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The Federal Reserve Board (“FRB”) released yesterday (April 30, 2020) updated term sheets for the Main Street New Loan Program (the “MSNLF”) and the Main Street Expanded Loan Program (the “MSELF”), as well as a term sheet for the new Main Street Priority Loan Program (the “MSPLF”), as part of the latest efforts to roll out the corporate lending programs envisioned by Title IV of the CARES Act.
- The revised Main Street Loan Programs generally offer attractive terms for much needed liquidity that many sponsored portfolio companies would take advantage of if eligible.
- Importantly, while a borrower’s eligibility for borrowing under the Main Street Lending Programs, as well as the maximum amount of loans it may borrow, are conditioned on meeting certain leverage ratios (i.e., 4x under the MSNLF, or 6x under the MSPLF and the MSELF), the revised term sheets have clarified that these ratios will be calculated using adjusted EBITDA. It appears that these ratios will still be calculated taking into account all of a borrower’s undrawn and available commitments as if fully drawn, and there is no indication that cash or cash equivalents may be netted.
- However, notwithstanding some beneficial changes, it is likely that the Main Street Loan Programs as currently proposed will be unavailable to many sponsored portfolio companies.
- Most significantly, the Fed has clarified that it will use the SBA’s affiliation rules for purposes of determining a borrower’s eligibility based on size (i.e., 15,000 employees or fewer or $5 billion or less in 2019 annual revenues). As a result, many private equity-sponsored companies will be aggregated with their sponsor and its other portfolio companies and will thus find that they are not eligible to participate in the Main Street Lending Programs.
- Other impediments include:
- The need for debt and lien capacity under existing bond and/or loan facilities, which not all leveraged companies will have without obtaining consent or a waiver from their existing creditor group(s);
- The required 4 year tenor and meaningful amortization of the Main Street loans, which will run afoul of maturity and weighted average life debt and lien incurrence limitations in many existing bond and loan facilities; and
- The impact on financial maintenance covenants.
- Even if a portfolio company can run the gauntlet of eligibility while finding covenant flexibility under its existing debt documents, conditions will apply to Main Street Lending Program loans that may be unattractive to sponsored portfolio companies.
- Of particular note are the limitations, each of which (absent waiver from the Treasury) would continue to apply until 1 year following repayment of the loans, on payment of dividends, certain stock buybacks and employee compensation (although the Main Street Lending Programs now provide for limited exceptions to facilitate tax payments in pass through structures).
- In addition, borrowers will be prohibited from voluntarily prepaying or cancelling certain of their other existing debt during the life of the loans.
- Sponsors will need to consider whether the benefits of accessing the Main Street Loan Programs outweigh these restrictions.
- Many (but not all) of the concerns above (e.g., debt and liens capacity and impact on financial maintenance covenants, dividend restrictions) could be ameliorated if loans under the relevant Main Street Loan Program could be incurred at a holdco level. However, it is still unclear whether the Fed would treat new Main Street loans to an unencumbered holdco as “eligible”. The programs certainly do not contemplate PIK interest for the life of a loan to accommodate such a structure.