The Federal Reserve recently announced that the Federal Reserve Bank of Boston has set up the special purpose vehicle (SPV) to purchase participations in loans originated by eligible lenders under the Main Street Lending Program (Program). In addition, Program loan participation agreement, form borrower and lender certifications, and other required form agreements are now available on the Federal Reserve Bank of Boston’s Main Street Lending Program Forms and Agreements website, available here. The Federal Reserve also updated its Frequently Asked Questions (FAQs), dated May 27, 2020, which can be found here.
As described in our earlier Alerts, the Federal Reserve and the U.S. Department of Treasury are making available up to $600 billion in new financing for eligible small and mid-sized businesses. The FAQs clarify the subordination rules for each of the Program’s three separate facilities, summarized below:
What does “contractually subordinated in terms of priority” for New Loans mean?
This phrase is interpreted to mean that a New Loan may not be contractually junior in priority in bankruptcy to the borrower’s other unsecured loans or debt instruments. The Federal Reserve’s FAQs make significant exceptions to this general rule. First, the FAQs provide that a secured New Loan may be junior in lien priority to an existing loan.
Second, a New Loan may be unsecured even if the borrower has existing secured debt. Finally, the borrower may take on additional debt after receiving a New Loan provided the new debt would not have a senior contractual priority over the New Loan.
What does “senior to or pari passu with, in terms of priority and security” for Priority Loans mean?
Priority Loans have a leverage ratio of six times adjusted 2019 EBITDA compared to four times for New Loans. To partially offset the increased risk, Priority Loans must be senior to or pari passu with, in terms of priority and security, the borrower’s other debt. For purposes of the subordination rule, the term “other debt” includes debt for borrowed money and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, and all guarantees, but excludes debt secured by real property at the time of origination. To comply with the Priority Loan subordination rules:
What does “senior to or pari passu with, in terms of priority and security” for an upsized tranche in an Expanded Loan mean?
Under the Expanded Loan Facility, the upsized tranche to the borrower’s existing credit facility is subject to the following subordination rules:
What Should Prospective Borrowers Do Next?
Prospective borrowers should prepare in advance of the launch of the Program. This includes carefully reviewing the borrower’s existing indebtedness agreements and covenants, and, if applicable, commencing discussions with the borrower’s existing lenders of Program loan availability and compliance with the applicable subordination provisions.
Tarter Krinsky & Drogin is ready to assist to determine prospective borrowers’ eligibility under the Program and other U.S. government programs. The above summary is current as of June 5, 2020.
Attorney Advertising. The information contained in this Legal Alert provides a general summary of the topics covered and is not intended to be and should not be relied upon as legal advice. You should consult with your legal counsel for advice and before making legal, business or other decisions.
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