On May 27, the Federal Reserve Bank of Boston (the “Boston Fed”)—which is tasked with administering the Federal Reserve’s Main Street Lending Program (the “MSLP”)—released  the agreements and forms for participants in the MSLP, along with associated explanatory materials and an expanded Frequently Asked Questions (the “FAQs”).  Previous statements by the Federal Reserve have indicated the expectation of launch of the MSLP by the end of May or early June.  While this release does not provide an exact launch date, we expect the publication of the documentation will allow interested market participants to begin negotiating and documenting loans intended for purchase under the program.  

We have included below a description of the MSLP loan documentation package as released by the Boston Fed and a description of selected updates to the FAQs.  For a summary of the terms of the MSLP facilities, please see Polsinelli’s previously-published Main Street Lending Program Whitepaper, available here.  If you have additional questions about the MSLP, please reach out to the listed authors or your regular Polsinelli contact.

Documentation Components:

Lender Registration Materials -- To participate in the Main Street Lending Program, potential lenders must register with the Boston Fed by filling out and returning the Lender Registration Certification and Covenants and the Lender Wire Instructions.  This is a program-level registration that would not need to be repeated for each individual MSLP loan made by the lender.  The release does not make clear when lenders can begin submitting registration materials, but the forms are available on the Boston Fed website.

• The Lender Registration Certification and Covenants is a pre-printed form to be signed by both the principal executive officer and principal financial officer of the lender (or individuals performing similar functions).  There does not appear to be a concept of senior officers within a lending division, as opposed to the entity as a whole, which may be problematic for larger institutions.  The document includes certifications that the lender is an “Eligible Lender” pursuant to the MSLP terms, that it is eligible under the CARES Act conflict of interest provisions, that it is solvent, and the document includes covenants that the lender will promptly notify the Boston Fed upon any of the certifications becoming untrue.  The form also includes acknowledgments relating to liability for misrepresentations, potential for lender information disclosure and a recordkeeping requirement.

• The Lender Wire Instructions relate to payments owed by the MSLP SPV to the lender under the participation agreements or servicing agreements.  It is required to be completed and signed by the lender’s principal financial officer (or individual performing similar functions).

Participation Agreement – The economic details of a participation being sold to the MSLP SPV are intended to be recorded in the Loan Participation Agreement Transaction Specific Terms (the “Transaction Specific Terms”).  This is akin to a term sheet and would be filled out and signed by the lender.  It incorporates by reference the Loan Participation Agreement Standard Terms and Conditions (the “Standard Terms”), which sets forth the substantive contractual provisions governing the participation.  Since it is incorporated by reference in the Transaction Specific Terms, the Standard Terms would not need to be separately executed or delivered.  Below are some significant features of the Standard Terms:

• The Standard Terms includes an express disclaimer of any obligation to repurchase a sold participation, regardless of any default or misrepresentation by seller.

• There is a “big boy” representation that each party may have material information not known to the other, and an express waiver of any claims related to a failure to disclose that information (except as otherwise required in the transaction documentation).  The implication is that lenders are expected to originate loans within their existing underwriting and approval process, and lenders must provide the information required in the documentation package, but lenders are not required to disclose any other potentially adverse information in their possession.

• The buyer and seller bear their own respective legal and other costs of documenting and selling the participation, but the MSLP SPV is required to reimburse the seller for its share of any out of pocket expenses and disbursements related to administration of the participation and the credit agreement and related credit support documents.

• The Standard Terms includes a defined term “Core Rights Act”, which are significant lender decisions with respect to the loan.   These actions could only be taken at the direction of the MSLP SPV as majority lender, or pursuant to a voting mechanism with other holders in the case of the MSELF where the MSLP SPV may not be the majority holder.  There is a concept of deemed consent if the lender proposes to take a Core Rights Act but the MSLP SPV does not respond.

• The originating lender is not a fiduciary, but is required to exercise the same duty of care it would exercise for loans solely in its own portfolio.  Absent bad faith, gross negligence, willful misconduct or breach of any express provisions of the Standard Terms, the lender will not be liable for its actions or inactions.

• The Standard Terms contains an “elevation” process for the MSLP SPV to be elevated from participant to assignee, and therefore a direct party to the credit agreement upon certain events.  This would occur pursuant to an Assignment in Blank that is required to be executed by the originating lender. 

