CARES Act Main Street Lending Program: Loan
Parameters, Borrower and Lender Eligibility,
Key Issues
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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
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Main Street Loan ProgramMay 19, 2020
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Presenters: Main Street Loan ProgramJamie Class, Partner
Foley & Lardner
Boston, Massachusetts
New York, New York
Heidi Furlong, Partner
Foley & Lardner
Milwaukee, Wisconsin
Hoang “Quan” Vu, Partner
Foley & Lardner
Houston, Texas
Justin Lauria-Banta,Associate
Foley & Lardner
Milwaukee, Wisconsin
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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?
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Main Street Loans Background and Key Terms
3
• Program Goals
• Sources of Law
• Key Terms
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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.
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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.
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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
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Main Street Loans: Eligible Lenders
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▪ 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.
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Main Street Loans: Eligible Borrowers
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– 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.
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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.
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Main Street Loans: Ineligible Borrowers
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▪ 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.
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Main Street Loans:Capital Structure, Key Restrictions
and Certifications
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Main Street Loans: Capital Structure
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▪ 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.
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Main Street Loans: Financial Condition
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▪ 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.
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Adequate Credit Accommodations–More Open Questions
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▪ 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.
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Borrower Certifications: Use of Proceeds
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▪ 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.
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Borrower Restrictions and Certifications
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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.
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Borrower Certifications
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▪ 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.
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Main Street Loans –Leverage Ratio
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Main Street Loans: Debt to EBITDA
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▪ 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.
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Calculating Adjusted EBITDA
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▪ 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).
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Calculating Debt for the Leverage Ratio
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▪ 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
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Debt Excluded from the Leverage Ratio
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▪ 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.
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Underwriting and Credit Assessment
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Underwriting and Credit Assessment
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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.
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Main Street Loans: Credit Assessment
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▪ 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.
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Can Main Street Loans Work?Scenarios
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Scenario 1:ABC Manufacturing Company with No Debt
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▪ 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.
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Scenario 2: Ambulance Services Companywith Capital Equipment Loan with EligibleLender
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▪ 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.
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Scenario 3: Continuing Care Facility Companywith Non-Formula Line of Credit with EligibleLender
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▪ 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.
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Scenario 4: Research Companywith Formula Line Asset Based Loan with Eligible Lender
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▪ 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.
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Scenario 5: Retail Companywith Term Loan with Eligible Lender
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▪ 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.
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Scenario 6: Food Transportation Company with Non-Bank Debt
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▪ 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.
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Main Street Loans: What Next?
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Main Street Loans: What Next?
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▪ 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.
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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
617.226.3111
Heidi M. Furlong
Partner, Milwaukee
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
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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: [email protected]
Heidi Furlong [email protected]
Hoang Quan Vu: [email protected]
Justin Lauria-Banta: [email protected]
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.
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