Additional Credit Facilities of the Federal Reserve

On April 9, 2020, the U.S. Department of Treasury (“Treasury”) and the Federal Reserve (the “Fed”) announced additional actions to provide up to $2.3 trillion in loans to support the economy.  These loans are aimed at assisting households and employers of all sizes and to bolster the ability of state and local governments to deliver critical services during the COVID-19 pandemic.

The Main Street New Loan Facility and Main Street Expanded Loan Facility (together the “Main Street Facilities”) enhance U.S. banks ability to lend to businesses.  The Main Street Facilities allow certain companies who are not eligible for relief under the CARES Act relief programs, such as the Paycheck Protection Program (the “PPP”), or the Fed’s corporate bond and commercial paper facilities to receive some type of relief.  Although the Main Street Facilities are noteworthy in being the first federal relief program that allows the Fed to directly support business loans, these loans may not be attractive for companies that are well funded and have available liquidity because the loans are not forgivable and are subject to restrictions on a borrower’s executive compensation, stock repurchases, and dividends. 

The Fed and the Treasury also announced significant actions to support other credit markets, including (i) providing liquidity to financial institutions participating in the PPP, (ii) increasing the size and scope of the Primary Market Corporate Credit Facility (the “PMCCF”), the Secondary Market Corporate Credit Facility (the “SMCCF”), and the Term Asset-Backed Securities Loan Facility (the “TALF”), which collectively will now support up to $850 billion in credit, and (iii) establishing a new Municipal Liquidity Facility that will offer up to $500 billion in lending to help states, cities, and counties manage cash flow stresses caused by the COVID-19 pandemic. The Fed is using its emergency powers to provide aid to businesses and local governments during the pandemic. The terms of the facilities are not as detailed as they might be under less exigent circumstances and the term sheets published by the Fed contemplate that additional adjustments may be made. KMK will continue to monitor additional or modified information as it becomes available.

Below is a description of each of these programs and facilities:

1.  The Main Street Facilities

Under the Main Street Facilities, U.S. banks will originate and service loans to eligible businesses. The originating banks will retain a 5% interest in the loans and sell the remaining 95% participation interest to a special purpose vehicle funded by the Fed.  The Main Street Facilities are expected to provide up to $600 billion in financing by U.S. banks to eligible businesses.  In general, businesses are eligible if they are based in the U.S. and have no more than 10,000 employees or $2.5 billion in 2019 annual revenues.

a.  Main Street New Loan Facility (“New Loan Facility”)

The New Loan Facility is intended to help facilitate new loans to businesses. These loans will be unsecured term loans and do not require collateral. 

• Eligible Borrowers. Excludes companies that participate in the Main Street Expanded Loan Facility or Primary Market Corporate Credit Facility.
• Loans Terms:
  • Unsecured term loan originated on or after April 8, 2020;
  • 4 year maturity with of principal and interest payments deferred for 1 year;
  • No prepayment penalty;
  • Adjustable rate of SOFR + 250-400 basis points;
  • Minimum loan size of $1 million; and
  • Maximum loan size that is the lesser of (i) $25 million or (ii) 4 times the borrower’s 2019 EBITDA (including existing outstanding and committed but undrawn debt).
• Loan Origination and Servicing Fee: 100 basis points of the principal amount.
• Other Requirements:
  • Proceeds may not be used to repay or refinance pre-existing debt or other loans.
  • Borrowers must use reasonable efforts to maintain its payroll and employees during the term of the loan.
  • Borrowers must follow the compensation, stock repurchase, and capital distribution restrictions that apply to Economic Stabilization Program in the CARES Act. In general, the restrictions below apply for the period the loan remains outstanding plus one year:
    • An employee’s total compensation during any 12 consecutive month period is generally capped at the following amounts:
      • If total compensation exceeded $425,000 in 2019, total compensation is capped at the amount received in calendar year 2019; or
      • If total compensation exceeded $3,000,000 in 2019, total compensation is capped at $3,000,000 plus 50% of the excess over $3,000,000 of compensation received in calendar year 2019;
    • Borrowers generally cannot use any of its cash to repurchase publicly traded stock; and
    • Borrowers are prohibited from paying dividends or making other capital distributions with respect to common stock.

b.  Main Street Expanded Loan Facility (“Expanded Loan Facility”)

The Expanded Loan Facility is a Fed supported upsizing of existing term loans with a new tranche having the terms below. Any collateral securing these loans will secure the loan participation on a pro rata basis.

