Locke Lord QuickStudy: Help for Main Street: Lender Certifications and Covenants for the Main Street Lending Program

On May 27, 2020, the Federal Reserve Bank of Boston (the “Boston FRB”), the entity that will administer ‎the Federal Reserve’s Main Street Lending Program (the “Program”), released additional details of the Program, most specifically related to the requirements of its three facilities, the Main Street New Loan ‎Facility (the “MSNLF”), the Main Street Expanded Loan Facility (the “MSELF”), and the Main Street ‎Priority Loan Facility (the “MSPLF” and collectively with the MSNLF and MSELF, the “Facilities”), including the legal documents that Main Street lenders (the “Lenders”) will be required to complete (the “Documents”).  The Documents are currently available on the Boston FRB’s website.

Included in the Documents are the certifications and covenants that Lenders must make to the Boston FRB and its special purpose vehicle (the “SPV”) in connection with the Program. Specifically, a Lender will be required to make (a) certain one-time registration certifications and covenants to register as a Lender under the Program, as summarized in Section A, below, and (b) certain transaction specific certifications summarized in Section B, below, in connection with each sale by the Lender to the SVP of a participation in any loan made under the Program (each, a “Loan”).

A. Registration Certifications and Covenants

To register with the SPV, a Lender must complete the “Lender Registration Certifications and Covenants” form and certify that as of the date of its application, the Lender:

• qualifies as an Eligible Lender¹;
• is not a Covered Entity², based upon its reasonable diligence³;
• is not currently “Insolvent”, as that term is defined in 12 CFR 201.4(d)(5)(iii); and
• will notify both the SPV and the Boston FRB, and will cease engaging in new transactions under the Program, if it fails to qualify as an Eligible Lender, becomes a Covered Entity or becomes Insolvent.

B. Transaction Specific Certifications and Covenants

Once registered, a Lender must provide the transactional certifications and covenants set forth in the “Lender Transaction Specific Certifications and Covenants” in connection with each sale by the Lender to the SPV of a participation interest in a Loan.  These certifications and covenants vary slightly, depending upon the Facility used, but generally include certifications and covenants that:

• based on the Lender’s due inquiry, which includes a review of the borrower’s certified legal formation documents such as a certified charter from its jurisdiction of organization (the “Certified Documents”), the borrower is a business formed prior to March 13, 2020;
• the borrower has executed and delivered to the Lender the “Borrower Certifications and Covenants”, which are described in the attached Locke Lord QuickStudy;
• any outstanding loans owing by the borrower to the Lender, other than the Loan, had an internal risk-rating equivalent ‎to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system ‎as of December 31, 2019;
• the Lender will not (i) require the borrower to repay ‎principal or interest on previously issued debt, unless those payments are mandatory and due and owing or (ii) seek to cancel or reduce any of the borrower’s existing ‎committed lines of credit, except in an event of default;
• the basic terms and other characteristics of the Loan, such as origination and maturity dates, interest rate, one-year deferral of cash principal and interest payments, amortization schedule, and Loan amount comply with the requirements of the relevant Facility (including, based upon the financial records and calculation of adjusted EBITDA of the borrower (and if applicable, the borrower’s adjusted EBITDA on a consolidated basis with its affiliates⁴ and/or subsidiaries⁵) provided by the borrower, the leverage-based limits on Loan amount);
• the methodology the Lender required the borrower to use when calculating adjusted EBITDA for the borrower and, if applicable, its affiliates, is one that the Lender has previously used to calculate adjusted EBITDA for the borrower or for similarly situated borrowers prior to April 24, 2020;
• for an MSPLF Loan:⁶
  1. if unsecured, the Lender has no reason to believe the Borrower’s other debt (other than mortgage debt) is secured at the time the Loan is originated;
  2. if secured, the “Collateral Coverage Ratio”⁷ for the Loan is either (A) at least 200 percent, or (B) not less than the aggregate Collateral Coverage Ratio for all of the borrower’s other secured debt (other than mortgage debt); and
  3. if secured by a shared pool of collateral, the Lender has no reason to believe the lien securing the Loan is not senior to or pari passu with the lien securing the borrower’s other debt (other than mortgage debt);

• for an MSELF Loan, any collateral securing the underlying credit facility will secure both the underlying credit facility and the Loan on a pari passu basis, both at the time of origination and while the Loan is outstanding;
• the Loan is not at the time of origination, and will not during the term of the Loan become, through the action of the Lender, contractually subordinated to any of the borrower’s other debt;
• the documentation governing the Loan contains certain required covenants and other provisions, including (i) a mandatory prepayment provision triggered upon a material misrepresentation or material breach by the borrower of its certifications and covenants under Section 2 or 3 of the Borrower Certifications and Covenants, (ii) a customary lien covenant or negative pledge, (iii) a cross acceleration provision triggered by acceleration of any other debt of the borrower owing to the Lender and (iv) a financial reporting covenant requiring periodic delivery by the borrower of the financial information and calculations required by Appendix C to the Federal ‎Reserve’s Frequently Asked Questions with respect to the Program (the “FAQs”)‎;⁸and
• the Loan participation sold to the SPV is in the percentage required by the terms of the applicable Facility and the Lender will retain its entire direct ownership interest in the Loan until the Loan matures or neither the SPV nor any government assignee holds an interest in the Loan.

Except for purposes of the certification regarding the borrower’s formation and the lien certifications and covenants described above, the Lender has no responsibility to verify the accuracy of ‎the borrower’s certifications or to monitor the borrower’s compliance therewith and may rely on the borrower’s certifications.  The Lender must, however, notify the SPV and the Boston FRB if the borrower reports that it has made a material misrepresentation or materially breached covenants during the term of the Loan and for one year after repayment. 

The SPV, the Boston FRB, the Federal Reserve Board and the Secretary of the Treasury are authorized to make public disclosures of information regarding a Loan, including the identity of the Lender and amount and other material terms of the Loan.

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Your regular Locke Lord contacts and the authors of this article would be happy to help you navigate the CARES Act and associated guidance as they relate to or otherwise affect small and mid-sized businesses and their lenders.