A new bill
was signed into law on July 4, 2020, to extend the period to August 8, 2020, that a loan may be obtained under the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and as amended by the Paycheck Protection Program Flexibility Act (PPPFA). The PPP makes available to small businesses up to $659 billion in potentially forgivable loans for the payment of payroll costs and certain other expenses.

For Further Information:

We previously circulated a legal alert (available here) outlining the general terms and conditions of the PPP, a legal alert (available here) summarizing changes to the PPP effected by the PPPFA, and various legal alerts (available here, here, here, and here) highlighting PPP guidance from the SBA and Treasury as such guidance was published.

If you have any questions regarding the PPP or the PPPFA, please reach out to Jeff Brandel or Lauren Roberts.

During the last two weeks, the Federal Reserve Bank of Boston (“FRB Boston” or “Federal Reserve”) has made a number of updates to the Federal Reserve’s Main Street Lending Program (“Main Street” or “Program”). On June 15, the Program opened for lender registration. Prior to that, on June 8, the term sheets for each facility were updated to reflect a number of changes to the facilities, including longer maturities, longer principal deferral, smaller minimum loan sizes, and larger maximum loan sizes. Finally, the Federal Reserve announced that it is working on two facilities designed to support lending to nonprofit organizations.

Lender Registration Opened

Eligible lenders can now register through the lender portal and find the necessary registration documents on the Program website. The FRB Boston is encouraging lenders to begin making Main Street loans immediately as Main Street will begin purchasing loan participations through the portal soon. Borrowers must apply for the Program loans through a participating lender. Information for borrowers can be found here
on the FRB Boston website.

Expansion of the Program

Updated term sheets for the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF) and a revised FAQ document for the Program were released on June 8. Please check the Federal Reserve website
for updated term sheets and FAQs. The changes to the Program include:

• Lowering the minimum loan size for two of the facilities;
• Increasing the maximum loan size for all of the facilities;
• Increasing the term of each loan to five years;
• Delaying principal payments for two years; and
• Raising the SPV’s participation to 95% for all loans.

The necessary legal forms and agreements for eligible borrowers and eligible lenders to participate in the three facilities have been updated to reflect the changes. View the updated forms and agreements here. The Program will still accept loans that were originated under the previously announced terms, if funded before June 10, 2020. The chart below has additional details about the facilities.

Terms*	MSNLF	MSPLF	MSELF
Term	5 years (previously 4 years)
Minimum Loan Size	$250,000 (previously $500,000)		$10 million
Maximum Loan Size	Lesser of: $35 million (previously $25 million); or 4x 2019 adjusted EBITDA minus existing outstanding and undrawn available debt**	Lesser of: $50 million (previously $25 million); or 6x 2019 adjusted EBITDA minus existing outstanding and undrawn available debt**	Lesser of: $300 million (previously $200 million); or 6x 2019 adjusted EBITDA minus existing outstanding and undrawn available debt** (previously, the loan also could not exceed 35% of outstanding and undrawn available pari passu debt)
Required Retention by Eligible Lender	5%	5% (previously 15%)	5% of Upsized Tranche
Principal Repayment (Includes capitalized interest)	15% at the end of year 3 and year 4, 70% at maturity (previously, for MSNFL, 1/3 at the end of year 2, year 3, and at maturity, and for MSPLF and MSELF, 15% at the end of year 2 and year 3, 70% at maturity)
Interest Payments	Deferred for one year (no change)
Rate	LIBOR (1 month or 3 month) + 3% (no change)

*Please review specific features of the three facilities in the respective term sheets.
** Calculated as of the date of the loan application

Updates Regarding Facilities for Non-Profit Organizations

The Federal Reserve has also announced that it is working on two facilities designed to support lending to nonprofit organizations: the Nonprofit Organization New Loan Facility (NONLF) and the Nonprofit Organization Expanded Loan Facility (NOELF). The Federal Reserve and the U.S. Department of the Treasury will accept comments on these facilities through June 22, 2020.

For Further Information:

We previously circulated a legal alert (available here) outlining the general terms and conditions of the Program. If you have any questions regarding the Main Street Lending Program, please reach out to Erin Simmons or Stephanie Block-Guedez.

Registered investment advisers (RIAs) that do business with retail investors are required to file their client relationship summary on Form CRS by June 30, 2020. Form CRS must be filed electronically through IARD as Part 3 of the RIA’s Form ADV. RIAs must then deliver to current retail clients their Form CRS within thirty (30) days following the June 30, 2020 compliance date. RIAs who do not do business with retail investors are generally not required to complete or file a Form CRS.

If you have any questions, please contact Peter Schwartz or Stephanie Danner.

Last week, the U.S. Fish and Wildlife Service (FWS) took another step toward finalizing regulations that would define the scope of prohibitions under the Migratory Bird Treaty Act (MBTA) to exclude incidental take. On June 5, 2020, the FWS released a draft environmental impact statement (DEIS) analyzing the environmental effects of the proposed rule and alternatives to it. The FWS is accepting public comment on this DEIS until July 20, 2020.

The MBTA prohibits take of migratory birds and imposes criminal penalties for violations of it. The DEIS marks FWS’s latest step toward defining a narrow scope of the MBTA’s prohibition on take of migratory birds. In late 2017, the Solicitor of the Interior issued opinion No. M-37050
concluding that the MBTA does not prohibit incidental take or, in other words, take that results from an activity but is not the purpose of the activity. This opinion relied on a legal interpretation from the U.S. Court of Appeals for the Fifth Circuit set forth in United States v. CITGO Petroleum Corp., 801 F.3d 477 (5th Cir. 2015). This opinion also reversed the previous Solicitor’s opinion concluding the opposite: that the MBTA prohibits incidental take. If finalized, the rule would effectively alter the migratory bird protections that a broad range of industries and land uses, including oil and natural gas, wind, solar, and energy transmission, must implement to avoid prosecution by the FWS in the event of a migratory bird take, particularly in western states.

