The $600 billion Main Street Loan program has been highly anticipated to provide financial support in the form of loans to small and medium-sized U.S. businesses affected by the COVID-19 pandemic. The Federal Reserve Bank of Boston that is administering the Main Street Loan program has released term sheets and various other program documents for the three types of loans, “New,” “Priority” and “Expanded,” as well as over 70 pages of Frequently Asked Questions (FAQs). As a result, the contours of the Main Street Loan program are now substantially settled as the Fed announced publicly on Monday, July 6, that the Main Street Lending Program is now fully operational and ready to purchase participations in eligible loans that are submitted to the program by registered lenders (Eligible Lenders).
A key feature of the Main Street Lending Program is the interplay between several program documents, in particular the Participation Agreement, the Assignment-in-Blank and the Co-Lender Agreement, and the impact such program documents may have in default scenarios.
The Participation Agreement governs the relationship between the federal government’s special purpose vehicle which will be purchasing participations in Main Street loans (the Main Street SPV) and the Eligible Lender making such Main Street loans. The Participation Agreement is based on the widely adopted model participation agreement form developed by the Loan Trading and Syndication Association (the LSTA) for par and near par loan transactions (but with some important distinctions described below), and sets forth (i) the framework for the Main Street SPV’s participation in a Main Street loan, including mechanisms for the sharing of payments, costs and expenses, (ii) representations, warranties, indemnification and standard of care provisions, (iii) the Main Street SPV’s voting rights with respect to certain specified issues, (iv) the Main Street SPV’s right to elevate its participation in the Main Street loan to assignment, such that it (or its assignee) becomes a direct lender under the Main Street loan, and (v) the Main Street SPV’s right to transfer its interests in the Main Street loan both before and after elevation.
The Participation Agreement also includes two useful additions: (i) it makes explicit that the participation is irrevocable and that neither party has the right to require the Eligible Lender to repurchase or buy-back the participation or the Main Street SPV to sell or put-back the participation, and (ii) the Main Street SPV’s waiver of administrative priority status under Section 507(a)(2) of the Bankruptcy Code. By expressly including in both the form of Participation Agreement and the Co-Lender Agreement an express waiver by the Main Street SPV of any claim it may have under Section 507(a)(2) of the Bankruptcy Code, the Fed pre-emptively addresses an important concern of Eligible Lenders that creditor claims of the Main Street SPV in a bankruptcy proceeding involving the borrower (or a co-obligor) as to the unsecured portion of Main Street loans would be treated differently under the Bankruptcy Code (e.g., accorded administrative priority) than the ordinary unsecured claims of Eligible Lenders and other unsecured creditors. Section 507(a)(2) specifically provides Federal Reserve Banks with an administrative priority claim (under Section 503(b)) as to any unsecured claims related to “loans made through programs or facilities [like the Main Street loan programs] authorized under section 13(3) of the Federal Reserve Act.” The waiver is intended to provide Eligible Lenders comfort that bankruptcy courts will follow and enforce the 95/5% economic risk allocation of the Main Street loan programs.
The Assignment-in-Blank is to be signed in blank by both the Eligible Lender and the borrower at the time the Main Street loan is made in order to facilitate the Main Street SPV’s elevation (or elevation and transfer) of its participation in the event a “Specified Permitted Transfer” (discussed below) occurs. In doing so, the Eligible Lender and the borrower are providing the Main Street SPV with their advance consent to such an elevation or elevation and transfer. The form is for use with bilateral facilities. Alternatively, in the case of an Expanded Main Street loan being added to a multi-lender facility with customary syndicated loan provisions, the parties are to use the existing assignment and assumption.
