/>iAmong a number of federal lending programs enacted during the COVID-19 pandemic to ease economic hardship, the Main Street Lending Program (“MSLP”) established a much needed financial lifeline for small to mid-size businesses.[1] From our experience, the lenders, as was the case with the Paycheck Protection Program (“PPP”), were trying to help parties for which conventional financing was no longer available. Such lenders also considered the MSLP as an opportunity to develop new deposit customers (the yield on the retained portion of the MSLP loan did not, by itself, generate much return, especially on a risk adjusted basis). The loan sizes ranged from as small as $1.2 million up to $50 million. Unlike some other COVID-19 federal lending programs that offered loan forgiveness, the MSLP loans were fully recourse and required repayment. As described in greater detail below, the MSLP loan term sheets provided for a one-year interest deferral, with principal payments commencing in year three with full maturity in year five. The MSLP was announced in April 2020 and ceased accepting new loan applications on January 8, 2021. This means that the earliest MSLP loans recently entered year five when a 70% principal payment will be due. Lenders that underwrote MSLP loans should expect that some borrowers that are unable to make the final principal payments may seek to restructure the loans in the near-term.
First, it’s helpful to understand the structure of the MSLP. To facilitate lending under the program, the Federal Reserve System through its Board of Governors authorized the Federal Reserve Bank of Boston to establish a special purpose vehicle, MS Facilities LLC (“Main Street SPV”), a Delaware limited liability company. Main Street SPV has two members: the Federal Reserve Bank of Boston, as its managing member, and the US Department of Treasury, as its preferred equity member. The Federal Reserve Bank of Boston lent $16.6 billion to Main Street SPV to fund loans under the MSLP.[2]
Loans under the MSLP were originated by banks or other eligible financial institutions that required borrowers to complete certifications establishing themselves as eligible borrowers. The lenders sold a 95% participation interest in each loan to Main Street SPV and retained a 5% economic interest, as well as servicing rights. The lenders received an origination fee at origination and ongoing servicing fees as a percentage of the outstanding principal amount of the loan. Under the terms of the MSLP, the lenders are responsible for the day-to-day servicing and administration of the loans. Borrower requests to modify the terms of the MSLP loans must be approved by Main Street SPV, as further described below.
There were 1,830 loans made under the MSLP. Based on available data, it is believed that approximately half are still outstanding.[3] As of July 31, 2024, total outstanding principal across the program neared $5 billion. Principal amortization began in year three of each MSLP loan, with 15% due at the end of year three, 15% due at the end of year four, and the remaining 70% due at the end of year five. While historically low, loan defaults have increased rapidly beginning in 2023, which coincides with the first principal payments coming due.[4]
For businesses that do not have the cash available to repay a MSLP loan in full at maturity, they can refinance the MSLP loan without prepayment penalty if they can obtain alternative financing.
If refinancing is not an option, loan modification may allow borrowers additional time to repay the loans. Main Street SPV will approve loan modifications under certain conditions, including “whether (1) the debtor is or is likely to be in payment default in the foreseeable future without the modification, (2) if the debtor declared or will declare bankruptcy, (3) there is substantial doubt that the debtor will continue as a going concern, (4) the debtor’s entity-specific projected cash flows will not be sufficient to service its debt, or (5) the debtor cannot obtain funds from sources other than the existing creditors at market terms for debt with similar risk characteristics.”[5] Generally, modification may include changes to the principal payment schedule or interest deferral, as well as other amendments on a case by case basis that reduce the likelihood of an event of default and exercise of remedies by the lender.
For lenders that administer troubled MSLP loans, any material loan modifications (i.e., “Core Rights Acts”) must be approved by Main Street SPV through a formal request from the lender administrating the MSLP loan. Such modifications generally include, among others, (i) requests for term extensions; (ii) reductions in principal, interest rate, fees or other amounts payable under the loans; (iii) payment deferrals; (iv) changes to pro-rata sharing provisions or applicable of proceeds of collateral; (v) releases of collateral; (vi) waivers of material loan provisions; (vii) subordination of the lien granted under the MSLP loan documents; and (viii) the exercise (or failure to exercise) of rights and remedies under the loan documents. Main Street SPV has retained knowledgeable restructuring professionals who will work with lenders and their counsel on these requests.
To date, however, Main Street SPV has not permitted MSLP loan maturity extensions beyond 2026. Nor has Main Street SPV approved reductions in interest rates (which are based on a SOFR floating interest rate) or reductions in principal, and it is not anticipated that Main Street SPV will do so as there is no statutory basis for doing so under the program.
Borrowers that are unable to refinance or obtain loan modification may seek to sell assets or their entire businesses in order to raise cash to repay the MSLP loans. Asset sales can be accomplished outside of a court-supervised process or through a court-supervised process, such as under chapter 11 of the US Bankruptcy Code. In the right circumstances, chapter 11 bankruptcy can result in the maximization of value of a borrower’s assets by allowing bidders to purchase assets “free and clear” of liens and other interests. MSLP loans are treated similarly to any other secured financing in bankruptcy and do not enjoy any special privileges under the US Bankruptcy Code. Lenders should expect their liens granted in connection with MSLP loans to attach to the proceeds of borrower’s asset sales. It should be noted, however, that new funding is not authorized under the MSLP. Borrowers seeking debtor-in-possession financing in chapter 11 likely will need to seek funding from a third-party. In situations where a borrower that files under chapter 11 seeks to subordinate a MSLP loan to new financing, an administering lender will need to seek approval from Main Street SPV through a Core Rights Act request. Main Street SPV has retained a restructuring advisor in anticipation of potential bankruptcy filings from borrowers under the MSLP to address these situations and work with administering lenders.
For administering lenders seeking exits from distressed MSLP loans, there is a developing market for the purchase of these loans. As part of this development, Main Street SPV has entered into a Loan Sale Advisory Services agreement with its restructuring advisor to facilitate the evaluation of requests to sell MSLP loans.
With the likely uptick in MSLP loans becoming distressed, it is imperative that lenders that administer troubled MSLP loans should retain knowledgeable counsel with experience in navigating the complexities and unique features of MSLP workouts. Loan workouts are most successful when lenders are actively engaged with borrowers early in the process.
[1] The MSLP was established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (section 4003), Pub. L. 116-136 (2020) (“CARES Act”).
[2] The US Department of Treasury contributed capital to Main Street SPV with funds from the Exchange Stabilization Fund under section 4027 of the CARES Act.
[3] See United States Government Accountability Office, Report to Congressional Committees, Federal Reserve Lending Programs, Status of Monitoring and Main Street Lending Program (December 2023) (providing that 1,175 loans were still outstanding as of August 2023).
[4] See Lessons Learned: Recognizing Structural Aspects of the Main Street Lending Program that Failed to Prevent Fraud, Office of the Special Inspector General for Pandemic Recovery, at 2 (February 2024).
[5] See Financial Statements: MS Facilities LLC for the years ended December 31, 2023, and 2022 and Independent Auditors’ Report, at 10.