On February 3, 2020, the FWS issued a proposed rule to define the scope of the MBTA consistent with opinion No. M-37050. At the same time, the FWS published a Notice of Intent to prepare a DEIS.

The DEIS analyzes three alternatives: regulations defining the scope of the MBTA to exclude incidental take, regulations defining the scope of the MBTA to include incidental take, and a no-action alternative under which the FWS would continue to implement the MBTA consistent with opinion No. M-37050. In the DEIS, FWS determined that the proposed rule would improve legal certainty surrounding implementation of the MBTA but recognized that the proposed rule would likely reduce implemental of best practices and would likely negatively impact migratory birds, other biological resources, cultural resources, and ecosystem services.

The FWS must issue a final environmental impact statement before it can adopt final regulations. The FWS is expected to publish the final environmental impact statement and final regulations later this year.

If you have any questions, please contact Katie Schroder , Courtney Shephard, or Zach Miller.

The Paycheck Protection Program Flexibility Act (PPP Flexibility Act) was signed into law on June 5, 2020 and amends certain terms of the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The PPP has made available to small businesses up to $659 billion in potentially forgivable loans for the payment of payroll costs and certain other expenses. The following is a summary of the terms of the PPP that have been amended by the PPP Flexibility Act.

Terms of PPP Loans:

Covered Period for Receiving PPP Loans. The “covered period” during which PPP loans may be made has been extended to end on December 31, 2020 instead of June 30, 2020. Note that some members of Congress published a Letter of Congressional Intent stating that applications for loans should only be accepted on or prior to June 30, 2020. Additional guidance may be forthcoming on this issue. Also note that a different covered period applies for forgiveness purposes, as is further described below.

Minimum Maturity. PPP loans made after the enactment of the PPP Flexibility Act, to the extent not forgiven, will have a minimum maturity of 5 years. The maturity terms of any earlier PPP loan may be amended to provide for the same, if so agreed by the lender and borrower.

Deferral Period. The PPP Flexibility Act extends the required deferral of payments on a PPP loan until (1) the date on which the applicable forgiveness amount with respect to such loan has been determined and remitted to the lender or (2) the date that is 10 months after the end of the borrower’s covered period for loan forgiveness purposes, but only if the borrower has not applied for forgiveness by such date.

Loan Forgiveness:

Covered Period for Forgiveness Purposes. Under the PPP, the “covered period” for loan forgiveness purposes was the 8-week period following the origination of the particular loan. The PPP Flexibility Act extends this period to end on the earlier of (1) 24 weeks after the origination of the particular loan or (2) December 31, 2020. However, a borrower that received a PPP loan prior to the enactment of the PPP Flexibility Act may elect to still use the 8-week period following the origination of its loan.

Reduced Forgiveness Due to Reductions in Employee Headcount or Salaries. Under the PPP, a borrower’s loan forgiveness amount may be reduced if either (1) its full-time equivalent (FTE) employee headcount is decreased or (2) salaries and wages are decreased by more than 25% for any of its employees who made less than $100,000 annualized in 2019.

However, the PPP Flexibility Act provides that a reduction in FTE employees will not lead to a proportionate reduction in the amount of loan forgiveness available to a borrower to the extent that the borrower is able to document either:

• An inability to rehire former employees who were employed by the borrower on February 15, 2020, as well as an inability to hire similarly qualified individuals for unfilled positions by December 31, 2020; or
• “An inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”

Right to Cure Reductions. In addition, a borrower now has until December 31, 2020 (rather than June 30, 2020) to cure any reductions in employee headcount or salaries that would otherwise reduce the amount of loan forgiveness available to the borrower.

Proportion of Funds Required to be Spent on Payroll Costs. Notwithstanding prior guidance by the Small Business Administration (SBA) and the Department of the Treasury (Treasury) providing that 75% of a PPP borrower’s loan forgiveness amount must have been spent on payroll costs, the PPP Flexibility Act requires a borrower to spend only 60% of its loan on payroll costs in order to receive loan forgiveness. In other words, up to 40% of the loan may be used to pay expenses (other than payroll costs) that are eligible for forgiveness under the PPP without affecting the borrower’s right to receive loan forgiveness. Note that at least 60% of the total PPP loan proceeds borrowed under the PPP must be spent on payroll costs; otherwise the loan is not eligible to be forgiven. We understand that discussions are taking place to modify this requirement.

Deferral of Payment of Employer Payroll Taxes:

Under the PPP, a borrower that had received forgiveness of all or part of its PPP loan would not be entitled to defer payment of its payroll taxes under Section 2302 of the CARES Act. The PPP Flexibility Act amends Section 2302 of the CARES Act to delete that restriction relating to PPP borrowers.

We expect the SBA and Treasury will release additional guidance in the Frequently Asked Questions and through additional Interim Final Rules interpreting both the PPP and the PPP Flexibility Act.

For Further Information:

We previously circulated a legal alert (available here) outlining the general terms and conditions of the PPP and various legal alerts (available here, here, here, and here) highlighting PPP guidance from the SBA and Treasury as such guidance was published.

If you have any questions regarding the PPP, please reach out to Jeff Brandel or Lauren Roberts.

The Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as amended by the Paycheck Protection Program and Health Care Enhancement Act, has made available up to $659 billion in potentially forgivable loans to small businesses for the payment of payroll costs and certain other expenses.

The Small Business Administration (SBA) and the Department of the Treasury (Treasury) recently made available the PPP loan forgiveness application (Loan Forgiveness Application) and new guidance relating to PPP loan forgiveness. The recent guidance includes an interim final rule posted by the SBA and Treasury on May 22, 2020 addressing PPP loan forgiveness (Loan Forgiveness IFR), an interim final rule posted by the SBA on May 22, 2020 on the SBA’s PPP loan review procedures and related borrower and lender responsibilities (Loan Review IFR), and additional published answers to frequently asked questions regarding the PPP (FAQ Guidance). We have summarized some of the recent guidance below.