The Co-Lender Agreement is also to be signed by both the Eligible Lender and the borrower at the time a bilateral Main Street loan is made. This agreement provides the agency and operational mechanics to accommodate multiple lenders in the event the Main Street SPV elevates or elevates and transfers its participation interest. The Co-Lender Agreement includes joinder provisions to admit the new lender as an additional lender under the loan documents and to grant such lender the benefit of any guarantees and collateral documents supporting the Main Street loan, as well as provisions designating the Eligible Lender as the Administrative Agent to act on behalf of all lenders, permitting the further assignment and transfer of the loans, and governing the intercreditor relationships among the lenders, including as to payment sharing and voting rights.
Elevation and Transfer
The Main Street SPV may seek an “elevation” of its participation interest to an assignment, thereby becoming a direct lender to the Eligible Borrower, under the following circumstances: (i) such elevation constitutes a Specified Permitted Transfer, (ii) with the prior consent of the Eligible Lender, or (iii) if any action or inaction by the Eligible Lender with respect to a Core Rights Act (discussed below) would result in any Loan Forgiveness. Prior to the occurrence of an elevation, the Main Street SPV may sell, assign or grant subparticipations in its participation interest without the consent of the Eligible Lender only if such action constitutes a Specified Permitted Transfer.
A “Specified Permitted Transfer” includes: (a) an elevation, pre-elevation transfer or subparticipation when (i) a payment default has occurred under any Main Street loan document, (ii) specified insolvency events have occurred with respect to the borrower or Eligible Lender, or (iii) required by statute or court order; (b) an elevation when any action or inaction by the Eligible Lender with respect to a Core Rights Act (as discussed below) would result in any Loan Forgiveness; or (c) any pre-elevation transfer or subparticipation to specified governmental assignees.
At any time after an elevation, the Main Street SPV may assign, grant a participation in, or otherwise transfer all or any portion of its rights in the Main Street loan without the consent of the Eligible Lender, but subject to the requirements of the Co-Lender Agreement (for bilateral facilities) or the assignment provisions of the underlying loan documents (for multi-lender facilities), as applicable. The Co-Lender Agreement requires the consent of the Eligible Borrower (provided no event of default then exists) and the “Administrative Agent” for assignments, unless such an assignment is to another current lender under the facility (or its affiliates or approved funds) or to specified governmental assignees. Importantly, the Co-Lender Agreement designates the Eligible Lender as the Administrative Agent for purposes of the bilateral facility, so in this capacity the Eligible Lender does obtain a consent right to post-elevation assignments.
In contrast, the Eligible Lender is prohibited from assigning or transferring its interest in the Main Street loan (and, in the case of Main Street expansion loans, its existing interest in the underlying loans as well) until the earlier of (i) the maturity date of the Main Street loan and (i) the date neither the Main Street SPV nor a governmental assignee holds an interest in the loan. The Eligible Lender may thus be required to continue to hold its position in the applicable facility even after the Main Street SPV transfers a portion of its interest to another lender, regardless of the actions (or inactions) taken by the Main Street SPV relating to the Main Street loan, including in a workout, restructuring, bankruptcy or other distressed situation.
The Fed explains in FAQ J.5 that it does not expect the Main Street SPV to use its elevation or transfer rights as a matter of course, even when the borrower is in distress. Rather, Eligible Lenders are to follow market-standard workout processes and to exercise the same duty of care in approaching such proceedings as they would exercise if they retained a beneficial interest in the entire loan. Further, the Fed expects that the Main Street SPV generally will not elevate and assign except in situations where (i) the economic interests of the Eligible Lender and the Main Street SPV are misaligned or (ii) the loan amount is relatively large in comparison to other loans in the Main Street SPV’s portfolio of participations.
