The Main Street Lending Program (“MSLP”) is a federal lending program established in 2020 during the COVID-19 pandemic as a much needed financial lifeline for small to mid-size businesses impacted by the sharp slowdown in economic activity.[1] The loans were underwritten and structured so that they would be serviced by private sector banks while MS Facilities LLC (“Main Street SPV”), a special purpose entity created by the Federal Reserve Bank of Boston, would hold a 95% economic interest in each loan. Unlike other stimulus programs, the MSLP requires borrowers to repay the loans. To give businesses sufficient breathing room before repayment begins, MSLP loans have a one-year interest deferral with 15% principal payments coming due at the end of year three and four and full amortization at the end of year five. MSLP loans have variable interest rates and are generally secured by liens on assets of the borrowers, and in some cases, principal guaranties. As discussed below, as some borrowers seek loan modifications to defer principal payments that can be as much as tens of millions of dollars, Main Street SPV has declined to allow extensions of the five-year maturity date even though statutory authority may not expressly prohibit it. This has led to a burgeoning secondary market for the purchase of these loans—in some cases at discounts—which can give borrowers relief in situations where conventional refinancing is unavailable.

The MSLP has seen an uptick in defaults and requests for modifications in recent months as some borrowers struggle to make scheduled principal payments.[2] Other borrowers likely will have difficulty making the final principal payments of 70% of the loan balance at maturity without refinancing. At present, Main Street SPV is approving loan modifications in certain circumstances that provide borrowers interim relief, such as deferral of interest or interim principal payments.[3] However, Main Street SPV has taken the position that the legislation authorizing the MSLP does not permit loan modifications that extend the five-year maturity date.

An examination of the MSLP legislation reveals some loan modification prohibitions, but the law appears silent on others. Pursuant to 15 U.S.C. § 9042(b)(1)–(4), the statute governing the MSLP, there are four categories of eligible borrowers: (1) passenger air carriers; (2) cargo air carriers; (3) businesses critical to maintaining national security; and (4) a catchall provision for “eligible businesses,” which includes all borrowers not deemed an “ineligible business” under the Small Business Association regulations cited in Main Street SPV term sheets.[4] The statute is clear that MSLP loans are not eligible for principal reduction regardless of which bucket the business falls into: “The principal amount of any obligation issued by an eligible business . . . shall not be reduced through loan forgiveness.”[5] 

Other sections of the MSLP statute appear to differentiate relief available based on the type of business that received a MSLP loan. For example, MSLP loans issued to “eligible businesses under paragraphs (1), (2) and (3) of subsection (b),” relating to passenger air carriers, cargo air carriers, and businesses critical to national security, respectively, shall not “in any case [be] longer than 5 years.”[6] The statute does not appear to contain a specific provision limiting the term of MSLP loans for other “eligible businesses” to five years.[7] Similarly, modification of MSLP loans appear to have different statutory limitations depending on the category of eligibility the borrower falls into.[8] “The duration of any loan [made to a passenger air carrier] . . . that is modified, restructured, or otherwise amended . . . shall not be extended beyond 5 years from the initial origination date of the loan.”[9] Apart from this limitation for “passenger air carriers,” the statute does not appear to specify a limitation for the other three categories of eligible borrowers. Nor is there a specific provision limiting Main Street SPV’s ability to modify interest rates. The statute simply requires that to modify a loan made to a cargo air carrier, a business critical to national security, or a borrower eligible under the catchall provision, the borrower must remain an eligible business with an eligible loan and that the modification “is necessary to minimize costs to taxpayers that could arise from a default on the loan.”[10]

Despite the apparent lack of an express prohibition on maturity date extensions, there is only one reported MSLP loan that received a maturity date extension.[11] The authors of this article understand that Main Street SPV has subsequently declined to approve other maturity date extension requests, which is reflected in the reported data. It therefore appears that absent congressional action, or a change in Main Street SPV’s position, many companies that took MSLP loans will need to refinance, raise additional capital, or consider other workout alternatives within the next 12 months.