It is also worth noting that on May 28, 2020, the House of Representatives approved a bill
that would make it easier for borrowers to receive full forgiveness of their PPP loans, including by (1) extending the time period during which funds spent on qualified expenses would be eligible for forgiveness and (2) reducing the percentage of the forgiveness amount required to be spent on payroll costs from 75% to 60%. The bill will next be considered by the Senate, and if it becomes law, it will implicate a number of the provisions summarized below.

Forgiveness of Payroll Costs:

The following payroll costs (as defined in the CARES Act and a subsequent interim final rule issued by the SBA) of a PPP borrower are potentially eligible for forgiveness:

• Payroll costs paid or
  incurred during either (1) the eight-week period beginning on the date the loan is funded (the Covered Period) or (2) if so elected by a borrower with a bi-weekly or more frequent pay period, the eight-week period beginning on the first day of the first pay period starting in the Covered Period (the Alternative Payroll Covered Period); and
• Payroll costs incurred during the borrower’s last pay period in the Covered Period or Alternative Payroll Covered Period, as applicable, and paid no later than the next regular payroll date.

Payments to Furloughed Employees, Bonuses, and Hazard Pay. Compensation paid to furloughed employees, bonuses, and hazard pay are all potentially eligible for loan forgiveness, subject to the cap of $15,385 (the eight-week equivalent of $100,000 per year) of total compensation for each employee.

Compensation of Owner-Employees and Self-Employed Individuals. The amount of compensation of an owner-employee or self-employed individual that may be forgiven is capped at the lesser of (1) 8/52 of 2019 compensation or (2) $15,385 (the eight-week equivalent of $100,000 per year).

Forgiveness of Costs Other than Payroll Costs:

In addition to qualifying payroll costs, the following costs (Nonpayroll Costs) may be eligible for forgiveness:

• Interest payments (but not any prepayment or payment of principal) on a business mortgage obligation on real or personal property incurred prior to February 15, 2020;
• Payments on business rent obligations on real or personal property under a lease agreement that was in force prior to February 15, 2020; and
• Business utility payments (for electricity, gas, water, transportation, telephone, or internet access) for which service began prior to February 15, 2020.

To qualify for forgiveness, a Nonpayroll Cost must be either (1) paid during the Covered Period or (2) incurred during the Covered Period and paid no later than the next regular billing date (which may fall after the end of the Covered Period). In any event, Nonpayroll Costs may not constitute more than 25% of the loan forgiveness amount.

Reduction of Forgiveness Amount:

In general, a borrower’s loan forgiveness amount will be reduced if:

• Full-time equivalent (FTE) employee headcount is decreased; or
• Salaries and wages are decreased by more than 25% for any employees who made less than $100,000 annualized in 2019.

However, a reduction in headcount or salary levels will not be counted against a borrower to the extent that:

• The reduction is due to a termination for cause or an employee’s voluntary resignation or voluntary request for reduced hours during the Covered Period or Alternative Payroll Covered Period, as applicable;
• The borrower cures any such reduction made between February 15, 2020 and April 26, 2020 by no later than June 30, 2020; or
• During the Covered Period or Alternative Payroll Covered Period, as applicable, the borrower makes a good faith offer in writing to rehire a terminated employee (or restore any reduction in an employee’s hours, if applicable) for the same salary and number of hours as prior to the termination (or reduction in hours), but the employee rejects such offer. To qualify for this exception, the borrower must also keep a record of such offer and rejection and inform the applicable state unemployment insurance office of the rejected offer of reemployment within 30 days of the rejection. The Loan Forgiveness IFR states that the SBA’s website will provide further information on how a borrower should report a rejected offer to rehire a former employee to the applicable state unemployment insurance office.

Calculation of Number of FTE Employees. In order to calculate its average number of FTE employees for an applicable period, a borrower must first calculate the full-time equivalency of each employee by dividing the average number of hours paid for such employee per week by 40 (capped at a full-time equivalency of 1.0 for each employee). Alternatively, for each employee who was paid for fewer than 40 hours per week on average, the borrower may elect to use a full-time equivalency of 0.5; however, the borrower must apply the same calculation method to all of its part-time employees.

No Double Penalization. A borrower’s loan forgiveness amount will be reduced for applicable salary or wage reductions only to the extent that the same are not attributable to a reduction in the borrower’s FTE employee headcount.

Loan Forgiveness Process:

The PPP loan forgiveness process requires a borrower to submit the Loan Forgiveness Application to the lender servicing its PPP loan. The lender must review the request for forgiveness and issue a decision regarding such request to the SBA within 60 days of receipt of the borrower’s Loan Forgiveness Application. If the lender has found that the borrower is entitled to forgiveness, the SBA will pay the forgiveness amount to the lender within 90 days of notice of the lender’s decision (although payment may be delayed or denied if the SBA also reviews the applicable PPP loan).

SBA’s Review of PPP Loans:

All PPP loans are subject to the SBA’s review at any time in the SBA’s discretion, and the SBA has suggested that it will review all PPP loans in excess of $2 million. The SBA may review whether a borrower was eligible for its PPP loan, whether the loan amount was calculated correctly, whether the loan proceeds were used for permitted purposes and/or whether the borrower is or was entitled to loan forgiveness.

Review of Certification Regarding Need for PPP Loan. Recent FAQ Guidance again addresses the certification in the PPP borrower application form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” providing that:

“SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees.”

The FAQ Guidance further provides that:

“Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance …. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”

Borrower Right to Provide More Information. If it appears that a borrower may have been ineligible for a PPP loan or for the amount of the loan or forgiveness received, the lender or the SBA will contact the borrower for more information, and the SBA has indicated that it will take into account all information provided by the borrower in response.

