Practice Areas

Main Street Priority Loans: Who Is Eligible, and What Commitments Are Required?

July 10, 2020

Recently, the Federal Reserve established the Main Street Lending Program, which was authorized under Section 13(3) of the Federal Reserve Act. The program is designed to provide support to small and medium-sized businesses and their employees across the United States during the current period of financial strain by supporting the provision of credit to such businesses. The program includes three types of loan facilities, namely, the “New Loan Facility,” the “Priority Loan Facility,” and the “Expanded Loan Facility.”

This article will focus on the Priority Loan Facilities (“Priority Loans”) and will summarize the eligibility criteria, the loan size available and collateral requirements, and the required commitments from eligible borrowers for Priority Loans. These criteria are based upon guidance issued by the Federal Reserve Bank of Boston and set forth in the Main Street Priority Loan Facility Term Sheet effective as of June 8, 2020 (the “Term Sheet”), the Main Street Priority Loan Facility Borrower Certifications and Covenants Instructions and Guidance issued on June 11, 2020 (“Borrower Certifications and Covenants”), and the Main Street Lending Program Frequently Asked Questions effective June 26, 2020 (“FAQ”).

General Eligibility Requirements for Priority Loans

To be eligible for a Priority Loan under the program, the prospective borrower must satisfy the following conditions:

  1. Must be an eligible business;[1]
  2. Must meet at least one of the following two conditions: have 15,000 or fewer employees, or had 2019 annual revenues of $5 billion or less;[2]
  3. Must be a domestic entity with significant operations in the United States and with a majority of its employees based in United States;
  4. Must not participate in any other type of Main Street Loan (g., New Loan Facility or the Expanded Loan Facility) or the Primary Market Corporate Credit Facility;
  5. Must not have received specific support pursuant to Subtitle A of Title IV of the CARES Act;[3] and
  6. Must not be a “Covered Entity” under the conflicts of interest rules of the CARES Act (g., not an elected official and/or any family member thereof).

For determining affiliation based on equity ownership under the program, entities are deemed an affiliate of an individual or entity that owns or has the power to control more than 50 percent of its voting equity.[4] The SBA interprets this broadly, so the ability of a single minority member to block virtually any corporate action is deemed to trigger the affiliation rule.[5]  However, the plain language of 13 C.F.R. § 121.301(f)(1) only finds affiliation if a single investor has this blocking power, thus a group of investors having this power through supermajority controls would not trigger affiliation. 

Sizing and Collateral Requirements for a Priority Loan

If a prospective borrower satisfies the criteria of an “eligible borrower,” the next step is to examine what constitutes an “eligible loan” that the eligible borrower may obtain. The term sheet for a Priority Loan Facility sets forth what constitutes an “eligible loan.” These loan terms include the following:

  1. the maximum loan size is the lesser of $50 million or an amount that, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed six[6] times the eligible borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA); and
  2. at the time of origination, and at all times the eligible loan is outstanding, the eligible loan is either senior to or pari passu with, in terms of priority and security, the eligible borrower’s other “Loans or Debt Instruments” (as defined below), other than “Mortgage Debt” (as defined below) (“Senior Loan Test”).

Loan Size. One unique feature associated with the Priority Loan Facility (as opposed to the New Loan Facility or the Expanded Loan Facility) is that an eligible borrower may use the proceeds of a Priority Loan to prepay existing debt that is outstanding and owed to lenders other than the eligible lender that originates the Priority Loan.[7] In addition, if the Priority Loan is being used to refinance existing debt, the existing debt being refinanced is not included in the calculation of the eligible borrower’s “existing outstanding and undrawn available debt.”[8] However, any outstanding PPP Loan that has not yet been forgiven is counted as existing debt for purposes of determining maximum loan size.[9]

As noted above, the maximum loan size is determined by reference to the eligible borrower’s adjusted 2019 EBITDA. The methodology an eligible lender requires an eligible borrower to use when calculating its adjusted 2019 EBITDA must be a methodology the eligible lender previously required to be used for adjusting EBITDA when extending credit to the eligible borrower or to similarly situated borrowers on or before April 24, 2020 (emphasis added).[10] “Similarly situated borrowers” are borrowers in similar industries with comparable risk and size characteristics.[11] If an eligible lender has used multiple EBITDA adjustment methods with respect to the eligible borrower or similarly situated borrowers (e.g., one for use within a credit agreement and one for internal risk management purposes), then the eligible lender should choose the most conservative method it has employed.[12] In all cases, the eligible lender must select a single method used at a point in time in the recent past and before April 24, 2020. The eligible lender may not “cherry pick” or apply adjustments used at different points in time or for a range of purposes, and it must document the rationale for its selection of any adjusted EBITDA methodology.[13]

