On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act or the Act). Title IV of the Act authorizes the Secretary of the Treasury (the Secretary) to make $500 billion of loans, loan guarantees, and other investments to support eligible businesses, states, and municipalities in order to help alleviate the losses incurred by such entities as a result of COVID-19.
Section 4003(c)(3)(D)(ii) of the Act provides that the Board of Governors of the Federal Reserve System (the Federal Reserve) may establish a main street lending program (the Main Street Lending Program) in order to support lending to small and midsize businesses by eligible lenders (as defined below), which must remain consistent with the requirements of section 13(3) of the Federal Reserve Act, using such funds as appropriated by section 4027 of the Act. Eligible lenders include U.S. federally insured depository institutions (including banks, savings associations, or credit unions), U.S. branches or agencies of a foreign bank, U.S. bank holding companies, U.S. savings and loan holding companies, U.S. intermediate holding companies of a foreign banking organization, or U.S. subsidiaries of any of the foregoing (the Eligible Lenders).
On April 30, 2020, the Federal Reserve released additional guidance on the Main Street Lending Program. The Secretary provided that under a Main Street New Loan Facility (the MSNLF), a Main Street Priority Loan Facility (the MSPLF), and a Main Street Expanded Loan Facility (the MSELF), the Federal Reserve Bank of Boston will lend to a single common special purpose vehicle (SPV) on a recourse basis. Such SPV will then use these funds to (i) purchase 95 percent participations in Eligible Loans (as defined below) from an Eligible Lender under the MSNLF; (ii) purchase 85 percent participations in Eligible Loans from Eligible Lenders under the MSPLF; and (iii) purchase 95 percent participations in the updated tranche of Eligible Loans from Eligible Lenders under the MSELF. In each case, the Eligible Lenders will be required to retain (i) 5 percent of each Eligible Loan under the MSNLF, and each upsized tranche of each Eligible Loan under the MSELF, respectively; and (ii) 15 percent of each Eligible Loan under the MSPLF. The Secretary will make an initial $75 billion combined contribution in connection with the MSNLF, the MSPLF, and the MSELF, with up to $600 billion expected to be made available to the programs collectively. The guidance by the Federal Reserve clarified that, unlike the paycheck protection program (the PPP), the Main Street Lending Program debt is not forgivable. However, a business that has received PPP loans, or that has affiliates that have received PPP loans, is permitted to also borrow under the Main Street Lending Program, provided that the business meets all necessary eligibility criteria.
General terms of the Eligible Loans
Eligible Borrower: It is important to note that a borrower (an Eligible Borrower) that participates in either the MSNLF, the MSPLF, or the MSELF may not also participate in another facility or in the Primary Market Corporate Credit Facility (the PMCCF). The PMCCF is a program that was introduced concurrently with the MSNLF, MSPLF, and MSELF, whereby funding is available for direct purchases by an SPV to be established by the Federal Reserve of “Eligible Assets” (corporate bonds or portions of syndicated loans) from “Eligible Issuers.” Additionally, in order to be eligible for either the MSNLF, the MSPLF, or the MSELF, an Eligible Borrower:
- Must have been established prior to March 13, 2020;
- Must not be an “ineligible business”;1
- May have up to (i) 15,000 employees or (ii) $5 billion in 2019 annual revenue;
- Must be a business (i) that is created or organized in the United States or under the laws of the United States, (ii) with significant operations in the United States, and (iii) with a majority of its employees based in the United States; and
- Must not have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (subtitle A of title IV of the CARES Act).
With respect to a potential Eligible Borrower’s employee headcount and 2019 revenue, it is important to note that the most recent guidance requires such figures to be aggregated among the applicant itself along with its affiliates. The central element in determining affiliation is control; however, it is important to note that it does not matter whether control is exercised, so long as the power to control exists. There are four tests for affiliation based on control: (1) affiliation based on ownership; (2) affiliation arising under stock options, convertible securities, and agreements to merge; (3) affiliation based on common management; and (4) affiliation based on identity of interest. Additionally, in determining the size of a business, the revenue and employees of the applicant business and all of its domestic and foreign affiliates should be taken into account, regardless of whether the affiliates are organized for profit.