Borrower Right to Appeal Determination. If the SBA determines that a borrower was ineligible for its PPP loan or for the loan or forgiveness amount applied for, the borrower may appeal this determination. The appeals process is expected to be addressed in a separate interim final rule to come.

Borrower Right to Request Review. If a borrower receives written notice from the lender servicing its PPP loan that the loan forgiveness applied for will be denied, the borrower will have 30 days to request that the SBA review the lender’s decision.

Retention of PPP Records. The Loan Review IFR requires that each borrower retain the applicable documentation in its records for six years after the forgiveness or repayment of its PPP loan in full and permit representatives of the SBA to access such records upon request.

For Further Information:

We previously circulated a legal alert (available here) outlining the general terms and conditions of the PPP and various legal alerts (available here, here, and here) highlighting PPP guidance from the SBA and Treasury as such guidance was published. If you have any questions regarding the PPP, please reach out to Jeff Brandel or Lauren Roberts.

As a result of the Coronavirus Aid, Relief & Economic Security (CARES) Act, the Federal Reserve has created the Main Street Lending Program (“Main Street” or “Program”) to provide up to $600 billion in financing for small and medium-sized businesses. The Program will operate three facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF). On May 27, the Federal Reserve Bank of Boston (FRB Boston), which is administering the Program on behalf of the Federal Reserve, released borrower and lender documents along with updated term sheets for each facility and a revised FAQ document for the Program. Please check the website of the FRB Boston for Program documents and FAQs. Main Street is expected to launch any day now.

1. Structure of the Program

Main Street is not a direct loan program from the Federal Reserve or the U.S. government, and loans under the Program will not be forgiven. Instead, the FRB Boston has set up a special purpose vehicle (SPV), funded in part by the U.S. Treasury, to purchase participations in loans originated by Eligible Lenders. An Eligible Borrower (described below) may obtain a qualifying loan from an Eligible Lender (described below), and the SPV will purchase a participation interest in the qualifying loan at par from the Eligible Lender. The participation by the SPV will be 95 percent in the case of the MSNLF and the MSELF, and 85 percent in the case of the MSPLF. The Eligible Lender that advances a loan under the Program is required to retain the remaining portion of the loan and the related risk (pro rata with the SPV’s participation interest) until the loan made under the Program matures or until neither the SPV nor a governmental assignee holds an interest in the loan, whichever comes first.

2. Who can make loans under the Program?

Generally, U.S. banks, savings associations, credit unions, and holding companies, including U.S. branches or subsidiaries of foreign banking organizations, can make loans under the Program. Nonbank financial institutions are not Eligible Lenders at this time, but the Federal Reserve may expand eligibility to them in the future.

Each Eligible Lender will use its own loan documentation, which should be substantially similar to the loan documentation it uses in the ordinary course of business, adjusted only as required by the Program. The Appendixes to the FAQ contain information on what must be included in the loan documentation.

3. Who can borrow under the Program?

The Program sets forth certain minimum criteria to be eligible to borrow under the Program. Each Eligible Lender will then apply their own underwriting standards to evaluate the financial condition of each business. Below is a list of some of the criteria to be an Eligible Borrower under the Program.

• The business was established prior to March 13, 2020.
• The business was created or organized in the U.S. (or under the laws of the U.S.) and has significant operations in, and a majority of its employees based in, the U.S.
• The business is a for-profit organization. Non-profits may be eligible in the future but are not currently eligible.
• The business, together with its affiliates, only participates in one of the Main Street facilities and does not participate in the Primary Market Corporate Credit Facility (PMCCF).
  • Note: Businesses that received support through the SBA Paycheck Protection Program (PPP) are eligible to receive a Main Street loan.
• The business has not received specific support pursuant to the Coronavirus Economic Stabilization act of 2020 (Subtitle A of Title IV of the CARES Act).
• The business is not an “Ineligible Business” according to Small Business Administration (SBA) regulations.
• The business meets at least one of the following two conditions: (a) has no more than 15,000 employees or (b) has 2019 annual revenues of no more than $5 billion.
  • Number of employees should be determined following the framework set forth in the SBA’s regulation at 13 CFR 121.106. The business will need to calculate the average total number of persons employed for each pay period over the prior 12 months, including all full-time, part-time, seasonal, or otherwise employed persons (but not volunteers or independent contractors). The business will also need to include those employed by its affiliates in accordance with the affiliation test set forth in 13 CFR 121.301(f) (1/1/2019 ed.).
  • Revenues may be determined one of two ways:
    • The business and its affiliates’ annual “revenue” per its 2019 GAAP audited financial statements.
    • The business and its affiliates’ annual receipts for the fiscal year 2019, as reported to the IRS, with “receipts” having the meaning used by the SBA in 13 CFR 121.104(a).
  • Most recent audited financial statements or annual receipts may be used if a borrower or one of its affiliates does not yet have audited financial statements or annual receipts for 2019.
• The business must be able to make all of the certifications and covenants required under the Program. See the term sheets for the three Main Street facilities and a summary below.

4. What are the terms of the Eligible Loans under the Program?

The main differences between the facilities are where they fit in with an Eligible Borrower’s existing debt, the allowed leverage of the Eligible Borrower, and the amount that may be borrowed.

• MSNLF: New loans that may be unsecured or secured, first or second lien. Available to Eligible Borrowers with lower leverage ratios.

• MSPLF: New loans that may be unsecured if the Eligible Borrower has no secured debt other than mortgage debt, otherwise they must be secured and meet certain collateral coverage tests. If the loans share collateral with other debt, they must be senior to or pari passu with that debt. Available to Eligible Borrowers with higher leverage ratios. May be used to refinance existing debt with lenders other than the Eligible Lender.