Voting Rights Both Before and After Elevation
Critically, the Participation Agreement provides that the Eligible Lender retains sole authority to exercise all votes, rights and remedies with respect to the Main Street loan, except specifically with respect to “Core Rights Acts.” “Core Rights Acts” are defined to include (i) actions (or inactions) with respect to the Main Street loan which affect what are commonly thought of as “sacred rights” and (ii) actions (or inactions) which affect specific concerns or features of the Main Street program. The scope of the Core Rights Acts is quite broad (certainly broader than the “sacred rights” that is the trigger for participant voting rights under the LSTA model participation agreement form referred to above), and Eligible Lenders and borrowers should be aware that obtaining the Main Street SPV’s consent to such actions (and inactions) may present both substantive and administrative challenges. The Fed observes that “the Main Street SPV will make commercially reasonable decisions to protect taxpayers from losses on Main Street loans and will not be influenced by non-economic factors when exercising its voting rights….” While the Main Street SPV’s and Eligible Lender’s economic interests should be generally aligned, we anticipate that the Main Street SPV’s decisions regarding Core Rights Act will not always result in the outcome preferred by Eligible Lenders. For instance, the Eligible Lender may be less reluctant than the Main Street SPV to postpone payment, or write off some portion, of the loan as part of a work-out. We would also expect that an Eligible Lender with other exposure to the Eligible Borrower or its affiliates might take a different view of its overall economic relationship with such entities than would the Main Street SPV or another governmental transferee.After an elevation occurs, the Main Street SPV’s voting rights will be governed by: (i) for bilateral Main Street loans, the Co-Lender Agreement, and (ii) for multi-lender Main Street loans or “Expanded” facilities, the underlying loan documents. Under the Co-Lender Agreement, amendments and waivers require the consent of the “Required Lenders,” unless such amendments or waivers are with respect to actions (or inactions) comprising “Core Rights Acts”, in which case the consent of all lenders or all impacted lenders is required. Note that as the Main Street SPV or its assignees will hold 95% of the Main Street loan after elevation, they will be in control of all actions (or inactions) requiring the consent of the Required Lenders, leaving the Eligible Lender in a minority position with no blocking right other than in matters comprising Core Rights Acts or otherwise requiring the vote of the affected lender. This may not be the result expected by Eligible Lenders as “club” deals sometimes require the consent of at least two non-affiliated lenders when the consent of Required Lenders is needed. With respect to multi-lender Main Street facilities (in particular, “Expanded” loans), the Main Street SPV’s voting rights will be guided by the provisions in the underlying loan documents, so we would expect those rights to follow market standards.
As you are aware, things are changing quickly and the aid measures and interpretations described here may change. The summary attached to this post represents our best understanding and interpretation based on where things currently stand as of July 7, 2020.
 Please see our comparative and annotated chart of the Main Street Loans here.
 “Loan Forgiveness” is defined as any reduction of the principal amount of the Main Street loan or other action or arrangement that, in the good faith determination of the Main Street SPV, could reasonably be expected to result in violation of the prohibition on loan forgiveness set forth in Section 4003(d)(3) of the CARES Act. Loan Forgiveness does not include the addition of higher priority “priming” liens in a bankruptcy proceeding, reductions in interest, including any PIK interest, and extensions of amortization schedules and maturity dates.
 Such “sacred rights” include: the (i) extension, increase or reinstatement of any commitment to a loan, (ii) reduction in principal, interest or other amounts payable in respect of a loan, (iii) delay or postponement of any scheduled payment of principal, interest or other amounts under a loan, (iv) altering of provisions dealing with pro rata sharing or the application of proceeds, (v) release of all or substantially all of the collateral or value of guarantees, and (vi) waiver of conditions precedent to closing, effectiveness or funding.
 Including: (i) changes to the lender voting approval level with respect to any Core Rights Act, (ii) departures from any provision relating to certain certifications the borrower is required to make in the Main Street program documents, (iii) departures (other than a temporary delay) from any provision requiring the periodic financial reporting by the borrower, (iv) express subordination of the Main Street loan or any security interest in all or substantially all of the collateral therefor, and (v) failure to accelerate and exercise remedies with respect to the Main Street loan upon a Seller Debt Cross-Acceleration (defined as cross-acceleration upon a default under other indebtedness owed by the borrower to the Eligible Lender).
 FAQ J.6
 “Required Lenders” is defined to mean lenders holding more than 50% of the total credit exposure.