Law360 (July 17, 2020, 5:40 PM EDT) --
Under the program, the Federal Reserve will purchase participations in loans from a special purpose vehicle, or SPV, established by the Fed as a conduit to make such loans.
Pursuant to the most recent terms through June 20, the program will make available up to $600 billion in liquidity to eligible lenders that will in turn provide direct loans to eligible businesses. The program will be deployed through the Main Street New Loan Facility, the Main Street Expanded Loan Facility and the Main Street Priority Loan Facility — or the MSNLF, MSELF and MSPLF, respectively.
In part one of this two-part article, we provided a brief summary of the most recent terms of the MSNLF, MSPLF, and MSELF.
In part two, we will provide some guidance on practical issues that should be considered by borrowers and lenders that desire to participate in the program facilities.
Restrictions and Limitations of Existing Credit Agreements
Any borrower seeking to take advantage of the facilities under the program will need to perform an analysis to assess how any loan under the program facilities will integrate with existing debt structures.
Contractual issues related to everything from restrictions on additional debt and liens to prohibitions on distributions should be assessed carefully to determine the appropriateness of a credit solution under the program.
General Restrictions on Debt and Lien Incurrence; Sizing Considerations
Although most covenants only restrict the ability of a borrower to incur more debt, the general covenant structure of a borrower's debt agreements should be assessed in totality to determine interactions with any loan incurred under one of the program facilities.
For example, at the outset, restrictions on the incurrence of debt and liens, if applicable, that are contained in existing debt agreements will have to be assessed to determine potential requirements for waivers or lender consents if there is not sufficient capacity under the existing covenants to incur debt under one of the program facilities.
Similarly, borrowers will have to perform calculations and analysis as to whether the additional debt will cause any issues with respect to compliance with any existing financial covenants. Borrowers should also make a strategic assessment to determine if consumption of capacity under existing debt and lien incurrence baskets will cause financing challenges in the future by restricting future incurrence capacity under the current debt facilities.
Further, the program facilities provide for specified limitations on the loan sizing. It is important to note that earnings before interest, taxes, depreciation, and amortization — or EBITDA — determinations for purposes of sizing the loans under the program facilities will not be tied to any contractual agreements or EBITDA definitions that may exist among the relevant borrowers and lenders, but rather to each lender's internal underwriting criteria.
This may have the effect that certain borrowers that are used to being able to add back substantial amounts to their EBITDA pursuant to bespoke EBITDA credit agreement provisions may find themselves limited to smaller loans than they would otherwise expect.
It is also noteworthy that existing undrawn lines of credit — subject to certain exceptions, e.g., for commercial paper backstops or receivables financing — will have to be included in the leverage calculation for purposes of loan sizing, which again may result in unexpected reductions to available loan amounts under the program facilities.
Repayment of Existing Indebtedness
Borrowers should also be aware that the Fed has provided for certain restrictions relating to the repayment and termination of any debt other than loans incurred under the program facilities, except for loans under the MSPLF, which are permitted to be used by the borrower to refinance existing debt owed to a lender that is not the eligible lender at the time the MSPLF loan is made.
Generally, borrowers will be restricted from making payments of principal and interest on other debt unless such payments are mandatory and due; provided that a borrower will be permitted to refinance debt that is maturing no later than 90 days from the date of such refinancing.
While this should allow servicing of other debt in the ordinary course, borrowers should keep in mind that as a practical matter, loans under the program facilities will need to be repaid first during any deleveraging efforts, which in certain circumstances may increase the borrowers' overall borrowing costs (e.g., if any other debt has a higher rate of interest than the program facilities).
Further, the program facilities do not permit the borrower to cancel or reduce any of its committed lines of credit with any lender. However, the Federal Reserve has advised that this covenant does not prohibit the reduction or termination of uncommitted lines of credit in the normal course of business, the expiration of existing lines of credit in accordance with their terms, or the reduction of availability under existing lines of credit in accordance with their terms due to changes in borrowing bases or reserves in asset-based or similar structures.
For a borrower seeking to make use of the MSELF, one of the more likely paths such borrower would elect to follow to expand any specific loan would be through the incremental facility provisions of the relevant credit agreement. The specific terms of the MSELF should be reviewed in light of existing constraints related to incremental facilities.