• Eligible Borrowers. Excludes companies that participate in the New Loan Facility or Primary Market Corporate Credit Facility.
• Eligible Loans:
  • Unsecured term loan originated on or after April 8, 2020;
  • 4 year maturity with of principal and interest payments deferred for 1 year;
  • No prepayment penalty;
  • Adjustable rate of SOFR + 250-400 basis points;
  • Minimum loan size of $1 million; and
  • Maximum loan size that is the lesser of (i) $150 million, (ii) 30% of the borrower’s existing outstanding and committed by undrawn bank debt or (ii) 6 times the borrower’s 2019 EBITDA (including existing outstanding and committed but undrawn debt).
• Loan Upsizing and Servicing Fee: 100 basis points of the principal amount of the upsized tranche of the eligible loan.
• Other Requirements:
  • Proceeds may not be used to repay or refinance pre-existing debt or other loans.
  • Borrowers must use reasonable efforts to maintain its payroll and employees during the term of the upsized tranche.
  • Borrowers must follow the compensation, stock repurchase, and capital distribution restrictions referenced above.

There are a number of open questions with respect to the Main Street Facilities, including (1) whether the Fed will require any specific EBITDA definition be used or limit the types or size of add-backs in the EBITDA definition, (2) what “reasonable efforts to maintain payroll” means in practice and associated penalties, and (3) how the prohibition on paying dividends applies to limited liability companies and partnerships, including with respect to tax distributions, guaranteed payments, and management fees.

2.  Primary Market Corporate Credit Facility (“PMCCF”)

The PMCCF is intended to serve as a funding backstop for corporate debt issued by eligible issuers. The Fed will make an initial equity investment in a special purpose vehicle, which will (i) purchase qualifying bonds as the sole investor in a bond issuance; and (ii) purchase portions of syndicated loans or bonds at issuance. The PMCCF, initially funded with $50 billion of equity from the Treasury, will leverage its equity ten times when acquiring bonds or syndicated loans from investment grade issuers, and seven times when acquiring other eligible assets.

• Purchase Amount: Eligible issuers may approach the PMCCF to refinance outstanding debt from the period of three months prior to the maturity date. Eligible issuers may also approach the PMCCF at any time to issue additional debt, provided their rating is reaffirmed at BB-/Ba3 or above by each major nationally recognized statistical rating organization (“NRSRO”) with a rating of the issuer. The maximum amount of outstanding bonds or loans that may be purchased may not exceed 130% of the issuer’s maximum outstanding bonds and loans on any date between March 22, 2019 and March 22, 2020.
• Eligible Issuers/Borrowers:
  • U.S. companies with significant operations and a majority of its employees based in the U.S.;
  • Excludes companies that will receive direct financial assistance under the CARES Act; and
  • As of March 22, 2020, the issuer was rated at least BBB-/Baa3 by a major NRSRO and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs. If any such issuer’s rating was subsequently downgraded, the issuer must be rated at least BB-/Ba3 at the time of purchase.
• Eligible Assets:
  • Sole Investor: Corporate bonds that are issued by an eligible issuer and have a maturity of 4 years or less.
  • Part of a Syndicate: Syndicated loans or corporate bonds that are issued by an eligible issuer and have maturity of 4 years or less. The PMCCF may purchase no more than 25% of any syndicate.
• Pricing:
  • Corporate Bonds: Issuer-specific, informed by market conditions, plus a 100 basis points facility fee.
  • Syndicated Loans/Bonds: PMCCF will receive the same pricing as other syndicate members, plus a 100 basis points facility fee on the PMCCF’s share of the syndicate.
• Termination: PMCCF will cease purchasing eligible assets no later than September 30, 2020.

