CARES Act Main Street Lending Program: Loan

Parameters, Borrower and Lender Eligibility,

Key Issues

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.

TUESDAY, MAY 19, 2020

Presenting a live 90-minute webinar with interactive Q&A

Jamie N. Class, Partner, Foley & Lardner, Boston & New York

Heidi M. Furlong, Partner, Foley & Lardner, Milwaukee

Justin D. Lauria-Banta, Attorney, Foley & Lardner, Milwaukee

Hoang Quan Vu, Partner, Foley & Lardner, Houston

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-877-447-0294 and enter your Conference ID and PIN when prompted.

Otherwise, please send us a chat or e-mail sound@straffordpub.com immediately

so we can address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the ‘Full Screen’ symbol located on the bottom

right of the slides. To exit full screen, press the Esc button.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 2.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the link to the PDF of the slides for today’s program, which is located

to the right of the slides, just above the Q&A box.

• The PDF will open a separate tab/window. Print the slides by clicking on the

printer icon.

FOR LIVE EVENT ONLY

Main Street Loan ProgramMay 19, 2020

5

Presenters: Main Street Loan ProgramJamie Class, Partner

jclass@foley.com

Foley & Lardner

Boston, Massachusetts

New York, New York

Heidi Furlong, Partner

hfurlong@foley.com

Foley & Lardner

Milwaukee, Wisconsin

Hoang “Quan” Vu, Partner

hvu@foley.com

Foley & Lardner

Houston, Texas

Justin Lauria-Banta,Associate

jlauria-banta@foley.com

Foley & Lardner

Milwaukee, Wisconsin

6

Overview: Main Street Loan Program

▪ Background and Key Terms

▪ Eligible Borrowers and Eligible Lenders

▪ Capital Structure, Key Restrictions and Certifications

▪ Leverage Ratio

▪ Underwriting and Credit Assessment

▪ Can Main Street Loans Work? Scenarios.

▪ What Next with Main Street Loans?

7

Main Street Loans Background and Key Terms

3

• Program Goals

• Sources of Law

• Key Terms

8

Main Street Loans: Background▪ Goal: Facilitate funding to small and medium-sized business that were in

sound financial condition prior to the COVID-19 pandemic to maintain operations and payroll.

▪ The Federal Reserve will use $75 billion of CARES Act funds to create an SPV pursuant to Section 13(3) of the Federal ReserveAct.

▪ The SPV will purchase up to $600 billion in participation interests of qualifying loans from Eligible Lenders.

▪ Sources of Law: CARES Act and Legislation, Federal Reserve Act, Rules and Guidance, SBA rules, regs and guidance (for affiliation principles).

▪ Original term sheets on April 9, 2020. New term sheets and FAQs on April 30, 2020. Report to Congress on Priority Program on May 7, 2020.

▪ Expect modifications and clarifications.

9

Main Street Loans: High LevelMain Street Loans: Term Loans for up to 4 years, at L+3

Three Types of Term Loans: New Parri Passu Loans, New Priority Loans and Upsized Existing Loans.

Loans by Lenders to Borrowers Participated in by Fed:

▪ (i) Eligible Borrower applies for loan from Eligible Lender.

▪ (ii) Eligible Borrower makes certifications and agrees to terms.

▪ (iii) Eligible Lender makes loan to Eligible Borrower.

▪ (iv) Eligible Lender makes required certifications and Eligible Borrower’s certifications to SPV.

▪ (v) Federal Reserve purchases participation in Eligible Loan.

10

Main Street Loans: Key TermsNew Loans PriorityLoans Expanded Loans

Loan Eligibility New Loan origination after April 24,

2020

New loan originated after April 24,

2020

Expansion of an existing term loan

originated before April 24, 2020.

Loan must have 18 months

remaining eligibility.

Collateral Requirements Secured or unsecured Secured orunsecured Secured or unsecured; any collateral

securing the original existing loan

will secure the expanded loan on a

pro rata basis.

