On April 9, 2020, as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Treasury and the Federal Reserve Board (Federal Reserve) unveiled the Main Street Loan Program (MSLP), aimed to provide emergency liquidity to small and medium-sized businesses suffering losses caused by the COVID-19 pandemic. The program includes two credit facilities: the New Main Street Loan Facility (MSNLF), which allows lenders to make new loans to eligible borrowers, and Main Street Extended Loan Facility (MSELF), which allows lenders to increase the amount of existing loans to eligible borrowers.
While the MSLP is a welcome development for businesses across the United States in these uncertain times, there remain several major issues with the program that could prevent the program from helping as many businesses as possible. A large number of market players, including lenders, law firms and professional associations, submitted comments to the Federal Reserve during the public comment period that ended on April 16. Among them were the Loan Syndications and Trading Association (LSTA) and the United States Chamber. of Commerce, which provided detailed comments on the MSNLF and MSELF termsheets published by the Federal Reserve.
1. Lack of flexibility to negotiate tailor-made loan terms
The biggest criticism of the MSLP, and the general theme of LSTA and Chamber of Commerce comments, is that the program does not give parties sufficient leeway to negotiate loan terms tailored to the needs of individual borrowers and the interests of borrowers. lenders. For example, the MSNLF and MSELF prescribe a particular interest rate (SOFR plus 250-450 basis points), a minimum loan size ($ 1 million), and a leverage test based on EBITDA. By allowing parties to agree on different terms, the overall appeal and availability of the program would increase dramatically.
For example, according to the LSTA, the 400 basis point cap on the interest rate differential may be too low to induce lenders to extend loans to certain highly leveraged borrowers. Perhaps even more problematic, requiring the use of SOFR as a benchmark rate may prove difficult for many lenders, as this is yet another new clue that banks have yet to implement in their credit facilities to a significant degree. Instead, many lenders (especially small financial institutions) would prefer to use Prime, LIBOR, or other common indexes, which may be accompanied by fallback language that allows SOFR as a proxy rate. Taxing SOFR on MSELF loans would be particularly difficult, as it would be difficult to add a SOFR-based tranche to an existing facility based on another benchmark rate. For this reason, the LSTA suggested that the Federal Reserve allow an MSELF loan to benchmark the same benchmark as the existing loan, which would simplify the documentation process and eliminate the need for overly complicated drafting and allocation adjustments.
Likewise, the minimum loan amount of $ 1 million is too large and may exclude some small businesses that are looking for smaller amounts of cash, as the Chamber of Commerce particularly noted. In addition, the current MSNLF and MSELF termsheets impose a maximum loan size (and a separate but related attestation) that depends on the borrower’s debt-to-EBITDA ratio, which would prevent many companies from borrowing under the loan. program. The LSTA commented that lenders should be allowed to define EBITDA in a manner consistent with existing debt agreements with a given borrower, as well as the borrower’s industry in general. And for borrowers who typically don’t have positive EBITDA, like nonprofits or startups, lenders should be able to use alternative credit measures typical of the borrower’s industry.
2. Exclusion of private lenders
Another major drawback of the MSLP is that it is currently limited to “US insured deposit institutions, US bank holding companies, and US savings and loan holding companies.” This requirement excludes a significant portion of mid-market firms which often borrow from foreign banks and non-bank lenders such as private debt funds. The consensus among observers is that this definition of “eligible lenders” is unnecessarily restrictive. The LSTA highlighted the “urgent need to provide liquidity” to businesses affected by the COVID-19 crisis in its argument that a wider range of lenders should be allowed under the program. At a minimum, argued the LSTA, non-US and non-bank lenders should be allowed to lend alongside existing eligible lenders existing loans under the MSELF. The Federal Reserve could go even further by allowing ineligible lenders to combine with eligible lenders into a syndicate under the MSNLF or MSELF.
3. Constraints on existing credit agreements
Another source of criticism and confusion is how loans under the MSLP will fit into existing debt structures. Most borrowers are parties to existing credit agreements that contain covenants that prohibit taking on new secured debt (or, in some cases, even unsecured debt), so incurring debts under the MSLP would require a consent or modification of the existing credit facility. In addition, the MSLP currently requires borrowers to refrain from repaying other loan balances of “equal or lower priority”, except for mandatory principal payments. It is not clear whether this precludes the repayment of a loan at maturity or the repayment of drawings under the revolving credit facilities, but it would be reasonable to allow such payments. In addition to these potential obstacles, there are also warranty issues in the context of MSELF. While new MSNLF loans are unsecured, MSELF loans will be secured by any collateral that secures the existing loan (whether pledged under the original terms of the existing loan or upon termination. (increase) on a pro rata basis, potentially preventing borrowers from participating in MSELF due to existing debt constraints.
The LSTA noted that when a company’s existing credit arrangements do not allow for new secured debt, one possible solution is to allow an increased tranche under the MSELF to be unsecured even if the existing loan is secured. , as long as the lender in this scenario is willing to make an unsecured loan. The LSTA also demands that in all cases where a borrower cannot take on new debt, lenders be allowed to lend to a direct or indirect holding company of the borrower so as not to violate these restrictions.
Changes Needed to the Main Street Loan Program
We have highlighted some of the concerns about the MSLP in its current form, in addition to the many other issues, clarifications and questions raised by the LSTA and others. Market participants should be on the lookout for revisions to the program in the days and weeks ahead that will hopefully address these concerns. Cooperation and coordination between lenders, borrowers, the Federal Reserve and the Treasury is essential to deliver much needed liquidity to small and medium-sized businesses in the fastest and most efficient manner.
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