• MSELF: Loans made as an increase (or “upsize”) to an Eligible Borrower’s existing credit facility. They may be unsecured if the Eligible Borrower has no secured debt other than mortgage debt, otherwise they must be secured. If the underlying loan is secured, the upsize tranche must be secured on a pari passu basis with the underlying loan (or the term tranche, if there is both a term tranche and a revolving tranche). Available to Eligible Borrowers with higher leverage ratios.

5. What are the terms of the Eligible Loans under the Program?

The basic terms of the three facilities are as follows:*

Terms	MSNLF	MSPLF	MSELF
Term	4 years	4 years	4 years
Minimum Loan Size	$500,000	$500,000	$10 million
Maximum Loan Size	Lesser of: $25 million; or 4x 2019 adjusted EBITDA** minus existing outstanding and undrawn available debt****	Lesser of: $25 million; or 6x 2019 adjusted EBITDA** minus existing outstanding and undrawn available debt****	Lesser of: $200 million; 35% of existing outstanding and undrawn available pari passu debt; or 6x 2019 adjusted EBITDA*** minus existing outstanding and undrawn available debt****
Required Retention by Eligible Lender	5%	15%	5% of Upsized Tranche
Principal Repayment (Year One Deferred for All) (Includes capitalized interest)	1/3 at the end of year 2, year 3, and at maturity	15% at the end of year 2 and year 3, 70% at maturity	15% at the end of year 2 and year 3, 70% at maturity
Rate	LIBOR (1 month or 3 month) + 3%	LIBOR (1 month or 3 month) + 3%	LIBOR (1 month or 3 month) + 3%
Fees*****	1% to SPV; up to 1% to Eligible Lender	1% to SPV; up to 1% to Eligible Lender	0.75% to SPV; up to 0.75% to Eligible Lender
Security	Can be secured or unsecured, 1st or 2nd lien	Must be secured if Eligible Borrower has other secured debt (other than Mortgage Debt) Can be unsecured if no secured debt other than Mortgage Debt at origination If secured, “Collateral Coverage Ratio” at origination must be at least 200% or not less than the aggregate “Collateral Coverage Ratio” of all other secured debt (other than Mortgage Debt) Does not need to share collateral with other secured debt, but if it does, must be senior or pari passu with such other debt Must contain lien covenant/negative pledge (with baskets/exceptions) consistent with what Eligible Lender uses in ordinary course with similarly situation borrowers	Must be secured if Eligible Borrower has other secured debt (other than Mortgage Debt) Can be unsecured if no secured debt other than Mortgage Debt at origination Any collateral that secures the underlying loan must secure the upsized tranche on a pari passu basis (however, if the underlying facility includes a revolving tranche and a term tranche, the upsized tranche only needs to share collateral with the term tranche on a pari passu basis) Must contain lien covenant/negative pledge (with baskets/exceptions) consistent with what Eligible Lender uses in ordinary course with similarly situation borrowers
Special Features/Requirements	Cannot be contractually subordinated Eligible Borrower can incur additional debt after receiving	Cannot be contractually subordinated Can be used to refinance existing debt owed to other lenders (not the Eligible Lender)	Cannot be contractually subordinated Loan being upsized must have been originated on or before April 24, 2020 and have at least 18 months remaining before maturity (maturity may be extended at time of upsizing to satisfy 18-month requirement)

*Please review specific features of the three facilities in the respective term sheets.
** Adjusted 2019 EBITDA must be calculated using 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 (must be a method used recently and if multiple methods used, must use most conservative).
*** Adjusted 2019 EBITDA must be calculated using the methodology the Eligible Lender previously required to be used for adjusting EBITDA when originating or amending the underlying loan on or before April 24, 2020 (must be a method used recently and if multiple methods used, must use most conservative).
**** Calculated as of the date of the loan application.
*****The SPV will pay the Eligible Lender 0.25% of the principal amount of its participation annually for servicing.

6. What are the other requirements and restrictions of Eligible Loans?

• If an Eligible Borrower has outstanding loans with the Eligible Lender as of December 31, 2019, such loans must have an internal risk rating equivalent to “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date.
• Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of application.
• In addition to other certifications required by statutes and regulations, the following certifications and covenants will be required from Eligible Borrowers:
  • The Eligible Borrower will be prohibited from prepaying principal and interest on any other debt until the Eligible Loan is repaid in full. This restriction does not include a refinancing permitted in connection with a MSPLF, repaying lines of credit in the normal course of business, taking on and repaying certain normal course debt, such as inventory or equipment financing, or refinancing maturing debt, but it does include a prepayment triggered by taking out the Eligible Loan if more than de minimus. The Eligible Borrower must commit to not seek to reduce or cancel any committed lines of credit.
  • The Eligible Borrower must certify that it is unable to secure “adequate credit accommodations from other banking institutions.” This does not necessarily mean that no credit is available but can mean that the amount, price, or terms of credit available are inadequate. Borrowers are not required to demonstrate that credit has been denied by other lenders or document the inadequacy of available credit.
  • The Eligible Borrower must have a reasonable basis to believe that, as of the date of origination of the Eligible Loan and after giving effect to such loan, it 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 period.
  • The Eligible Borrower must commit that it will follow compensation, stock repurchase, and capital distribution restrictions that apply under the CARES Act, except that an S corporation or other tax pass-through entity may make distributions reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
  • While the Eligible Loan is outstanding, each Eligible Borrower must make good-faith efforts to maintain payroll and retain employees, giving consideration to its capacities, the economic environment, available resources, and the business need for labor. However, Eligible Borrowers are still eligible to apply for Main Street loans if, as a result of COVID-19, they have already laid-off or furloughed workers.

7. What role will the SPV have?

Initially, the SPV’s interest will be a participation (one that is transferable with, in most situations, the Eligible Lender’s consent). Under certain circumstances, the SPV will be able to elevate its interest from a participation to an assignment. However, it is not expected that the SPV will exercise such right as a matter of course, including if a loan is distressed or in workout, but will exercise it only where (i) the interests of the Eligible Lender and the SPV differ, or (ii) the loan is one of the larger loans in the SPV’s portfolio of participations.