Term 4 years 4 years 4 years

InterestRate Libor + 3% Libor + 3% Libor + 3%

Minimum Loan Size $500,000 $500,000 $10,000,000

Maximum Loan Size $25M but pro forma leverage ratio

capped at 4x 2019 adjustedEBITDA

$25M but pro forma leverage ratio

capped at 6x 2019 adjustedEBITDA

Lesser of: (i) $200M; (ii) 35% of

outstanding and undrawn available

debt; (iii) an amount that does not

cause additional tranche to cause pro

forma leverage ratio to exceed 6x

2019 EBITDA

Repayment Principal and interest deferred for1

year (interest capitalized)

Straight line amortization over years

2, 3 and 4.

Principal and interest deferred for 1

year (interest

capitalized) Payment

of:

15% principals in years 2 and 3

70% balloon in year 4

Principal and interest deferred for1

year (interest

capitalized) Payment

of:

15% principal in years 2 and 4

70% balloon in year 4

Fed Participations 95% 85% 95%

SPV Fee (Likely Paid by Borrower) 1% 1% 0.75%

Origination Fee Paid by Borrower 1% 1% 0.75%

Servicing Fee Paid by SPV to Lender 0.25% 0.25% 0.25%

Subordination Must not be contractually

subordinated in terms of priority to

any of the borrower’s other

unsecured loan or debt instruments

Must be senior or pari passu with, in

terms of payment priority and lien

priority, the borrower’s other loans or

debt instruments (other than mortgage

debt)

Must be senior to or pari passu with,

in terms of payment priority and lien

priority, the borrower’s other loans or

debt instruments (other than mortgage

debt) 11

Main Street Loans Eligible Lenders and Borrowers

712

Main Street Loans: Eligible Lenders

8

▪ U.S. federally insured depository institution (including banks, savings associations or credit unions)

▪ U.S. branch or agency of a foreign bank

▪ U.S. bank holding company

▪ U.S savings and loan holding company

▪ U.S. intermediate holding company of a foreign banking organization

▪ U.S. subsidiary of any of the foregoing

*Fed stated it is considering expanding eligible lenders to include certain nonbank lenders.

13

Main Street Loans: Eligible Borrowers

9

– Must be established prior to March 13, 2020.

– Must not be an Ineligible Business (applying SBArules).

– After giving effect to SBA affiliation rules, either (i) has 15,000 employees or fewer or (ii) had 2019 annual revenues of $5B or less.

– Must be created or organized in the US or under laws of US with significant operations in and a majority of its employees based in the US.

– Has not received specific support pursuant to the CARES Act (PPP loans are ok).

– Borrower must have been in sound financial condition prior to the onset of the COVID-19 pandemic.

14

Main Street Loans: Ineligible Borrowers

▪ Ineligible Businesses include:

– Finance and insurance companies

– Businesses located in a foreign country

– Businesses deriving more than one-third of gross annual revenue from legal gambling activities

– Businesses primarily engaged in political or lobbying activities

– Speculative businesses “such as oil wildcatting”

– Hedge fund and private equity firms excluded under SBA rules

▪ Portfolio companies are NOT excluded.

15

Main Street Loans: Ineligible Borrowers

11

▪ Non-Profits are not eligible at this time.

– Guidance stated that Treasury will be evaluating the feasibility of adjusting program criteria to allow non-profits to participate.

– EBITDA is a key metric for current Main Street program criteria.

– EBITDA is not typical metric used to evaluate credit risk of non-profits.

▪ At this time: not for most start-ups – must have 2019 positive adjusted EBITDA.

▪ Other forms of organization may be considered for inclusion as a Business under the Main Street Loan Program at the discretion of the Federal Reserve.

16

Main Street Loans:Capital Structure, Key Restrictions

and Certifications

1217

Main Street Loans: Capital Structure

13

▪ Main Street New Loans may not be contractually subordinated in

terms of priority to other loans or debt instruments.

▪ Main Street Priority and Expanded Loans must be senior to or pari

passu with, in terms of priority and security, the Borrower’s other

loans or debt instruments, other than mortgage debt.