3.  Secondary Market Corporate Credit Facility (“SMCCF”)

The SMCCF is intended to serve as a funding backstop for corporate debt on the secondary market. The Fed will make an initial equity investment in a special purpose vehicle to purchase in the secondary market eligible individual corporate bonds and eligible corporate bond portfolios in the form of exchange-traded funds (“ETFs”) issued by eligible issuers. The SMCCF, initially funded with $25 billion of equity from the Treasury, will leverage its equity ten times when acquiring corporate bonds from investment grade issuers and ETFs whose primary investment objective is exposure to investment grade corporate bonds.  It will leverage its equity seven times when acquiring corporate bonds from issuers rated at below investment grade, and from three to seven times when acquiring other eligible assets, depending on risk.

• Purchase Amount: The maximum amount of bonds that may be purchased on the secondary market may not exceed 10% of the issuer’s maximum outstanding amount of bonds on any date between March 22, 2019 and March 22, 2020. The maximum amount of instruments that the PMCCF and SMCCF may purchase cannot exceed 1.5% of the combined potential size of the SMCCF and PMCCF.
• Eligible Issuers/Borrowers:
  • U.S. companies with significant operations and a majority of its employees based in the U.S.;
  • Excludes companies that will receive direct financial assistance under the CARES Act; and
  • As of March 22, 2020, the issuer is rated at least BBB-/Baa3 by a major NRSRO and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs. If any such issuer’s rating was subsequently downgraded, the issuer must be rated at least BB-/Ba3 at the time of purchase.
• Eligible Assets:
  • Corporate Bonds: Corporate bonds that are issued by an eligible issuer, have a maturity of 5 years or less, and were sold to the SMCCF by an eligible seller.
  • Eligible ETFs: U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds.
• Eligible Seller: U.S. companies with significant operations and a majority of its employees based in the U.S.
• Pricing: SMCCF will purchase eligible bonds at fair market value in the secondary market, and will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.
• Termination: SMCCF will cease purchasing eligible bonds no later than September 30, 2020.

4.  Paycheck Protection Program Lending Facility (“PPP Facility”)

The Paycheck Protection Program Lending Facility is intended to assist banks that originate PPP Loans. The PPP Facility will extend credit to eligible financial institutions that originate PPP Loans, taking the loans as collateral at face value. The Fed will lend to these banks, on a non-recourse basis.

• Amount of Loans: The principal amount of the loan will be equal to the principal amount of the PPP Loan pledged as collateral.
• Eligible Borrowers: U.S. depository institutions that originate PPP Loans.
• Maturity and Acceleration of Maturity: The maturity date will be the same as the maturity date of the PPP Loan pledged as collateral. The maturity date will be accelerated if the underlying PPP Loan goes into default and is sold to the SBA on the SBA guarantee. The maturity date will also be accelerated to the extent any loan forgiveness reimbursement is received from the SBA.
• Interest Rate: 35 basis points

The Fed also released FAQs about the PPP Facility.  Among other topics, the FAQs address the documentation required to participate in the PPP Facility, the ability of institutions that do not have a master account at the Fed to borrow from the PPP Facility through a correspondent bank, the differences between borrowing under the PPP Facility and utilizing the Fed’s discount window, initiating an extension of credit from a Federal Reserve Bank, the use of electronic signatures and public disclosure of a loan from the PPP Facility.

5.  Term Asset-Backed Securities Loan Facility (“TALF”)

The TALF is intended to help meet the credit needs of consumers and businesses by facilitating the issuance of asset-backed securities (“ABS”) and improving the market conditions for ABS more generally.  The new TALF program is modeled on a similar credit facility established in 2008 to ensure the proper functioning of critical ABS markets during the global financial crisis. However, the purpose of this TALF is different from the 2008 TALF and is generally focused to facilitate lending to consumers and businesses.