Eligible Lenders will have the option to fund the Eligible Loan upfront and submit the required documents to sell a participation to the SPV no later than 14 days after the closing of the Eligible Loan. Alternatively, an Eligible Lender may extend an Eligible Loan but condition its funding on receiving a binding commitment from the SPV to purchase a participation. Once a binding commitment is received, the Eligible Lender would be required to fund the Eligible Loan within 3 business days and the SPV would fund the participation within 3 business days of receiving notice of such funding from the Eligible Lender.

8. What about asset-based borrowers?

While asset-based borrowers are not generally evaluated on the basis of EBITDA, it remains the key underwriting metric for the Program. The Federal Reserve and the Treasury Department will evaluate potentially adjusting eligibility requirements for asset-based borrowers.

9. How long will the Program be in effect?

All participations must be purchased by the SPV by September 30, 2020.

If you have any questions regarding the Main Street Lending Program, please reach out to Erin Simmons or Stephanie Block-Guedez.

The COVID-19 pandemic has forced unprecedented shutdowns in businesses across the country. Following closely on the heels of this upheaval is a growing list of class action lawsuits from consumers whose plans were canceled or drastically scaled back in the era of social distancing, as well as from investors unhappy with companies’ performances in the shaken global market. Class actions often arise in situations where a large number of people or entities are negatively impacted in a similar way by the same event. In these situations, the class action mechanism allows for the possibility of bringing many related claims in one action, thereby aggregating the damages sought by multiple plaintiffs into one suit and drastically increasing a company’s exposure. Although the full scope of these lawsuits in the wake of COVID-19 remains to be seen, a few categories of class action lawsuits already filed offer some hints at what’s to come.

Event & Ticket Cancelation

Stay-at-home and social distancing orders have forced the cancelation of many events that involve large public gatherings, including concerts, cruises, flights, and sporting events. Ticket sellers have had to decide between offering refunds or rainchecks, and many have chosen the latter. As evidenced by recent complaints against Ticketmaster and StubHub, some consumers would have preferred refunds and filed suit in reaction to these decisions. Hansen, et al. v. Ticketmaster Entertainment, Inc., No. 3:20-cv-02685 (N.D. Cal. Apr. 17, 2020); McMillan, et al. v. StubHub Inc., No. 3:20-cv-00319 (W.D. Wis. April 2, 2020).

Memberships

In a similar category of suit, companies that offer ongoing access to services in exchange for recurring or flat fees (like gyms, recreational facilities, and ski resorts) have been sued by consumers alleging dues should have been suspended or refunded when their access ended. Members of 24 Hour Fitness sued the fitness chain, alleging they were charged full monthly fees despite the fact the gyms closed in mid-March. Labib, et al. v. 24 Hour Fitness USA, Inc., No. 4:20-cv-02134 (N.D. Cal. Mar. 27, 2020). Likewise, season pass holders sued Vail for retaining the fees from season pass sales despite closing its resorts indefinitely in March, although some of the suits were dropped after Vail announced it would give credits to pass holders based on the number of days they were able to ski. McAuliffe v. Vail Corp., No. 1:20-cv-01176 (D. Colo. Apr. 27, 2020); Clarke v. Vail Corp., No. 1:20-cv-01163 (D. Colo. Apr. 24, 2020); Faydenko v. Vail Resorts, Inc., No. 20-cv-01134 (D. Colo. Apr. 22, 2020); Han v. Vail Resorts, Inc., No. 20-cv-01121 (D. Colo. Apr. 21, 2020); Hunt, et al; v. Vail Corp., No. 4:20-cv-02463 (N.D. Cal. Apr. 10, 2020).

Higher Education

As colleges transition to online learning, students and their parents begin to wonder why they should be required to pay for room and board when the dorms and dining halls remain shuttered. For example, a class action recently filed in Arizona alleges the Arizona Board of Regents improperly retained fees for the cost of on-campus services when students were not allowed on campus. Rosenkrantz, et al. v. Arizona Board of Regents, No. 2:20-cv-00613 (D. Ariz. Mar. 27, 2020).

Securities

Right behind the consumer lawsuits driven by disrupted businesses are suits from investors unhappy with attendant drops in share prices. Although such suits may come from a number of different angles, the primary hook for the investor suits filed thus far has been allegedly false and misleading statements companies made in the lead-up to the pandemic. A class of shareholders in Norwegian Cruise Lines, for example, sued the company for making optimistic statements in February about their expected financial performance despite the developing COVID-19 outbreak. Douglas v. Norwegian Cruise Lines, No. 20-cv-21107 (S.D. Fla. Mar. 12, 2020).

As the above examples illustrate, any negative impact, however small, on a large number of people may give rise to a class action lawsuit. Such cases bring a host of unique procedural and strategic considerations, including fighting class certification and managing class related discovery in an efficient and effective way. These suits are only likely to increase as the impacts of COVID-19 continue to be felt, and companies should consider engaging experienced class action counsel early on to help them navigate these complex and unique issues.

If you have any questions, please contact Jennifer Allen or Kyle Holter.

The Environmental Protection Agency (“EPA”) is proposing to give the regulated community a more active role and voice in developing, modifying, and potentially withdrawing EPA’s significant guidance documents. The proposed rule, titled “EPA Guidance; Administrative Procedures for Issuance and Public Petitions” (“Proposed Rule”), was published in the Federal Register on May 22, 2020. The Proposed Rule is intended to provide “procedures for developing and issuing guidance documents and to establish a petition process for public requests to modify or withdraw an active guidance document.”