▪ Borrower will refrain from paying non-mandatory principal or

interest payments on other debt until the Main Street Loan is

repaid.

– Exception: Mortgage debt can be paid under Priority Loan Facility and Expanded

Loan Facility.

– Exception: Priority Loan Facility allows an Eligible Borrower to refinance existing debt

that it owes to a lender that is not an Eligible Lender.

▪ Borrower will not seek to cancel or reduce any of its committed

lines.

18

Main Street Loans: Financial Condition

14

▪ Borrower has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time.

▪ If applicable, Borrower must have had an internal risk rating (based on the Eligible Lender’s risk rating system) on December 31, 2019 that was equivalent to a “pass” in the Federal Financial Institutions Examination Council’s (FFIEC) supervisory rating system as of that date.

▪ Borrower cannot be insolvent under 13(3) of Federal Reserve Act.

00

19

Adequate Credit Accommodations–More Open Questions

15

▪ Exigent Circumstances Certification Deleted in Term Sheets:

– April 30th term sheets deleted the requirement from the April 9, 2020 term sheets that the Borrower certify that it “requires the financing due to the exigent circumstances presented by the…pandemic, and that, using the proceeds it will make a reasonable effort to retain employees.”

▪ Section 13(3) of Federal Reserve Act and Regulation A (12 C.F.R. 201):

– There must be evidence regarding unavailability of adequate credit accommodations which “may be based on economic conditions in the market or markets intended to be addressed by the program or facility, a written certification from the person or from the chief executive officer or other authorized officer of the entity at the time the person or entity initially borrows under the program or facility, or other evidence from participants or other sources.”

▪ Main Street Guidance (FAQ A.1 April 30,2020):

– The spread of COVID-19 has harmed communities and substantially disrupted economic activityin many sectors of the economy. In general, the availability of credit has contracted for small and medium-sized businesses while, at the same time, the disruptions to economic activity have heightened the need for such companies to obtain financing. Small and medium-sized businesses are integral to the U.S. economy and create jobs for a large share of the U.S. workforce.

20

Borrower Certifications: Use of Proceeds

16

▪ No requirement to use Main Street Loan proceeds for payroll or other designed costs. The April 30th term sheet deleted the April 9 term sheet Borrower certification that “…using the loan proceeds it will make a reasonable effort to retain its employees during the term of the Eligible Loan.”

▪ Borrower will use commercially reasonable efforts to maintain payroll and retain employees during the term of the Eligible Loan.

– “Commercially reasonable efforts” means borrower undertakes good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources and the business need for labor.

21

Borrower Restrictions and Certifications

17

Borrower will subject to the following restrictions for 1 year after repayment:

1. No public equity stock repurchases.

2. No capital distributions or dividend payments.

– Exceptions for tax pass-through entities.

3. Limits on Executive Compensation

(a) No officer or employee whose total compensation exceeded $425,000 in 2019 can

(i)receive total compensation which exceeds the total compensation received by such person in 2019 or (ii) receive severance pay that exceeds twice such person’s 2019 total compensation.

(b) No officer or employee whose total compensation exceeded $3 million in 2019 canreceive total compensation that exceeds $3 million + 50% of the amount above $3million that such person received in 2019 (applicable for any 12 consecutive monthperiod).

Total compensation = salary, bonuses, stock awards and other financial benefits.

22

Borrower Certifications

18

▪ Borrower to certify as to eligibility, no conflicts of interest under 4019(b) and other matters.

▪ Lender may rely on certifications (but must make own credit assessment).

▪ Borrower should carefully review each statement and certification, discuss questions and grey areas with management, counsel and advisors, and make a record of diligence and decisions supporting certifications.

23

Main Street Loans –Leverage Ratio

1924

Main Street Loans: Debt to EBITDA

20

▪ The Debt to EBITDA: Key Metric for eligibility and sizing loans.

– New Loans: $25M but Loan Amount Capped at 4x 2019 adjusted EBITDA pro forma for transaction.