Borrowers should consider the effect of an expansion facility on key contractual constraints related to maturity/amortization or even, potentially, most favored nation, or MFN, provisions.
For example, many credit agreements will not permit incremental facilities that mature earlier, or have a shorter weighted average life to maturity, than the existing facilities. Given the relatively short maturity and substantial required amortization of the MSELF, this could prevent borrowers from incurring loans under the MSELF under their existing credit agreements absent existing lenders' consent or applicable exceptions contained in the existing credit documents.
In addition, borrowers should review MFN provisions in their existing debt instruments to confirm that no MFN provisions are triggered, which could result in an increase of the rate of interest on the underlying loans in certain prescribed circumstances.
Further, mechanics related to the implementation of the upsized loan should be reviewed to ensure that any consent rights or requirements for documentation (e.g., amendments) are satisfied prior to making use of any loan under the MSELF.
The capital distribution restrictions that apply to any loan under the program facilities are relatively stringent and may set tighter constraints than existing provisions in the borrower's debt documents.
Except for tax distributions, loans under the program facilities would prohibit the payment of dividends or making of capital distributions with respect to any of the eligible borrower's common stock while the loan is outstanding and for 12 months thereafter.
A borrower would also be prohibited from the repurchase of any of its equity securities, or those of its parent company, while the loan is outstanding and for 12 months thereafter, except as required by existing contractual obligations.
The Fed has not expanded these restrictions or provided further guidance on any other potential distribution exemptions that may be part of the normal course of business.
While the exception for tax distributions is certainly helpful, there may be other ordinary course distributions that may be relevant depending on the particular borrower's structure (e.g., making distributions for overhead expenses and the like to any parent company) that would not be permitted under the existing guidelines.
New loans under the MSNLF will have some flexibility as to priority, as the only requirement is that such loans not be "contractually subordinated in terms of priority" to other existing debt.
While the Fed guidelines do not specify with absolute certainty what "contractually subordinated" means in this context, it appears that this refers to payment priority and will not restrict lien subordination (e.g., incurring loans under the MSELF as second lien debt behind existing first lien debt) and incurring unsecured loans under the MSELF if the borrower has existing secured debt.
On the other hand, loans and upsizes under the MSPLF and MSELF, respectively, are required to be senior to or equal with, in terms of payment priority and security, the borrower's other loans or debt instruments, other than mortgage debt. Notably, all loans may be senior or unsecured; however, the MSELF loans must be secured by the same collateral package, if any, as the underlying loan.
The requirement that both the MSPLF and MSELF loans be pari passu with any existing secured debt will trigger the need to ascertain any limitations on the incurrence of pari passu debt and liens and related procedural requirements.
The easiest approach here would be, in the case of the MSELF, structuring the new loans as a new incremental tranche under the existing credit agreement. However, in the case of the MSPLF and loans under the MSELF structured as sidecar facilities, a pari passu intercreditor agreement will most likely be required.
Some credit agreements include the basic framework for incurrence of additional pari passu secured debt, including mechanics for pari passu intercreditor agreements, but the requirement to enter into an intercreditor agreement with the existing lenders could significantly delay the borrower's ability to access the new financing, as well as significantly increase the expense to the borrower to obtain such financing.
In scenarios where credit agreements do not include specific mechanics for additional pari passu debt, amendments and/or consents from the existing lenders may be required, which could further increase the delay caused by putting a pari passu intercreditor agreement in place.
Certifications and Covenants
Eligible borrowers should make a detailed assessment of where in the debt document to include the required certifications and covenants. The required certifications and covenants are somewhat general, and there has been little detailed guidance to assist in narrowing the potentially wide interpretations that could apply to such certifications and covenants.
As such, borrowers may want to spend some time determining the optimal location for these requirements to avoid the risk of inadvertently breaching a covenant or certification and causing a cascade of events and/or accelerations throughout the debt instruments.
Michael Chernick and Tomasz Kulawik are partners at Shearman & Sterling LLP.
Mohamed El-Sayed and Lisseth A. Rincon Manzano, associates at the firm, contributed to this article.
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