Main Street Lending Program: Borrower’s Guide

As of June 10, 2020

MAIN STREET LENDING PROGRAM: BORROWER’S GUIDE

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Table of ContentsHigh-Level MSLP Summary 3

Borrower Roadmap to Participation in the MSLP 4

Determine “Formal” Eligibility 4

Determine “Informal” Eligibility 4

Consider the Use of Proceeds 4

Determine the Relationship with Existing Debt of the Borrower 5

Choose a Facility 5

Find a Lending Partner 6

Consider the “Formal” Strings Attached 6

Consider the “Informal” Strings Attached 6

Take Into Account the Federal Reserve’s Control Rights as Majority Lender 7

Work With the Lender to Negotiate the Loan and Complete the Required Documentation 7

For more information, please contact:Joseph W. AakerShareholder Kansas City Polsinelli 816.360.4180 jaaker@polsinelli.com

Dan FlaniganOffice Managing Partner Shareholder New York | Kansas City Polsinelli 212.644.2090 dflanigan@polsinelli.com

Kraig M. KohringShareholder Real Estate and Financial Services Department Chair Kansas City Polsinelli 816.360.4163 kkohring@polsinelli.com

After multiple rounds of term sheets and Frequently Asked Questions (the “FAQs”), the addition of a third facility and a slate of lengthy agreements and forms required for participation, businesses interested in participating in the Federal Reserve’s Main Street Lending Program (the “MSLP”) may have trouble figuring out where to start in deciding how (or whether) to utilize this program. This guide includes the current available information on the MSLP as of June 10, including the Federal Reserve’s announced changes to the terms of the MSLP loans on June 8 to expand access to additional borrowers.

We at Polsinelli hope this guide will help borrowers in their analysis and decision process around this complex program. In this guide we provide a high-level summary of the MSLP terms and a roadmap and issues list to guide potential borrowers considering participation in the program.

MAIN STREET LENDING PROGRAM: BORROWER’S GUIDE

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High-Level MSLP Summary

1For a more comprehensive summary of the terms and conditions of the MSLP and the differences among the facilities, please see the previously-published Polsinelli Whitepaper, available here.

The MSLP allows eligible lenders to make eligible loans to small and mid-size businesses and sell participations in those loans to a special purpose vehicle (the “Main Street SPV”) set up and funded by the Federal Reserve Bank of Boston (the “Boston Fed”). The structure is designed to encourage credit formation to this segment of the economy through funding and credit risk sharing by the Federal Reserve. Eligible loans are five-year term loans with an interest rate of LIBOR plus 3.00%. The loans are not eligible for forgiveness, but would be interest deferred for the first 12 months and would not begin amortization of principal until the end of year three. Borrowers would be subject to fees at origination of up to 2.00% of the loan amount.

Loans would be available under three different facilities:

1. Main Street New Loan Facility (the “New Loan Facility” or “MSNLF”),

2. Main Street Priority Loan Facility (the “Priority Loan Facility” or “MSPLF”) and

3. Main Street Expanded Loan Facility (the “Expanded Loan Facility” or “MSELF”).

MSLP Facilities Key Terms1

New Loan Facility Priority Loan Facility Expanded Loan Facility

Interest Rate LIBOR (1 month or 3 month) plus 3.00%

LIBOR (1 month or 3 month) plus 3.00%

LIBOR (1 month or 3 month) plus 3.00%

Maturity 5-year term loan 5-year term loan 5-year term loan

Prepayment Permitted at any time without penalty

Permitted at any time without penalty

Permitted at any time without penalty

Interest Deferral Period 12 months (interest capitalized) 12 months (interest capitalized) 12 months (interest capitalized)

Principal Amortization at Year End Years 3-5

15%, 15%, 70% 15%, 15%, 70% 15%, 15%, 70%

Requirement for Existing Credit Agreement or Other Outstanding Debt

No No Requires pre-existing credit facility that may be amended to add a new tranche with required terms

Minimum Loan Amount $250,000 $250,000 $10 million

Maximum Loan Amount Lesser of (i) $35 million and (ii) an amount that when added to existing (including committed but undrawn) debt does not exceed 4x borrower 2019 adjusted EBITDA

Lesser of (i) $50 million and (ii) an amount that when added to existing (including committed but undrawn) debt does not exceed 6x borrower 2019 adjusted EBITDA

Lesser of (i) $300 million and (ii) an amount that when added to existing (including committed but undrawn) debt does not exceed 6x borrower 2019 adjusted EBITDA

Ability to Refinance Existing Debt

No Yes — at origination may refinance outstanding debt to a lender other than the originating lender

No

Lender Retention Requirement 5% 5% 5%

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Borrower Roadmap to Participation in the MSLP

2The adjustment methodology must be that used in the lender’s prior loans to the borrowers or other loans to similarly situated borrowers.