EPA guidance documents—which can be in the form of interpretive memoranda, policy statements, manuals, bulletins, advisories, etc.—are legally non-binding methods of clarifying existing obligations and providing information to assist regulated entities in compliance with EPA regulations. In the past, however, EPA has arguably utilized these guidance documents to effectively create new regulatory requirements outside of the normal notice-and-comment process. Currently, EPA guidance documents are not subject to the Administrative Procedure Act’s notice-and-comment requirements; are not required to meet any specific set of criteria; or be published on a specific webpage. Such issues may create difficulties for regulated entities to monitor these documents. To address these topics, the Proposed Rule purports to ensure that “EPA’s guidance documents are: developed with appropriate review; accessible and transparent to the public; and provided for public participation in the development of significant guidance documents.”

Notably, this action implements, in part, President Trump’s October 2019 Executive Order 13891, “Promoting the Rule of Law Through Improved Agency Guidance Documents” (“Executive Order”). A central principle of this Executive Order is to clarify that guidance documents should explain existing obligations only; they should not be a vehicle for implementing new, binding requirements on regulated entities. Moreover, the Executive Order seeks to establish a method for allowing thorough public review of “significant guidance documents” prior to issuance.[1]
The Executive Order also seeks to make guidance documents more accessible to the public by requiring each federal agency to “establish or maintain on its website a single, searchable, indexed database that contains or links to all guidance documents in effect from such agency or component.” The EPA Guidance Documents portal was created on February 28, 2020 and purports to “provide links to all of EPA’s guidance documents.”

The Proposed Rule closely tracks the objectives of the Executive Order. Among other things, the Proposed Rule:

• Defines “significant guidance document” using the same four categories as the Executive Order;
• Requires EPA to publish a notice in the Federal Register announcing a new draft significant guidance document and provide a 30-day public comment opportunity prior to issuing the final guidance document;
• Requires EPA to publish a notice in the Federal Register announcing the proposed modification or withdrawal of an existing significant guidance document and provide a 30-day public comment opportunity before finalizing the modification or withdrawal of such a document;
• Creates a set of criteria that every guidance document must contain, including a summary of the guidance and a list of activities impacted by the guidance; and
• Provides the public with an avenue to request modification or withdrawal of existing guidance documents.

The Proposed Rule presents an opportunity for stakeholders to actively participate in the creation, drafting, and finalization of guidance documents that have significant impacts on regulatory obligations and compliance with EPA regulations. Specifically, affected entities can provide written comment on proposed guidance documents to highlight potential shortcomings or negative impacts of such guidance. Such comments potentially allow for affected entities to influence a guidance document before relying on the documents for compliance assistance.

The Proposed Rule also presents an opportunity for stakeholders to petition EPA for the modification or withdrawal of an active guidance document. The petition must, among other things, provide an explanation of the interest of the petitioner in the requested action; specify of the text that the petitioner request be modified or withdrawn; provide suggested text for EPA to consider; and provide a rationale for the requested modification or withdrawal. EPA will have 90 days to respond to the request, with a possible one-time extension.

The Proposed Rule will be open for public comment until June 21, 2020. EPA states that it is soliciting comments “on whether the issuance of a modification to an active significant guidance document or the withdrawal of an active significant guidance document should be announced via the Federal Register and subject to a 30-day public comment period, or if other means of public engagement, such as the EPA’s Guidance Portal or other Agency website, could be used to announce such actions.”

The Environmental Group of Davis Graham & Stubbs LLP handles air quality regulatory, transactional, and litigation matters for its clients in the oil and gas and other industry sectors. Please contact Randy Dann, Will Marshall, or Kate Sanford if you would like to discuss this development further or any other air quality matters of concern to your company.

[1] The Executive Order defines a “significant guidance document” as: (1) a document that would “have an annual effect on the economy of $100 million or more, or adversely affect the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or governments or communities in a material way”; (2) a document that would “create a serious inconsistency or otherwise interfere with an action taken or planned by another agency”; (3) a document that would materially alter the budgetary impact of entitlements, grants, user fees, loan programs or the rights and obligations of recipients thereof”; or (4) a document that would “raise novel legal or policy issues arising out of legal mandate, the president’s priorities, or the principles of Executive Order 12866”—an executive order issued by President Clinton in 1993 titled “Regulatory Planning and Review.”

In the days leading up to the announcement of COVID-19 pandemic-related stay-at-home orders, many Americans bought abnormally large quantities of toilet paper, among other necessities. This universal hoarding trend may have come as no surprise to veterans of oil and gas reserve-based lending, who have likely seen other examples of how anticipated scarcity breeds hoarding behavior. When the price of oil craters to levels that make production uneconomical, many producers with reserve-based credit facilities are incentivized to draw down as much cash as they can under their credit facilities in an attempt to shore up their liquidity. As grocery stores impose per-customer quotas to curb the hoarding of toilet paper and other essentials, lenders are turning to a trusted strategy to limit the hoarding of cash by oil and gas borrowers.

Background

Cash hoarding, and the anti-cash hoarding provisions that seek to counteract it, are recurring phenomena in reserve-based lending facilities (facilities where credit availability is tied to the value of a borrower’s oil and gas reserves, expressed as a “borrowing base” amount). Prior to the COVID-19 pandemic and the related collapse in demand for oil worldwide, the most recent surge in popularity of anti-cash hoarding provisions occurred during 2015 and 2016. When a severe (and/or prolonged) downturn in commodity prices appears, biannual borrowing base redeterminations – typically conducted by lenders in the spring and fall – threaten to shrink borrowers’ access to available credit at precisely the time they need it most in order to withstand the downturn. Reduced cash flows incentivize borrowers to draw down their revolving line of credit as much as possible to protect against a potential liquidity crunch. Lenders use the borrowing base redetermination process to limit such actions by borrowers, offering a bargain: amend your credit agreement to add anti-cash hoarding provisions, often along with a number of other concessions to the lender group, such as increased interest rate margins and tighter financial covenants, and, in return, the lenders will either maintain the borrowing base at its current level or agree to less of a reduction based on the underlying value of the borrowing base assets. This trend is currently playing out on a daily basis in the public filings of oil and gas companies disclosing their spring borrowing base redeterminations, along with concurrent amendments to their credit facilities that include the addition of anti-cash hoarding provisions.[i]

The current round of anti-cash hoarding amendments seems to have been partially touched off by the bankruptcy filing of Whiting Petroleum, announced on April 1, 2020. Whiting has reported that at the time of the bankruptcy filing, it held $585 million in cash. Since most reserve-based credit facilities are now generally secured by all of the borrower’s assets, including its cash, Whiting’s lenders likely have lien priority with respect to this $585 million. But it seems probable that restricting Whiting’s ability to draw down the full amount of its revolver would have been preferred by its senior lenders as compared to holding a secured claim in the bankruptcy.

