As the Secured Finance Network and its members have examined the Main Street Lending Program, there have been two aspects of the program in particular that have been identified as impacting on the utility of the program for borrowers from asset-based lenders. 

Both points, along with some others, have been raised in letters from the Secured Finance Network to the Department of the Treasury and the Federal Reserve.  And the Secured Finance Network has followed up with specific questions to Treasury arising from the “Main Street Lending Program Frequently Asked Questions” published on July 31, 2020 by the Federal Reserve Bank of Boston (the “FAQs”) in understanding what is permitted under the Program that could significantly impact how it may be used with an asset-based facility.

First, there are the requirements for a company to be an “Eligible Borrower” under the Program.  The criteria are tied to EBITDA, which is not necessarily the best benchmark for a typical asset-based borrower.  As the Secured Finance Network has pressed the issue, informal indications from the Treasury and several references in the FAQs suggest that the Treasury and Fed are considering how the existing criteria might be adapted to facilitate liquidity for an asset-based borrower.  The Secured Finance Network has even generated support for its position from the Senate Committee on Banking, Housing and Urban Affairs as set out in the July 31, 2020 letter from the Committee’s Chairman, Mike Crapo, to the Department of the Treasury and the Federal Reserve.

Second, there is the requirement that the liens that secure the Main Street Lending Program loans must  be “senior to, or pari passu with, in terms of priority and security,” the borrower’s other debt (other than debt secured only be real estate).  This is referred to in the materials for the Program as the “Priority and Security Requirement,” discussed below in more detail. 

If the debt under the Main Street Lending Program must be secured by liens on the same collateral that secure the asset-based facility on a pari passu basis, then what’s the point?

There will need to be a reserve against the borrowing base for such debt and there is no benefit to the borrower of any additional liquidity.  This “Priority and Secured Requirement” has reduced the interest of asset-based lenders in finding ways to use the Main Street Lending Program with their borrowers.

Is there a way that asset-based lenders may be able to have borrowers access the Program? In fact, in a careful review of the FAQs, there do appear to be certain paths for the use of the Main Street Lending Program in conjunction with an asset-based facility.

Any discussion of the Main Street Lending Program requires working through each of the different facilities available under the program:

• the Main Street New Loan Facility (MSNLF)
• the Main Street Priority Loan Facility (MSPLF)
• the Main Street Expanded Loan Facility (MSELF)

Putting aside the issues around whether a borrower is eligible, let’s just focus on the lien priority issue in the context of each of the types of facilities.

Main Street New Loan Facility (MSNLF)

The Main Street New Loan Facility (MSNLF) is the most straightforward.  Loans under the MSNLF may only be term loans, but may be either secured or unsecured.  Obviously, an unsecured facility avoids the issue—but also as a practical matter means that an “Eligible Lender” under the program is prepared to make an unsecured loan to an Eligible Borrower using such lender’s own underwriting standards.  Or as said in FAQ I.2,

     “Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application.  Eligible Lenders will apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower.  An Eligible Lender may require additional information and documentation in making this evaluation and will ultimately determine whether an Eligible Borrower is approved for a Program loan in light of these considerations.”

But, even if the Eligible Lender is not prepared to make an unsecured loan, the Eligible Lender may make an MSNLF loan secured by a second lien on the collateral (FAQ B.3), subject to an intercreditor agreement negotiated between the Eligible Lender making such loan and the asset-based lender.  This is because the MSNLF does not have a “Priority and Security Requirement” like the Main Street Priority Loan Facility (MSPLF) and the Main Street Expanded Loan Facility (MSELF). The MSNLF loan may not be “contractually subordinated in terms of priority” as stated in B.3 of the FAQs, which refers to “debt subordination,” but does not prohibit “lien subordination.”  FAQ B.3 says that the provision that the MSNLF Loan not be contractually subordinated does not prevent the issuance of a MSNLF Loan that is a secured loan “including in a second lien or other capacity”, and whether or not the Eligible Borrower has an outstanding secured loan of any lien position or maturity.