• Amount of Loans: The Fed will make available, through a special purpose vehicle, up to $100 billion of loans.
• Eligible Borrowers: All U.S. companies, with significant operations and employees in the U.S., which own eligible collateral and maintain an account relationship with a primary dealer.
• Eligible Collateral: U.S. dollar denominated cash ABS that have a credit rating in the highest long-term or, in the case of non-mortgage backed ABS, the highest short-term investment-grade rating category from at least two eligible NRSROs. Eligible collateral must be ABS where the underlying credit exposures are one of the following:
  • Auto loans and leases; student loans; credit card receivables; equipment loans; floorplan loans; insurance premium finance loans; certain SBA-guaranteed small business loans; leveraged loans; or commercial mortgages.
• Term: 3 years
• Interest Rate: For CLOs, 150 basis points over the 30-day average secured overnight financing rate (“SOFR”); for SBA Pool Certificates, the top of the federal funds target range plus 75 basis points; for SBA Development Company Participation Certificates, 75 basis points over the 3-year fed funds overnight index swap (“OIS”) rate; and for all other eligible ABS, 125 basis points over the 2-year OIS rate or 125 basis points over the 3-year OIS rate, depending on the weighted average life of the securities.
• Administrative Fee: 10 basis points
• Loans made on a non-recourse basis and substitution of collateral is generally not allowed.

A number of questions remain open with respect to the new TALF program. For instance, although CLOs are now eligible collateral, they are required to be "static" and issued by a U.S. company. In addition, there is some uncertainty whether a fund and/or newly-formed entity can be an eligible borrower under TALF.

6.  Municipal Liquidity Facility (“Municipal Facility”)

The Municipal Facility is intended to support lending to U.S. states, cities, and U.S. counties. The Fed will commit to lend to a special purpose vehicle that will purchase eligible notes directly from eligible issuers at the time of issuance. The Municipal Facility will have the ability to purchase up to $500 billion of eligible notes. Additionally, the Fed will require legal opinions and disclosures prior to the purchase and State law limitations applicable to the incurrence of debt by State and local governments will apply.

• Purchase Amount: The Municipal Facility will purchase eligible notes issued by an eligible issuer up to an aggregate amount of 20% of the general revenue from its own sources and utility revenue of the applicable governmental entity the fiscal year 2017.
• Eligible Issuers: A U.S. state, the District of Columbia, U.S. cities with a population exceeding one million residents, and U.S. counties with a population exceeding two million residents. Only one issuer per State, City, or County is eligible.
• Eligible Notes: Tax anticipation notes (“TANs”), tax and revenue anticipation notes (“TRANs”), bond anticipation notes (“BANs”), and other similar short-term notes issued by eligible issuers, provided such notes mature no later than 24 months from the date of issuance.
• Eligible Use of Proceeds: Proceeds must be used to help manage the cash flow impact of income tax deferrals resulting from an extension of income tax filing deadlines; potential reductions of tax and other revenues or increases in expenses related to the COVID-19 pandemic; and other requirements for the payment of principal and interest on obligations of the governmental entity.
• Origination Fee: 10 basis points 

CONCLUSION

We recommend that all potential borrowers consult with their bank, accountant, attorney and/or other advisor to evaluate whether they are eligible for any of the above programs and the advantages and disadvantages of such loans. 

KMK Law has commercial and structured finance, capital markets, tax, and securities attorneys as well as a multi-disciplinary team advising numerous clients on such matters. Please contact a KMK attorney for assistance, including those listed below.

Nicholas L. Simon
513.579.6574
nsimon@kmklaw.com

Allison A. Westfall
513.579.6987
awestfall@kmklaw.com 

Brett S. Niehauser
513.579.6596
bniehauser@kmklaw.com