Anti-Cash Hoarding Provisions: A Primer

Anti-cash hoarding provisions in credit agreements typically have three main components: (1) a condition precedent to future advances of loan funds, (2) a mandatory prepayment, and (3) a “cash balance” or “excess cash” definition that is used in the first two components.

The first component – the condition precedent to future advances – prevents borrowers from obtaining loan funds if it would result in the borrower’s cash balance exceeding a designated threshold. The threshold is set well below the amount of the borrowing base that would otherwise limit the availability of loan funds. In effect, a portion of the borrowing base becomes available only for purposes other than sitting on the borrower’s balance sheet.

The second component – the mandatory prepayment – caps the amount of cash that can be held on the borrower’s balance sheet, with any excess over that cap being required to go toward paying down the borrower’s outstanding loans. Unlike the first component, which only interferes with the borrower’s use of loan proceeds, the mandatory prepayment provision reaches cash that the borrower may have separately obtained from its operations or other sources. The prepayment threshold is tested frequently, as often as daily, to keep a tight leash on cash hoarding. The limitation on the borrower’s cash balance is sometimes structured as a flat dollar cap, sometimes as a percentage of the borrowing base or aggregate lender commitments, or sometimes as a hybrid of both concepts. Sometimes the mandatory prepayment only applies when a revolver utilization threshold is exceeded.

The third component is the defined term used to measure the borrower’s cash balance, which typically carves out a number of categories of cash that are exempt from the foregoing tests. The “cash balance” definition is where borrowers subject to anti-cash hoarding provisions have the opportunity to create flexibility for their anticipated cash management needs. Common carve-outs, often subject to durational limits, include:

• cash restricted or set aside for the purpose of meeting royalty obligations, taxes, payroll, or employee benefit payments;
• proceeds of permitted debt offerings that will be used to redeem other debt;
• refundable purchase price deposits held in escrow under purchase and sale agreements; and
• amounts subject to issued checks, initiated wires, or ACH transfers.

Beyond these three main components, anti-cash hoarding provisions may also include other variations, such as additional reporting obligations or negative covenants that flatly prohibit a borrower’s cash balance from exceeding a designated threshold at any time.

Additional Considerations for Borrowers

a. Lender voting. Reserve-based credit agreements are typically syndicated among a group of bank lenders, and typically provide that certain types of amendments to the credit agreement require 100% consent of all the lenders, while other types of amendments require only a majority or two-thirds vote. Amendments that are minor or that benefit the lenders usually require a majority vote, while amendments that are more material or that may negatively impact a lender’s economic interests usually require a 100% vote. Consistent with this principle, an amendment adding strictly anti-cash hoarding provisions should only require a majority lender vote.

Given the boom-and-bust nature of the oil and gas industry, many borrowers presently accepting the addition of anti-cash hoarding provisions to their credit agreements will also be looking to the future as to what it will require, from a lender voting perspective, to get rid of those same anti-cash hoarding provisions in the future. Borrowers should be aware that, while adding anti-cash hoarding provisions now may only require a majority lender vote, subtracting them in the future is likely to require a 100% lender vote because the removal would be taking away an economic benefit from the lenders. This means that a single holdout vote in the lender group could block the borrower from returning to an unrestricted cash management environment after commodity prices have improved. The holdout lender(s) may have motivations for blocking the removal of anti-cash hoarding provisions that have nothing to do with the borrower’s finances. While “yank a bank” provisions (whereby the borrower can replace a non-consenting lender with a new, consenting lender so long as the new, consenting lender pays off the non-consenting lender) are designed to provide a work-around in this context, they require a willing substitute lender in order to be useful, and they may involve the payment of additional fees or expenses.

b. “Cash balance” carve-outs. When negotiating anti-cash hoarding provisions, borrowers should consider all of the contexts in which they may need to hold cash on their balance sheet during the loan term – including any such contexts that may be unique to their particular business and thus not accounted for in publicly available anti-cash hoarding precedents – and should seek carve-outs from their “cash balance” definition to exempt those contexts from the new cash hoarding tests. For example, if a borrower has a large contingent obligation – such as a surety bond indemnity obligation – for which it needs to set aside cash without actually paying that obligation within a short period of time, it may need a specific carve-out for that purpose. If a borrower plans to refinance other indebtedness during the loan term, it should consider whether the exemptions from the “cash balance” definition provide enough flexibility to accommodate the possible timing and funds flow of such a transaction.

Conclusion

Anti-cash hoarding provisions in reserve-based credit agreements, like per-customer quotas for essential products, will hopefully go away soon. The provisions added during the 2015–2016 period were eventually taken out. Until then, borrowers should understand market practice and the trade-offs involved in adding these provisions to their credit agreements.

Should you have any questions concerning this topic, please contact Kristin L. Lentz or Taylor M. Smith.

[i]
Two examples of this trend can be accessed at the following links:

https://www.sec.gov/ix?doc=/Archives/edgar/data/1594466/000119312520121977/d923030d8k.htm

https://www.sec.gov/ix?doc=/Archives/edgar/data/1486159/000148615920000033/oas-20200424.htm