Determine “Formal” Eligibility

Generally, businesses are not eligible:

� If they are not U.S. businesses;

� If they are non-profit organizations or governmental organizations (other than tribal government);

� If they (together with their “affiliates”) have more than 15,000 employees and more than $5 billion in 2019 revenue; or

� If they are determined to be “ineligible businesses” under the Small Business Administration’s (the “SBA”) loan program eligibility regulation and guidance. “Ineligible businesses” under the SBA’s regulation and guidance include certain “vice” businesses, rental real estate developers and owners, and certain financial businesses, among others. However, in certain cases an ineligible business such as a real estate property owner may have an affiliate entity (such as a property management company) that is eligible.

Determine “Informal” Eligibility

Even if a business meets the explicit criteria for borrowing under the program, some may be effectively shut out for other potential reasons.

� Existing lenders — If a potential borrower has existing debt agreements with negative covenants that prohibit incurring new debt, it will need to obtain existing lender consent.

� Bank loan underwriting — MSLP lenders are obligated to originate loans in accordance with their underwriting and credit risk management requirements, and lenders must retain 5% of the loan. Additionally, while the Federal Reserve allows unsecured loans under the MSLP and doesn’t require personal guaranties, lenders applying their underwriting standards may insist on security and guaranty arrangements. Potential borrowers that are most harmed by the pandemic, and most in need of funds, may not be able to pass underwriting.

� 2019 earnings — The minimum loan amount under the MSLP is $250,000, and borrowers are subject to a maximum loan amount that is capped at a four or six times leverage ratio (depending on the facility) of their 2019 adjusted EBITDA.2 Therefore borrowers with a 2019 adjusted EBITDA of less than $41,000 are effectively excluded, and borrowers with other existing debt may be excluded even at higher 2019 adjusted EBITDAs because the existing debt is also factored into their leverage ratio cap.

Consider the Use of Proceeds

The only explicit restrictions on the use of proceeds of MSLP loans are the following.

� Funds cannot be used to repay existing debt, except for the right under the Priority Loan Facility (and not either of the other facilities), to refinance, at the point of origination, debt of a lender other than the originating lender.

� For U.S. borrowers with non-U.S. parents, funds cannot be used to benefit the non-U.S. parent or affiliates.

Beyond the explicit restrictions, Federal Reserve staff have noted that the “spirit” of the program is helping eligible businesses maintain operations and payroll. Therefore while not explicitly restricted, and as discussed further below, borrowers should consider whether other uses of proceeds, such as business or real property acquisitions, may draw unwanted scrutiny. Lenders may also be less willing to lend to borrowers whose proposed use of proceeds may present this risk.

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Determine the Relationship with Existing Debt of the Borrower

Each of the MSLP facilities contains requirements and limitations as to the structure of the MSLP loan relative to existing debt of the borrower.

� For loans under the New Loan Facility, the loan may not be contractually subordinated to other debt of the borrower at origination or during the term of the loan. However, the borrower may have other debt that is secured by collateral or supported by a guarantee even if the New Loan Facility loan is unsecured and not guaranteed.

� For loans under the Priority Loan Facility, the loan must be of equal standing in terms of both priority and security with other borrower loans (other than mortgage debt), at origination and during the life of the loan. This means that a borrower may not have (or during the term of the MSLP loan, incur) other secured debt (other than a mortgage on real property) without equally securing the MSLP loan. This would create problems for borrowers that anticipate the need for other (non-mortgage) secured borrowing, particularly where collateral is not easily divisible or is difficult to value — as the presence of other secured debt triggers a requirement to value the collateral and confirm that the MSLP loan would have a “Collateral Coverage Ratio” of at least 200% or not less than the Collateral Coverage Ratio of the other secured debt.

� For loans under the Expanded Loan Facility, the loan is subject to the same criteria as stated above with respect to the Priority Loan Facility, although the equality may be simpler to create if the other secured debt is the credit agreement that will accommodate the new eligible tranche and therefore equality is met by a grant of a pari passu interest in the same security.

Choose a Facility

Eligible borrowers are eligible to obtain loans under any of the three facilities (though each borrower and affiliated group may only use one of the facilities), subject to practical considerations as to whether the business has an existing credit agreement and whether the loan minimums and maximums are feasible for its situation. Beyond that, it is up to borrowers and lenders to determine which facility would best serve the borrower’s needs.

� The Expanded Loan Facility would generally be best suited for borrowers with large existing credit agreements and that want to borrow a large amount, since it allows a potential maximum loan amount of up to $300 million.

� For borrowers without existing credit agreements to amend, the only options are the New Loan Facility or the Priority Loan Facility.

� The Priority Loan Facility allows a higher leverage ratio (6x) to determine the maximum loan amount, so it may be better suited to borrowers with higher existing debt, those needing to borrow up to a higher leverage ratio or those needing a higher potential maximum loan amount ($50 million, versus $35 million for the New Loan Facility). It is also the only option for borrowers who wish to refinance existing debt.

� For those borrowers without leverage ratio cap concerns and not needing to refinance existing debt and that would not benefit from the higher potential maximum loan amount under the Priority Loan Facility, the New Loan Facility may be the best option if they have or anticipate incurring other secured debt, as the New Loan Facility does not require that the loan be equally secured with other secured debt of the borrower.