When asked why the Federal Reserve is allowing adjustments to EBITDA when it has noted supervisory concerns with these adjustments in the past, the Federal Reserve explains that “it is normal industry practice for lenders and borrowers to agree to adjust a borrower’s EBITDA to accommodate differences in business models across industries and to accommodate one-time events that may positively or negatively impact a borrower’s earnings.[14] For example, a company may want to adjust its EBITDA by the EBITDA of another target company it is considering acquiring in order to permit increases in the maximum loan size. In addition, while there is no limit to how much EBITDA can be adjusted, the Federal Reserve notes that there are important features of the program that are designed to limit excessive risk-taking.[15] Specifically, the Federal Reserve notes that EBITDA adjustments must be of the type the eligible lender has previously (and recently) required for the eligible borrower or similarly situated borrowers. Thus, the eligible lender will have to document that it recently permitted the add-back of a target company’s EBITDA to that of a borrower’s EBITDA in connection with its financial covenant calculations and its internal risk rating since the program requires that a Priority Loan have an internal risk rating from the eligible lender equivalent to “pass” in the FFIEC’s supervisory rating system as of Dec. 31, 2019.[16]

Senior Loan Test. As noted above, Priority Loans must 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.” “Loans or debt instruments” means all debt for borrowed money and all obligations evidenced by bonds, debentures, notes, loan agreements, or other similar instruments, and all guarantees of the foregoing. “Mortgage debt” means (i) debt secured by real property at the time of the Priority Loan’s origination, and (ii) limited purpose recourse equipment financings (including equipment capital or financing leasing and purchase money equipment loans) secured only by the acquired equipment.[17]

Secured vs. Unsecured. The Priority Loan must be secured if, at the time of origination, the eligible borrower has any other secured loans or debt instruments. The Priority Loan may not be contractually subordinated in terms of priority to any of the eligible borrower’s other loans or debt instruments, and the “Collateral Coverage Ratio” at the time of origination must be either (i) at least 200 percent, or (ii) not less than the aggregate Collateral Coverage Ratio for all of the Borrower’s other secured loans or debt instruments (other than mortgage debt). The “Collateral Coverage Ratio” means (i) the aggregate value of any relevant collateral security, including the pro rata value of any shared collateral, divided by (ii) the outstanding aggregate principal amount of the relevant debt. A Priority Loan may be unsecured only if the eligible borrower does not have, as of the date of origination, any secured loans or debt instruments (other than mortgage debt) and is not at any time the Priority Loan is outstanding, contractually subordinated in terms of priority.[18]

Prepayments of Priority Loans. Prepayment of the principal of Priority Loans is permitted without penalty and will reduce future payments in the manner specified in the underlying loan documents. While lenders have flexibility in specifying these terms, they should make efforts to align their approach with the expected amortization schedule (e.g., applying prepayments to the next scheduled principal payment due would maintain such alignment).[19]

Additional Covenants Applicable to Priority Loans

In addition to satisfying the criteria set forth in the Term Sheet to qualify as an eligible borrower, an eligible borrower must comply with the covenants more particularly set forth in the Borrower Certification and Covenants. These covenants can generally be summarized as follows:

  1. Limits on repayment of other loans or debt instruments;
  2. Limits on compensation of officers and employees;
  3. Limits on repurchase of equity securities; and
  4. Limits on distributions.

Repayment of Other Loans or Debt Instruments. The eligible borrower must commit to refrain from repaying the principal balance of, or paying interest on, any debt until the Priority Loan is repaid in full, unless the debt or interest payment is “mandatory and due.” In addition, the eligible borrower must commit that it will not seek to cancel or reduce any of its committed lines of credit with the eligible lender or any other lender. “Mandatory and due” means scheduled principal and interest payments or payments required upon the occurrence of an event that automatically triggers mandatory prepayments.[20] These covenants do not prohibit an eligible borrower from doing any of the following: (i) repaying a line of credit (including a credit card) in accordance with the eligible borrower’s normal course of business, (ii) taking on and paying additional debt obligations required in the normal course of business and on standard terms, including inventory and equipment financing, provided that such debt is secured only by the newly acquired property, and, apart from such security, is of equal or lower priority than the Priority Loan, or (iii) refinancing a debt that is maturing no later than 90 days from the date of such refinancing.[21]

Limits on Compensation. The program imposes certain limitations on total compensation to officers and employees in excess of $425,000. Total compensation includes salary, bonuses, awards of stocks, and other financial benefits provided by the eligible borrower and its affiliates.[22] These limitations are that no employee or officer whose total compensation exceeded $425,000, but was less than or equal to $3 million, in calendar year 2019 or the Subsequent Reference Period (as defined below) will, until 12 months after the date on which the eligible loan is no longer outstanding: (i) receive from the eligible borrower total compensation that exceeds, during any 12 consecutive month period, the total compensation received by the officer or employee from the borrower in calendar year 2019 or the Subsequent Reference Period, or (ii) receive from the eligible borrower severance pay or other benefits upon termination of employment with the eligible borrower which exceeds twice the maximum total compensation received by the officer or employee from the eligible borrower in calendar year 2019 or the Subsequent Reference Period.

