On June 15, the Federal Reserve announced that it is seeking public feedback until June 22 on a proposal to expand its Main Street Lending Program to provide credit access for small and medium-sized nonprofit organizations that were in sound financial condition before the coronavirus pandemic. If one or more of the parameters of the proposal would prevent or hinder otherwise eligible nonprofit organizations from benefiting from the program, there is only a short window to submit comments so potential borrowers and lenders are encouraged to act now to have their voice heard to change the rules. The Federal Reserve is actively seeking input from borrowers and lenders in this space, and in implementing prior changes to the Main Street Lending Program, the Federal Reserve has shown its willingness to adapt its terms to meet market needs.

The proposed expansion provides two loan options for nonprofits—the Nonprofit Organization New Loan Facility and the Nonprofit Organization Expanded Loan Facility. These facilities would be separate from the previously-announced Main Street Lending Program facilities for businesses. Loan terms under the proposed Main Street Lending Program nonprofit facilities are generally identical to the loan terms under the facilities for loans to businesses, including the interest rate, deferral of principal and interest payments, five-year term, and prepayment without penalty—though the nonprofit facilities differ in eligibility criteria and other terms. For an overview of the substantive features of the Main Street Lending Program facilities for businesses, please see our previously released Whitepaper and our recently updated Lender’s Guide and Borrower’s Guide.

The Main Street Lending Program nonprofit facilities would function in the same manner as the facilities for loans to businesses. The Federal Reserve Bank of Boston will utilize a special purpose vehicle (the “Fed SPV”) that is capitalized with a $75 billion investment from the U.S. Treasury under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) along with additional funds borrowed from the Federal Reserve to support an initial total lending amount of up to $600 billion in aggregate. The Fed SPV would purchase 95% participations in eligible new loans under the Nonprofit Organization New Loan Facility and eligible new tranches of existing loans under the Nonprofit Organization Expanded Loan Facility from the originating lender in “true sales” as expeditiously as possible after origination. The originating lender would perform the underwriting and documentation roles, retain 5% of the eligible debt and would act as servicer of the loan. While the originating lender would remain as the borrower’s point of contact via the lender’s role as servicer, the Fed SPV would have control rights with respect to modifications and other significant lender decisions with respect to the loan. The Fed SPV will cease purchasing participations in eligible loans on September 30, 2020, unless extended.

Under the proposed Nonprofit Organization facilities, each eligible borrower must:

• be a tax-exempt nonprofit organization under section 501(c)(3) or 501(c)(19) of the Internal Revenue Code;

• be created or organized in the U.S. or under the laws of the U.S. with significant operations and a majority of its employees based in the U.S.;

• be established prior to, and have been in continuous operation since, January 1, 2015;

• (i) have 15,000 employees or fewer, or (ii) have 2019 annual revenues of $5 billion or less (in each case when aggregated with “affiliates”);

• have at least 50 employees;

• have an endowment of less than $3 billion;

• have less than 30% of 2019 annual revenues be donations (including fundraisers);

• meet the following ratio test thresholds:

  • a ratio of (i) 2019 earnings before interest, depreciation and amortization (EBIDA) to (ii) unrestricted 2019 operating revenue, that is at least 5%;

  • a ratio of (i) liquid assets (after giving effect to loan proceeds) to (ii) 2019 average daily expenses, that is at least 90 days; and

  • a ratio of (i) unrestricted cash and investments to (ii) existing (including committed but undrawn) debt, including the amount of the Main Street Lending Program loan to be obtained, plus the amount of any CMS Accelerated and Advance Payments, that is greater than 65%; and

• not have also participated in other Federal Reserve assistance facilities, including the Municipal Liquidity Facility, or have received specific support for the air and national security industries under Subtitle A of Title IV of the CARES Act.

Borrowers under the Main Street Lending Program are required to make reasonable efforts to maintain their payroll and retain employees during the term of the loan. In addition to other certifications required by applicable statutes and regulations, borrowers must attest that they will comply with the restrictions on compensation, stock repurchase and capital distribution included under Section 4003 of the CARES Act. Under the CARES Act restriction on employee compensation, for the term of the loan plus one year:

• no officer or employee with total compensation greater than $425,000 in 2019 (other than pursuant to a collective bargaining agreement entered into prior to March 1, 2020) may receive total compensation during any consecutive 12 month period in excess of their 2019 compensation nor shall receive severance or other termination benefits in excess of two times their 2019 total compensation; and

• no officer or employee with total compensation greater than $3 million in 2019 may receive total compensation during any consecutive 12 month period in excess of $3 million plus 50% of that employee’s compensation in excess of $3 million in 2019.

  If you have questions about the Main Street Lending Program, or would like to discuss submitting comments to the Federal Reserve on the proposal, please reach out to the listed authors or your regular Polsinelli contact. The Federal Reserve release and the draft term sheets are available here.