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Find a Lending Partner

Lenders are the real gatekeepers of the MSLP loans, so it is important that a borrower finds a lender that is expected to enthusiastically seek to make MSLP loans and has the resources to quickly document and approve MSLP loans. Given the expected interest in the MSLP, it’s also important to find a lender that would be expected to prioritize a potential borrower. Federal Reserve research into the Paycheck Protection Program (the “PPP”) found that businesses and geographic areas with a higher degree of existing banking relationships had better success in obtaining PPP funding. For these reasons, an existing banking relationship is likely to be the best lending partner for MSLP borrowing. Note however that only the Priority Loan Facility allows usage of the loan proceeds at origination to refinance existing debt, and only existing debt of a lender other than the MSLP lender, so borrowers interested in pursuing that option would need to work with a new lender. There is currently no list of participating lenders, so a potential borrower will need to reach out to new contacts if its existing relationship banks do not expect to participate in the MSLP.

Consider the “Formal” Strings Attached

Participation in the MSLP comes with several formal ongoing requirements, including the significant restrictions noted below.

� Compensation restrictions — For the term of the loan plus one year, borrowers would need to cap compensation for employees or officers with 2019 total compensation greater than $425,000 and potentially reduce compensation for employees or officers with 2019 total compensation greater than $3 million.

� Buyback restrictions — For the term of the loan plus one year, borrowers would not be able to repurchase listed equity securities of the borrower or of a parent entity (except pursuant to pre-existing contractual obligations).

� Capital distributions — For the term of the loan plus one year, the borrower may not pay dividends or other capital distributions in respect of its equity securities, provided that for entities that are “pass-through entities” for tax purposes, capital may be distributed to owners to the extent necessary to pay tax liability associated with ownership of the borrower.

� Pre-payment of other debt — During the term of the loan, the borrower may not voluntarily pre-pay other debt, except revolving credit in accordance with normal course of business. Borrowers are allowed to refinance maturing debt, and to refinance existing debt with Priority Loan Facility proceeds as discussed above.

Additionally, borrowers are required to make certifications and covenants as to their eligibility in a form executed by the principal executive officer and principal financial officer of the entity. These restrictions, certifications and covenants may impair the flexibility of the business and may give rise to potential liability of the business or the individual signatories. These downsides must be weighed against the expected funding benefit of the program.

Consider the “Informal” Strings Attached

Potential borrowers should take note of the experience of PPP borrowers, where shifting guidance and public ire has led to the public shaming of borrowers deemed “unfit” for SBA assistance — even if those borrowers met the program requirements at the time of borrowing. The Federal Reserve has indicated that names of MSLP borrowers and loan amounts would be subject to public disclosure. Although MSLP loans are true loans that do not have the possibility of forgiveness — as a Federal Reserve assistance program we would expect the MSLP to be associated with “bailouts” in public perception. Potential borrowers should consider whether this public perception presents a risk to their business.

MAIN STREET LENDING PROGRAM: BORROWER’S GUIDE

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Take Into Account the Federal Reserve’s Control Rights as Majority Lender

Although the lender underwrites the loan and remains as servicer, the Main Street SPV as a holder of the majority of the loan will have certain control rights over significant lender decisions, including the decisions to grant requested forbearance or modifications with respect to the loan. Borrowers that expect changing circumstances and rely on their existing lender to be pragmatic and flexible with respect to modifications, waivers and consents should consider whether interposing the Federal Reserve as the ultimate decision-maker may limit that flexibility.

Work With the Lender to Negotiate the Loan and Complete the Required Documentation

A borrower that has decided to participate would then work with its chosen lender to negotiate the terms of the loan (or in the case of the Expanded Loan Facility, negotiate the terms of the new tranche to be added to the existing loan), get through underwriting and have the loan participation submitted for purchase by the Main Street SPV. Lenders are expected to use their existing loan documentation, along with some specific changes required to make the loan eligible under the MSLP. Beyond the loan documentation with the lender, several additional MSLP documents are required to be executed by the borrower, each of which are available on the Boston Fed website.

� Borrower Certifications and Covenants — These include certification as to eligibility of the borrower and are required to be executed by the principal executive officer and principal financial officer of the borrower. There is a separate form for each facility to accommodate the minor differences in required certifications.

� Co-Lender Agreement — For MSLP loans with only one lender, this document would amend the credit agreement to include provisions accommodating multiple lenders. It is not initially effective, and would only become effective if the Federal Reserve elects to “elevate” its participation interest into an assignment that would make it a direct lender under the credit agreement. The Federal Reserve has indicated they do not expect to use this right in the ordinary course, but may use it where they view the lender’s incentives as not aligned with the Federal Reserve’s, or if the loan is large relative to its portfolio of MSLP participations.

� Assignment in Blank — Like the Co-Lender Agreement, this document must be signed and submitted at the outset, but only comes into play upon the Federal Reserve’s election to “elevate.” This allows the conversion of the participation interest into an assignment, and requires the execution by borrower to document its consent.

The Boston Fed website with MSLP documents and forms, as well as links to term sheets for the facilities and the FAQs, is available here. If you have further questions about the MSLP, please reach out to the listed authors or your regular Polsinelli contact.