Federal Reserve Issues Updated Main Street FAQs on LIBOR Transition

In 2020, the Federal Reserve ("Fed") established the Main Street Lending Program ("MSLP") to support lending to small and medium-sized for-profit and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic.

Under the program, all MSLP loans were required to have an interest rate of LIBOR + 300 basis points. In 2017, the regulator of LIBOR, the U.K. Financial Conduct Authority, announced it did not intend to publish LIBOR beyond December 31, 2021. The deadline was subsequently extended to June 30, 2023 for the overnight, one-, three-, and six-month LIBOR settings, but publication of the one-week and two-month LIBOR settings ceased at the end of 2021.

As a result, all MSLP loans, which were required to based on either the one- or three-month LIBOR settings, will have to transition away from LIBOR by June 30, 2023, at the latest. To facilitate this transition, the Fed recently issued updated FAQs explaining to MSLP lenders how to transition their MSLP loans away from LIBOR.

Is Approval of the Main Street SPV Needed Before Modifying Interest Rate Benchmark?

In order to change the interest rate benchmark of a MSLP loan from LIBOR to a replacement index, a MSLP lender must receive the approval of the Main Street Special Purpose Vehicle ("Main Street SPV"). Under the MSLP, lenders are required to seek approval of any "Core Rights Act," Which Includes (i) changes "to the interest rate benchmark from LIBOR to a different reference rate," and (ii) "the insertion of a 'hardwired' fallback provision that would transition the Main Street loan's benchmark replacement to a clearly defined alternative reference rate without future discretion by the [lender]." Therefore, before transitioning away from LIBOR, MSLP lenders must seek approval of the Main Street SPV by submitting an Eligible Lender Request for Loan Modification or Waiver Form.

How Should Lenders Select A Replacement Rate?

According to the updated FAQs, the Main Street SPV will only approve requests to transition MSLP loans to reference rates which are "economically comparable" to the rate in a borrower's current loan agreement. The FAQs do not include a list of factors the Main Street SPV will consider when determining whether a replacement rate is economically comparable to the rate currently in the borrower's loan agreement. However, the Main Street SPV will approve "any Core Rights Act request for transactions to the following reference rates and spreads:

1)      1-month Term SOFR + 311.448 basis points, provided the current loan interest rate is 1-month LIBOR + 300 basis points; or

2)      3-month Term SOFR + 326.161 basis points, provided the current loan interest rate is 3-month LIBOR + 300 basis points."

Requests to transition to all other reference rates will be considered on a case-by-case basis. Lenders interested in using reference rates other than one- or three-month SOFR should include with their Core Rights Act submission an "analysis regarding the economic comparability of the proposed reference rate and spread to the current interest rate used in the Main Street Loan."