Co-Lender Agreement – The Co-Lender Agreement is intended to be used for bilateral loans under the MSLP and it functions to build in mechanics to accommodate multiple lenders within a previously bilateral credit agreement.   It is not a requirement in syndicated facilities as in that case the loan documentation should already contain the relevant mechanics.  The Co-Lender Agreement is an agreement between the borrower and the lender (in both its capacity as participant and Administrative Agent), but is not initially effective and would only become so upon an elevation of the MSLP SPV to direct lender pursuant to the Participation Agreement.

Servicing Agreement – The Servicing Agreement governs the role of the originating lender as servicer of the loan—though the substantive obligations and standards around that role are primarily contained within the Participation Agreement, or, to the extent applicable, the Co-Lender Agreement.  In addition to the pass-through of borrower communications required under the Participation Agreement, the Servicing Agreement requires the originating lender to keep records related to the loan documentation package and make them available upon reasonable prior notice.  It also obligates the lender as servicer to provide specified information to the MSLP SPV on a quarterly and annual basis.  The quarterly and annual information is listed on Schedule I to the Servicing Agreement, and includes borrower financial information, collateral value reporting and covenant default/cure reporting.  The quarterly reporting requirements are more extensive for Main Street Expanded Loan Facility loans than for loans under the other two facilities.

Borrower and Lender Transaction Specific Certifications and Covenants – The MSLP documentation package includes Transaction Specific Certifications and Covenants in standalone forms for each of the borrower and lender, and with separate forms for each of the MSLP facilities.  These forms document the certifications and covenants that are required pursuant to the previously-issued term sheets for each of the facilities.  For lenders, this is separate and in addition to the Lender Registration Certification and Covenants, and would be required to be delivered with respect to each participation to be sold to the MSLP SPV.  These documents are required to be executed by the principal executive officer and principal financial officer of a borrower (or individuals performing similar functions), and by an authorized signatory for a lender.  As with the Lender Registration Certification and Covenants, this document contains an instruction and guidance portion, along with the actual form that should be executed and returned as part of the documentation package.

Other Loan Documentation – The Boston Fed did not publish a standard credit agreement or related documentation, and lenders are expected to utilize their existing loan documentation as modified for eligibility under the MSLP facilities.  The updated FAQs contains an Appendix B which lists the covenants and other provisions that would be required to be incorporated into loan documentation.

Highlights of updated FAQs:

• An affiliated group of companies can only participate in one MSLP Facility (and may not participate in the Primary Market Corporate Credit Facility), and the affiliated group’s total participation is capped at the maximum that the affiliated group would be eligible to receive on a consolidated basis.  This restriction leverages the Small Business Administration’s expansive concepts of affiliation and aggregation, and could limit the eligibility of private equity portfolio companies or other investor-owned businesses.

• A U.S. subsidiary of a foreign parent is eligible as long as it otherwise meets the U.S. nexus test, however the proceeds of the loan may not be used for the benefit of the foreign parent or affiliates.

• Borrowers are required to certify that they are unable to secure adequate credit accommodations from other sources.  This relates to a statutory requirement for the Federal Reserve Act provision under which the MSLP is authorized.  The FAQs clarifies that this can be because the amount, price, or terms of credit are inadequate for the borrower’s needs, and that borrowers are not required to document rejections or receipt of unsatisfactory terms.

• The FAQs note that the Federal Reserve does not expect to utilize the Participation Agreement “elevation” process in the ordinary course, even in borrower financial distress, but may do so where (i) the economic interests of the MSLP SPV and the originating lender are “misaligned” or (ii) the loan amount is relatively large in comparison to the MSLP SPV’s portfolio.

• Since the Participation Agreement introduces the concept of MSLP SPV control over Core Rights Actions, the FAQs clarifies that the MSLP SPV will make commercially reasonable decisions to protect taxpayers from losses on MSLP loans and will not be influenced by non-economic factors when exercising its voting rights.

• A significant open issue with the MSLP is whether severely distressed borrowers, who are most in need of financing, will be eligible for MSLP loans given the underwriting requirements.  A newly-added FAQ notes that lenders are “encouraged to work with” borrowers affected by the pandemic and related shutdowns, and that lenders may “originate or expand” loans to those borrowers.  However, the FAQ goes on to state that the lender must satisfy itself as to the borrower’s ability to repay and that the lender should apply safe and sound credit risk management policies and practices.  It is unclear based on this question to what degree distressed borrowers who may not meet underwriting standards for non-MSLP loans would qualify for MSLP loans.

• Lenders are allowed to make loans under any of the MSLP facilities and fund them prior to MSLP submission, or to make funding contingent on the loan or tranche being funded by the MSLP SPV.

The documentation and updated FAQs are available on the Boston Fed’s website here.