These restrictions do not apply to an employee whose compensation is determined through an existing collective bargaining agreement dated before March 1, 2020. There are further restrictions on employees or officers whose total compensation exceeded $3 million for 2019.[23] The term “Subsequent Reference Period” is used for officers or employees who began their employment during 2019 or thereafter, and it is defined as the 12-month period starting from the end of the month in which the officer or employee commenced employment, if such employee’s or officer’s total compensation exceeded $425,000 during such period.

Limits on Repurchase of Equity Securities. This limitation is applicable to eligible borrowers that have, or have a parent company that has, equity securities that are listed on a national securities exchange. Eligible borrowers must commit not to repurchase[24] an equity security that is issued by the eligible borrower and listed on a national securities exchange until 12 months after the date on which the eligible loan is no longer outstanding. If the eligible borrower is part of a consolidated group for financial reporting purposes, the eligible borrower must commit not to repurchase an equity security issued by any of its parent companies that is listed on a national securities exchange while the eligible loan is outstanding. However, there is an exception whereby these restrictions do not apply to any repurchases required under a contractual obligation that was in effect as of March 27, 2020.[25]

Limits on Distributions. Until 12 months after the date on which the eligible loan is no longer outstanding,[26] except as provided below, the eligible borrower must agree not to pay dividends or make other capital distributions with respect to the common stock equivalents of the eligible borrower. Preferred stock or any other equity interest that provides for mandatory or preferential payment of dividends or other distributions is also subject to this restriction, unless both the equity interest and the obligation to pay dividends existed as of March 27, 2020. Dividends and other capital distributions do not include repurchases or redemptions. In addition, an eligible borrower that is an S corporation or other tax pass-through entity may make distributions in respect of its common stock equivalents to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings, provided such distributions are subject to any annual reconciliation, with any surplus or deficiency to be deducted from or added to distributions, as applicable, in the following year.


In summary, a business that is eligible for a Priority Loan under the program may be entitled to borrow up to the lesser of six times its adjusted 2019 EBITDA or $50 million. Our Business Services Practice Group is continually monitoring the program, and we are available to answer your questions.

[1] An eligible Business cannot be foreign-owned; it must operate domestically. An “Ineligible Business” is defined in 13 CFR 120.110(b)-(j) and (m)-(s), as amended.

[2] Each of the foregoing are analyzed after application of the “affiliation” rules.

[3] Businesses that have received PPP loans are permitted to borrow under the Priority Loan Facility, provided they are eligible borrowers. (See FAQ §F.2). A business is not eligible if it has received support pursuant to § 4003(b)(1)-(3) of the CARES Act, which relates to support provided to passenger air carriers, cargo air carriers, and businesses critical to maintaining national security. (See FAQ §E.1(6))

[4] The particular affiliation rule applicable to the program is in 13 C.F.R. § 121.301(f)(1). 

[5] Such an ability may come from the business’s charter, by-laws, operating agreement, or shareholder’s agreement.

[6] One major difference between a Priority Loan and a New Loan is that New Loans are limited to four times the eligible borrower’s adjusted 2019 EBITDA.

[7] FAQ §C.4.

[8] FAQ §C.6.

[9] FAQ §G.16.

[10] FAQ §G.1. See also FAQ §C.3, which states that “an eligible lender may make Priority Loans to new customers provided they follow their normal policies and procedures for originating a loan to a new customer, including Know Your Customer procedures.” In addition, “when sizing the amount of the eligible loan, the eligible lender must require the eligible borrower to use an adjusted EBITDA methodology that is based on a methodology that the eligible lender has previously required to be used to adjust EBITDA when extending credit to similarly situated borrowers on or before April 24, 2020.” (emphasis added)

[11] FAQ §G.14.

[12] FAQ §G.13.

[13] FAQ §G.13.

[14] FAQ §G.15.

[15] FAQ §G.15.

[16] If an otherwise eligible borrower applies for a loan at an eligible lender with which it has an outstanding loan, the eligible lender will make the determination of whether the eligible borrower’s existing loans have an internal risk rating that meets the requirements of the program. New eligible borrowers will have to be assigned a “pass” rating by the eligible lender using criteria for similarly situated borrowers. See FAQ §G.15.

[17] FAQ §C.5.

[18] FAQ §C.5. See Borrower’s Certifications and Covenants §4C for a description of the Lien and Collateral Valuation Reporting requirements. See also Appendix B to the FAQ’s for a model lien covenant that eligible lender’s should reference when drafting loan documentation.

[19] FAQ §G.17.

[20] Borrower Certification and Covenants §5A.

[21] FAQ §H.3.

[22] Borrower’s Certifications and Covenants §2D.

[23] See Borrower’s Certifications and Covenants §2D.

[24] For purposes of these restrictions, the term repurchase includes a redemption of an equity security.

[25] Borrower’s Certifications and Covenants §2D.

[26] No exception was noted for distributions incident to a liquidity event.

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