Consequently, an MSNLF Loan may be secured by a second lien on collateral that is subject to a first priority lien to secure obligations arising under an asset-based credit facility. While the FAQs do not specifically address intercreditor issues, the use of a typical intercreditor agreement is certainly consistent with the general principles of documentation under the Program.

Main Street Priority Loan Facility (MSPLF)

Unlike the MSNLF, the Main Street Priority Loan Facility (MSPLF) has the Priority and Security Requirement as set out in FAQ C.5.  So, do we just stop right there?

Actually, FAQ C.5 also says: 

     “The MSPLF Loan need not share in all of the collateral that secures the Eligible Borrower’s other Loans or Debt Instruments”.

This FAQ is the key. 

This means that the asset-based facility may have its first priority lien on receivables and inventory, without the requirement of having a pari passu lien to secure the MSPLF loan on the same collateral. Problem solved? And the good news about the MSPLF loan is that it may be used to refinance existing debt.

What’s the catch? 

For a MSPLF loan, either the loan must be secured by the same collateral on a pari passu basis with the asset-based debt or if not, then the “Collateral Coverage Ratio” for the MSPLF loan at the time of its origination must be either:

• at least 200%, or
• ·not less than the aggregate Collateral Coverage Ratio for all of the Borrower’s other secured Loans or Debt Instruments (other than Mortgage Debt).

What is a “Collateral Coverage Ratio”?  The term “Collateral Coverage Ratio” is defined in FAQ C.5 to mean:

• the aggregate value of any relevant collateral security, including the pro rata value of any shared collateral, divided by
• the outstanding aggregate principal amount of the relevant debt.

So, if the MSPLF loan can be secured either on a loan-to-collateral value ratio of “2 to 1”, that is 2 times the collateral value to the amount of the loan, or the ratio of the loan to value of the collateral for the MSPLF is the same or better than the loan to value ratio for the other secured debt (like the asset-based facility), then there may be separate pools of collateral for the MSPLF loan and the asset-based facility (with no lien on the receivables and inventory that the asset-based lender is relying on to secure the MSPLF debt).

There is a question about what “value” to use for purposes of this ratio, and the suggestion is that it should be the same form of value that the lender would use in the ordinary course, whether that is appraised fair market value for real estate or appraised net orderly liquidation value of equipment or other applicable methodology—tying back to the lenders’ own underwriting standards.

Obviously, a borrower may or may not have other collateral to give for the MSPLF, but keep in mind that even if the borrower has existing debt secured by assets like real estate or equipment, that debt may be taken out and replaced with the MSPLF loan.

There is another option.

The MSPLF might be used where the lenders under an existing syndicated credit facility were interested in reducing their exposure to an Eligible Borrower.  Unlike with the MSNLF or a MSELF, the proceeds of a loan under a MSPLF may be used to refinance existing debt owed by the Eligible Borrower to a Lender that is not the Eligible Lender. FAQ H.33 says that “…however, the Eligible Borrower may, at the time of origination of the MSPLF Loan, refinance existing debt owed by the Eligible Borrower to a lender that is not the Eligible Lender.”  

So, in an existing syndicated credit facility, a new institution that is an Eligible Lender under the Main Street Lending Program could become a lender in the syndicated facility and its share of the credit facility could reduce the loans and commitments of some or all of the other lenders in the credit facility. 

For example, suppose a Lender is the agent for a $60 million senior secured asset-based facility to a Borrower that otherwise satisfies the various requirements for a MSPLF loan.  The Lender is the agent for itself and another bank and each have a $30 million commitment in the credit facility, secured by liens granted to the agent.  A third institution, that is an Eligible Lender could make a $20 million MSPLF Loan and then each existing Lender could reduce its commitment by $10 million to keep the facility at $60 million, with each of the three Lenders now having a $20 million commitment.  The obligations of all three Lenders would be secured by the lien of the agent as is customary at the same level of priority with the proceeds of collateral shared pro rata between the three Lenders so as to satisfy the MSPLF Priority and Security Requirement.

