such as appraisal and legal fees). Further, lenders may not charge servicing fees to borrowers.
EBITDA
As described in the April FAQs, earnings before interest, taxes, depreciation, and amortization (EBITDA) is the key underwriting metric required for the Program’s three facilities. With respect to EBITDA adjustments, the May FAQs have clarified that participating lenders should require borrowers to adjust their 2019 EBITDA (1) if the borrower is a repeat customer, by using the same methodology that such lenders have previously required for EBITDA adjustments when extending credit to the borrower, or (2) if the borrower is a new customer, by using the methodology that such lenders would use for similarly situated borrowers3 on or before April 24, 2020. If the lenders have used multiple EBITDA adjustment methods, the lender should choose the most conservative method it has employed, and regardless, the lender must select a single method used at a point in time in the recent past and before April 24, 2020. This means that the lender may not “cherry-pick” or apply adjustments used at different points in time or for a range of purposes. In all cases, the lender should document the rationale for its selection of an adjusted EBITDA methodology.
Loan documentation
The May FAQs have also shed some light on the Program’s loan documentation requirements. Lenders will use their own loan documentation, which should be substantially similar to the loan documentation the lenders typically use in the ordinary course of lending to similarly situated borrowers. However, the loan documentation should be adjusted to reflect the requirements of the Program.4
Funding
Lenders will not be required to commit and pre-fund loans before the SPV has committed to purchase its participation in a Program loan. When the Program becomes operational, lenders will have two loan funding options, as follows:
Funded loan: Lenders may extend an MSNLF loan, an MSPLF loan, or an MSELF upsized tranche to borrowers, fund such loan, and then seek to sell a participation to the Program’s SPV by submitting all of the required documentation within 14 days after the extension of the funds. Upon a determination that such documentation is complete and consistent with Program requirements, the Program’s SPV would then purchase a participation in such loan by entering into the Participation Agreement, which is available on the Federal Reserve Bank of Boston’s website.
Condition of funding: Lenders may also extend an MSNLF loan, an MSPLF loan, or an MSELF upsized tranche to borrowers, but must make the funding contingent on a binding commitment from the Program’s SPV that it will purchase a participation through a commitment letter. Under this approach, the lender would submit all of the required documentation for processing, but would indicate in its submission that the loan has not yet been funded. If such documentation is complete and consistent with Program requirements, the Program’s SPV would provide the binding commitment letter to purchase the loan after it is funded. Such commitment letter would provide that (1) the lender is required to fund the loan within three business days of the date of such letter and (2) the Program SPV will purchase the participation in the loan not later than three business days after the lender notifies the Program SPV that the lender has funded the loan. This notification would be provided by entering the funding date of the loan into a field in the Programs Portal, which will be provided when the Program is operational.
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- The May FAQs provide an Appendix B that contains a model lien covenant that lenders should refer to when drafting their loan documentation.
- According to the May FAQs, “collateral coverage ratio” means the aggregate value of any relevant collateral security, including the pro rata value of any shared collateral, divided by the outstanding aggregate principal amount of the relevant debt.
- The May FAQs provide that “similarly situated borrowers” are borrowers in similar industries with comparable risk and size characteristics. The May FAQs have suggested that lenders document their process for identifying similarly situated borrowers when they originate an MSNLF loan or an MSPLF loan.
- Appendix A to the May FAQs contains a checklist of the items that must be reflected in the loan documentation in order for the SPV to purchase a participation in a loan. Appendix B to the May FAQs includes certain model covenants that lenders can elect to reference when drafting loan documentation in order to satisfy the Appendix A requirements. Appendix C to the May FAQs includes a list of the financial information that lenders must require borrowers to provide on an ongoing basis until the loans mature.
Client alert 2020-354