– Priority Loans: $25M but Loan Amount capped at 6x 2019 adjusted EBITDA pro forma for transaction.

– Expanded Loans: Lesser of: (i) $200M; (ii) 35% of outstanding and undrawn available debt; and (iii) Loan Amount capped at 6x 2019 EBITDA pro forma for transaction.

25

Calculating Adjusted EBITDA

21

▪ Lenders must use the methodology it previously used for calculating adjusted EBITDA when extending credit to the Eligible Borrower or to a similarly situated borrower on or before April 24, 2020.

▪ For the Main Street Expanded Loan Facility, Lender must use methodology it previously used for calculating adjusted EBTIDA when originating or amending the underlying loan on or before April 24, 2020).

26

Calculating Debt for the Leverage Ratio

22

▪ Debt includes “existing outstanding and undrawn available debt”

– All amounts borrowed under any loan facility, including unsecured and unsecured loan from any bank, non-bank financial institution, or private lender

– Publicly issued bonds

– Private placements

– Undrawn commitments

▪ Net or Gross Proceeds of Debt?

▪ Non-recourse SPV debt?

▪ PPP debt?

▪ Delayed draw term loans?

▪ Non-bank lenders

▪ PIK Interest

27

Debt Excluded from the Leverage Ratio

23

▪ Any undrawn commitment that serves as a backup line for commercial paper issuance.

▪ Any undrawn commitment that is used to finance receivables (or seasonal inventory).

▪ Any undrawn commitment that cannot be drawn without additional collateral.

▪ Any undrawn commitment that is no long available due to change in circumstance.

28

Underwriting and Credit Assessment

2429

Underwriting and Credit Assessment

25

Program Requirements

▪ Lenders will conduct an assessment of the Borrower’s financial condition at the time of the Borrower’s application.

▪ Lenders will apply its own underwriting criteria to loans.

▪ Borrower “pass rating” as of December 31, 2019.

▪ 2019 EBITDA definition with Eligible Borrowers and other similar customers.

30

Main Street Loans: Credit Assessment

26

▪ Main Street program terms are complicated but Eligible Lenders are wise to consider accessing the Main Street Program credit support to:

– Mitigate risk in connection with existing customers that have struggled.

– Fund new or existing customers where the prospects appear solid, with the Fed sharing some of the risk inherent in projecting the performance of loans during the COVID-19 pandemic and its aftermath.

▪ Evaluate relationships with borrowers, other investors, collateral, whether there are defaults, and alternatives if there are defaults.

▪ Evaluate legal documentation, collateral perfection and loose ends.

▪ Evaluate the ability to reduce availability under borrowing base and to impose reserves under existing debt agreements.

31

Can Main Street Loans Work?Scenarios

2732

Scenario 1:ABC Manufacturing Company with No Debt

28

▪ ABC Manufacturing Company has 2,000 employees and is in a essential industry. It has been operating with limited payroll reductions and some changes to operations.

▪ ABC Manufacturing Company had positive 2019 EBITDA and no debt. It would have received a “pass” in December 2019.

▪ Did not borrow PPP loans because it was ineligible due to size standard.

▪ Used revenues and cash on hand to operate during initial period of pandemic. Accounts receivables are being paid more slowly and the costs of parts used in the manufacturing has increased. ABC Manufacturing Company is still making sales that are not too far off the pre-COVID-19 projections, and has revenues and cash on hand to operate beyond 90 days.

▪ ABC Manufacturing Company needs funds to make planned investments at manufacturing sites, hire back employees, incur costs due to COVID-19 related retrofits, and pay higher costs due to supply chain disruptions.

33

Scenario 2: Ambulance Services Companywith Capital Equipment Loan with EligibleLender

29

▪ Ambulance Services Company had positive EBITDA for 2017, 2018 and 2019.

▪ Ambulance Services Company’s business relies on a skilled workforce and it prioritizes employee retention. The pandemic has impacted its business.