One potential alternative to refinancing that has emerged in recent months is a process for selling MSLP loans in the secondary market. Once a MSLP loan is sold, Main Street SPV assigns all of its rights in the loan to the purchaser. At that point, the MSLP loan no longer would be subject to the statutory restrictions imposed by the MSLP legislation, providing the borrower and the loan purchaser flexibility to freely negotiate loan modifications. 

Selling MSLP loans at discounts can attract purchasers who will have an opportunity to profit if they can recover more than they paid for the loan. In order to successfully sell an MSLP loan at a discount, Main Street SPV will need to consent to the transaction. Typically, the parties involved—the servicing bank, the borrower, and the loan purchaser—will need to demonstrate to Main Street SPV that the transaction will “minimize costs to taxpayers that could arise from a default on the loan,” which is the statutory standard for a loan modification.[12] Stated differently, the parties will need to demonstrate, at a minimum, that the sale price for the MSLP loans exceeds the liquidation value of the collateral securing the loan and other sources of recovery, if any, plus expenses associated with liquidating the collateral. The parties also should be prepared to demonstrate that the MSLP loan sale is a value maximizing transaction. There are several ways to demonstrate this, but the most successful method in most instances is to hold an open, competitive bidding process for the purchase of the loan. Parties should nevertheless understand that Main Street SPV has the discretion to refuse to consent to a note sale based on the particular facts and circumstances, even if the above-approach is followed.

Borrowers should be aware of the risks associated with a MSLP loan sale. For one, if the sale process is open and competitive, the identity of the purchaser of the MSLP loan may not be known until bids are submitted. Most MSLP loan agreements do not require the consent of the borrower to assign the loan to a new lender, so there may be no means for a borrower to object or otherwise halt a sale process to a purchaser that it deems “unfriendly.” In order to mitigate this risk, borrowers should conduct due diligence on the parties likely to show interest in bidding on the MSLP loan. Although borrowers cannot eliminate the risk entirely, they should discuss with potentially interested loan purchasers, if possible, how the loans can be modified in an appropriate way to permit the borrower to service the debt without undue financial hardship. Such modified terms could include extended maturity dates, alternative interest rates and amortization schedules, and relaxed financial covenants. Ideally, the parties can reach such an agreement on modified terms before the loan sale occurs.

Unless many of the companies with outstanding MSLP loans can obtain conventional refinancing within the next 12 months, many will be at risk of default if they cannot otherwise pay the MSLP loan in full at maturity. Without a substantive change to the MSLP legislation or Main Street SPV’s approach to loan modification requests, one of the few alternatives available is the loan sale process described in this article. Compared to other alternatives, such as chapter 11 reorganization, a loan sale is substantially less expensive and can lead to the desired outcome of a modified loan with payment requirements that the borrower can meet. However, this approach is not without its risks. To better understand the risks and appropriately consider all alternatives, the parties should retain knowledgeable legal counsel with experience navigating the complexities and unique features of MSLP workouts. Hunton Andrews Kurth attorneys have represented both lenders and borrowers in MSLP workouts.

[1] A more in-depth discussion of the background and functionality of the MSLP can be found in Hunton Andrews Kurth’s recent publication on the topic. See COVID-19 Hangover: Lender Options for a Distressed Main Street Lending Program Loan (huntonak.com), (August 15, 2024). The MSLP ceased authorizing new loans in January 2021.

[2] See The Federal Reserve Bank, Periodic Report: Update on Outstanding Lending Facilities Authorized by the Board under Section 13(3) of the Federal Reserve Act, p. 3 n.3 (Oct. 10, 2024) (showing increase in credit loss allowance).

[3] See The Federal Reserve Bank, MS Facilities LLC: Financial Statements 2023, p. 19.

[4] See 13 C.F.R. §§ 120.110(b)–(j) and (m)–(s), as modified by regulations implementing the PPP.

[5] 15 U.S.C. § 9042(d)(3).

[6]  See § 9042(c)(2)(D).

[7] See §§ 9041–9063.

[8] See § 9063.

[9] § 9063(b)(2).

[10] §§ 9063(c)(2)(B)(i)–(iii).

[11] See The Federal Reserve Bank, MS Facilities LLC: Financial Statements 2023, p. 19.

[12] § 9063(c)(2)(B)(iii).