To the extent that the existing syndicated credit facility is a revolving facility, rather than a term loan facility, since the MSPLF may only be a term loan, there would be some issues to be addressed.  To have the MSPLF Loan as a term loan work alongside the other revolving loans, the regular, recurring payments on the revolving loans in the ordinary course would need to be permitted without a concurrent payment on the term loan of its pro rata share of such payment, otherwise it would defeat the purpose of the revolving facility, where a borrower may make payments and then reborrow on a recurring basis.

FAQ H.3 says that the covenants required by each of the MSNLF, MSPLF and MSELF are not to prohibit an Eligible Borrower from “repaying a line of credit (including a credit card) in accordance with the Eligible Borrower’s normal course of business usage for such line of credit…”   Consequently, it would seem possible to have an Eligible Borrower with an asset-based revolving credit facility, i.e. a “line of credit” that it can borrow on and repay—in the ordinary course, while still having a loan under the MSPLF—where the revolving loan under the asset-based credit facility and the term loan under the Main Street Lending Program would be secured by the same lien held by one of the Lenders as agent for itself and the other Lenders and presumably post-default would likely need to be repaid from the collateral on a pari passu basis with the revolving facility ceasing to make advances in order to comply with the Program requirements—since post-default it would not be in the normal course of business usage for such line of credit.

At the request of the Secured Finance Network, Treasury has indicated it would consider this issue.

Main Street Expanded Loan Facility (MSELF)

Like the MSPLF, a MSELF “Upsized Tranche” is required to be senior to, or pari passu with, in terms of priority and security, the Eligible Borrower’s other Loans or Debt Instruments, other than Mortgage Debt as set forth in FAQ D.11.

The simple approach to this “Priority and Security Requirement” in the context of a MSELF loan is that if an Eligible Borrower is looking to increase its asset-based facility, and none of the other current lenders in a syndicated facility want to increase its commitment, or in the case of a single lender credit facility, the sole lender does not want to increase its commitment, the Eligible Lender under the Main Street Lending Program may provide a new commitment in the syndicated facility or in the case of the single lender facility, the single lender may upsize its facility with the MSELF if it is an Eligible Lender or can bring in an Eligible Lender and restate the facility as a syndicated facility.  The MSELF, unlike the MSNLF or MSPLF may be either a term loan or a revolving facility—whatever is required to match the facility that is being increased, so we avoid the question raised above in the context of the MSPLF.

What about a borrower that has both a term loan and a revolving loan as part of its asset-based facility?

FAQ D.11 says:

     “If the underlying credit facility includes both term loan tranche(s) and revolver tranche(s), the MSELF Upsized Tranche needs to share collateral on a pari passu basis with the term loan tranche(s) only.” (emphasis added)

This may be of interest.  Perhaps the asset-based lender can stretch a bit on the fixed assets with the MSELF increasing the term loan and relying somewhat on a last out on the current assets (since the MSELF would not have to be pari passu on the receivables and inventory collateral)?  In effect a version of a first in last out (FILO) structure?

What about a typical “split collateral” structure?  Could an Eligible Borrower upsize its term loan facility secured by a first lien on equipment and real estate held by an agent on behalf of the term loan lenders using an MSELF Upsized Tranche, while having a second lien on accounts and inventory, so long as the MSELF Upsized Tranche is secured by the same lien on a pari passu basis with the other debt incurred under the term loan facility?

FAQ D.11 only specifically refers to the “underlying credit facility” having both a term loan tranche and a revolver tranche—but the principle is the same even if instead of tranches in the same facility it is a separate term loan facility and asset-based revolving facility.  On this basis, the Eligible Borrower should be able to use an MSELF Upsized Tranche to increase the term loans, but not have a first lien on the accounts and inventory that secure the revolving loans even if they are not in the same “underlying credit facility”.

Conclusion

There are no doubt other scenarios and examples of how the Main Street Lending Program might work with an asset-based facility beyond those described above.  And while the threshold issue of whether a borrower is an “Eligible Borrower” exists, there may be circumstances where an asset-based lender may be able to use the Main Street Lending Program.