▪ Ambulance Services Company has an equipment loan facility with an Eligible Lender. The loans are only secured by the equipment and proceeds.

▪ Ambulance Services Company has no other debt and has cash on its balance sheet.

▪ Ambulance Services Company wants to borrow Main Street funds to pay payroll, purchase more equipment, pay consultants and advisors, and to cover increased costs of operations. It would also like to borrow Main Street funds to refinance the outstanding equipment loan.

34

Scenario 3: Continuing Care Facility Companywith Non-Formula Line of Credit with EligibleLender

30

▪ Continuing Care Facility Company provides residential care to elders. It was profitable in 2019 and in several prior years. This is a for-profit company.

▪ Continuing Care Facility Company incurred a PPP loan and has a non-formula line of credit available to it from an Eligible Lender secured by all assets (ie. the line of credit is available regardless of account receivables balance). It has a long term relationship with the Eligible Lender.

▪ The line of credit has an accordion feature for additional revolver capacity but not for term loans.

▪ Continuing Care Facility Company also has a mortgage on certain real estate in favor of the Eligible Lender.

▪ Continuing Care Facility Company has heightened economic uncertainty due to the COVID-19 pandemic and the population it serves. Continuing Care Facility Company would like to borrow Main Street funds to cover increased costs, ensure it can retain required employment levels and make some capital investments to address changes needed to operate the business.

35

Scenario 4: Research Companywith Formula Line Asset Based Loan with Eligible Lender

31

▪ Research Company is a small business with positive 2017, 2018 and 2019 EBITDA.

▪ Research Company did not incur PPP loans as it was not necessary to continue operations.

▪ Research Company has a revolving line of credit secured by accounts receivables and proceeds where the borrowing base is determined according to a percentage of accounts receivables. Research Company’s biggest customers are large credit worthy customers in the e-commerce and technology industries. The Company has excess availability under the revolver.

▪ Research Company has recovered from its initial short term losses, adjusted its business plan and projects that it will be profitable in 2020 and perform according to its pre-COVID projections in 2021.

▪ Research Company would like to borrow Main Street loans to use for (1) costs of marketing, recruiting and hiring more employees, (2) investing in equipment, technology and security upgrades, and (3) funding acquisitions. Research Company is interested in the Main Street program because the terms are attractive.

36

Scenario 5: Retail Companywith Term Loan with Eligible Lender

32

▪ Retail Company is a retail business with store locations and on-line businesses, positive 2017, 2018 and 2019 EBITDA and is an important relationship of the Eligible Lender.

▪ Rated a “pass” in 2019.

▪ Retail Company incurred PPP loans from the Eligible Lender.

▪ Retail Company has a secured term loan. Retail Company is currently in default.

▪ Retail Company would like to borrow Main Street loans to cover increased costs, ensure it can retain required employment levels and make some capital investments to address changes needed to operate the business and to get out of default with the lender.

37

Scenario 6: Food Transportation Company with Non-Bank Debt

33

▪ Food Transportation Company borrowed a PPP loan but returned it before May 14, 2020 because the business appears strong. Food Transportation Company has positive 2017, 2018 and 2019 EBITDA

▪ Food Transportation Company does not have debt with any Eligible Lender, but has term loans with a non-bank lender.

▪ Food Transportation Company has had to increase costs and is experiencing uncertainty due to COVID-19 and the impact on the food supply chain.

▪ Food Transportation Company wants to borrow Main Street Funds to ensure that it is well positioned to retain employees, buy additional equipment, for working capital and to pay unexpected costs and expenses. If it can borrow enough, it wants to refinance the non-Bank debt which is more expensive.

38

Main Street Loans: What Next?

3439

Main Street Loans: What Next?

35

▪ Evaluate:

– Lending relationships, collateral, and defaults.

– Funding needs over next 6 months, 1 year and 2 years.

– Plans, projections and assumptions to pay existing debt on existing terms and to continue business.

▪ Watch how the adequate credit accommodations requirement will be measured and document efforts.

▪ Consult with counsel and financial advisors on participation in Main Street Loan Program.

▪ Keep current with the law, program rules and changes.

40

Questions?

3641

About Foley

3742

Main Street Loan Programs

Antitrust

Appellate

BankruptcyBusiness Reorganizations

Capital Markets

Class Action

Construction

ConsumerLaw

Corporate Governance

Cybersecurity

Distribution & Franchise

Employee Benefits &

Executive Compensation

Environmental Regulation

Estates & Trusts

Export Controls

Finance & Financial Institutions

Government & Public Policy

Government Enforcement &

Compliance

Coronavirus Resource Center:

https://www.foley.com/en/insights/blog

s/coronavirus-resource-center

Insurance

Intellectual Property

Labor & Employment

LitigationMergers & Acquisitions

Outsourcing

Privacy, Security &

Information Management

PrivateEquity

Private Office

Real Estate

Securities & Corporate Finance

Securities Enforcement&

Litigation

Taxation

TechnologyTransactions

Venture Capital

White CollarDefense

Foley looks beyond the law and utilizes our interdisciplinary expertise to achieve client

objectives in the face of evolving demands in particular industries. 60 practice groups

providing business solutions in Finance, Business Law, Restructuring, Litigation and

Intellectual Property, including

43

Offers insights from across

Foley's many practice disciplines to

provide timely perspective on what

companies can do now and how they

can prepare for the future.

FOR MORE INFORMATION, PLEASE VISIT:

Foley.com/Coronavirus

Coronavirus Resource Center

44

For More Information, Contact:

Jamie N. Class is a partner and business lawyer with Foley & Lardner LLP. She advises clients in structuring, negotiating and closing debt transactions and restructurings. Jamie has more than 20 years’ experience representing US and global clients as issuers of and investors in debt instruments in a broad variety of debt financing and restructuring transactions.

Jamie is skilled at working with multiple parties to close syndicated secured and unsecured credit facilities, private placements and public offerings of securities, second lien notes, tender offers, exchange offers, consent solicitations, project finance transactions, tax exempt bond financings, acquisition financings, venture debt and convertible notes, and mezzanine financings. Jamie represents clients in debt restructurings, out of court work-outs, and the negotiation of intercreditor and subordination arrangements.

Heidi M. Furlong is a partner and business lawyer at Foley & Lardner LLP. Ms. Furlong focuses her practice on the representation of financial institutions and borrowers in sophisticated financing transactions, loan workouts and bankruptcies. Ms. Furlong is a member of the firm’s Finance & Financial Institutions Practice.

Ms. Furlong also has experience with derivative transactions, securitizations, public finance transactions, and federal and state regulation of a broad range of consumer finance matters.

Ms. Furlong speaks regularly on finance-related topics. Topics have included the Wisconsin wage claim statute, Article 9 for the Bankruptcy Lawyer, loan workouts, and subordination agreements and other intercreditorarrangements.

Jamie N. Class

Partner, Boston and New York

jclass@foley.com

617.226.3111

Heidi M. Furlong

Partner, Milwaukee

hfurlong@foley.com

414.297.5620

Coronavirus Resource Center: https://www.foley.com/en/insights/blogs/coronavirus-resource-center

Main Street Loan Facilities Article: https://www.foley.com/en/insights/publications/2020/05/cares-act-fed-reserve-main-street-loan-facilities

45

ATTORNEY ADVERTISEMENT. The contents of this document, current at the date of

publication, are for reference purposes only and do not constitute legal advice. Where

previous cases are included, prior results do not guarantee a similar outcome. Images of

people may not be Foley personnel.

© 2020 Foley & Lardner LLP

Thank youJamie Class: jclass@foley.com

Heidi Furlong hfurlong@foley.com

Hoang Quan Vu: hvu@foley.com

Justin Lauria-Banta: jlauria-banta@foley.com

DISCLAIMER

Information in this presentation is subject to forthcoming guidance, rules and regulations published by the Federal Government. The information provided is a summary only and is provided as of the current date.

46