The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Financial Statements:
MS Facilities LLC
A Limited Liability Company Consolidated by the Federal Reserve Bank of Boston
For the period from May 18, 2020
to December 31, 2020
and Independent Auditors’ Report
MS Facilities LLC
Contents
Page
Independent Auditors’ Report
1-3
Abbreviations
4
Financial Statements for the period from
May 18, 2020 to December 31, 2020:
Statement of Financial Condition
5
Statement of Operations
6
Statement of Changes in Members’ Equity
7
Statement of Cash Flows
8
Notes to Financial Statements
9-19
KPMG LLP
Two Financial Center
60 South Street
Boston, MA 02111
Report of Independent Registered Public Accounting Firm
To the Managing Member of
MS Facilities LLC:
Opinion on the Financial Statements
We have audited the accompanying statement of financial condition of MS Facilities LLC (a Special Purpose
Vehicle consolidated by the Federal Reserve Bank of Boston) (the “LLC”) as of December 31, 2020, the related
statements of income, changes in members’ equity, and cash flows for the period from May 18, 2020 to
December 31, 2020 and the related notes (collectively, the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the LLC as of December 31, 2020,
and the results of its operations and its cash flows for the period from May 18, 2020 to December 31, 2020, in
conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the LLC’s management. Our responsibility is to express an
opinion on these financial statements based on our audit. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent
with respect to the LLC in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the
risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relate
to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in
any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the
critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Allowance for loan losses related to loans collectively evaluated for impairment
As discussed in Notes 2 and 4 to the financial statements at December 31, 2020, the LLC’s total
allowance for loan losses was $2,413 million, of which $1,422 million related to the allowance for loan
losses for loans collectively evaluated for impairment (the general allowance). The LLC’s general
allowance includes both a quantitative and qualitative component. The LLC estimates the quantitative
component of the general allowance using a methodology that incorporates probability of default (PD)
KPMG LLP, a Delaware limited liability partnership and a member firm of
the KPMG global organization of independent member firms affiliated with
KPMG International Limited, a private English company limited by guarantee.
and loss given default (LGD) factors which are applied to the exposure at default (principal amount
outstanding) based on internal risk rating models grouped into Services and Non-services loan pools
for rating purposes. Such calculated loss factors include estimates of incurred losses over an estimated
loss emergence period. Adjustments for qualitative risk factors are made, if necessary, to reflect the
then-current environment when internal and external factors are identified that are not captured by the
quantitative component of the general allowance.
We identified the assessment of the general allowance as a critical audit matter. A high degree of audit
effort, including specialized skills and knowledge, and subjective and complex auditor judgment was
involved in the assessment due to significant measurement uncertainty. Specifically, the assessment
encompassed the evaluation of the general allowance methodology, including the methods and models
used to estimate (1) the PD factor, LGD factor, risk ratings and their significant assumptions, including
portfolio segmentation and the loss emergence period and (2) the qualitative risk factor adjustments.
The assessment also included an evaluation of the conceptual soundness of the risk rating models and
the PD and LGD factors. In addition, auditor judgment was required to evaluate the sufficiency of audit
evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We
evaluated the design and tested the operating effectiveness of certain internal controls related to the
LLC’s measurement of the general allowance, including controls over the:
•
development of the general allowance methodology
•
development of the risk rating models and the PD and LGD factors
•
identification and determination of significant assumptions used in the risk rating models and
the PD and LGD factors
•
development of the qualitative risk factors
•
performance testing of the risk rating models
•
analysis of the general allowance results and ratios.
We evaluated the LLC’s process to develop the general allowance by testing certain sources of data,
factors, and assumptions that the LLC used, and considered the relevance and reliability of such data,
factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and
knowledge, who assisted in:
•
evaluating the LLC’s general allowance methodology for compliance with U.S. generally
accepted accounting principles
•
evaluating judgments made by the LLC relative to the development of the risk rating models
and the PD and LGD factors by comparing them to relevant LLC specific metrics and the
applicable industry and regulatory practices
•
assessing the conceptual soundness of the risk rating models and the methods used for the
PD and LGD factors by inspecting the documentation to determine whether the model and
methods are suitable for their intended use
•
determining whether the loan portfolio is segmented by similar risk characteristics by
considering the LLC’s business environment and relevant industry practices
•
evaluating the length of the loss emergence period by comparing it to portfolio risk
characteristics and relevant industry practices
•
evaluating the methodology used to develop qualitative risk factors and the effect of those
factors on the general allowance compared with relevant credit risk factors and consistency
with credit trends and identified limitations of the underlying quantitative component of the
general allowance methodology.
We also assessed the sufficiency of the audit evidence obtained related to the general allowances by
evaluating the:
•
cumulative results of the audit procedures
•
qualitative aspects of the LLC’s accounting practices
•
potential bias in the accounting estimate.
We have served as the LLC’s auditor since 2020.
Boston, Massachusetts
March 17, 2021
MS Facilities LLC
Abbreviations
ASC
FASB
FRBB
FRBNY
GAAP
LLC
Main Street
MSELF
MSLP
MSNLF
MSPLF
NOELF
NONLF
Accounting Standards Codification
Financial Accounting Standards Board
Federal Reserve Bank of Boston
Federal Reserve Bank of New York
Accounting principles generally accepted in the United States of America
Limited Liability Company, or MS Facilities LLC
Main Street Lending Program
Main Street Expanded Loan Facility
Main Street Lending Program
Main Street New Loan Facility
Main Street Priority Loan Facility
Nonprofit Organization Expanded Loan Facility
Nonprofit Organization New Loan Facility
4
MS Facilities LLC
Statement of Financial Condition
As of December 31, 2020
(Amounts in thousands)
ASSETS
Cash and cash equivalents
Restricted cash and cash equivalents
Cash deposit
Short-term investments in non-marketable securities
Loan participations
Loan participations, principal amount outstanding
Principal and interest receivable
Allowance for loan losses
Loan participations at principal amount outstanding, net of allowance including interest
Total assets
LIABILITIES AND MEMBERS' EQUITY
Liabilities
Loans payable to FRBB
Interest payable
Service fees payable
Transaction fees, deferred revenue
Professional fees payable
Other liabilities
Total liabilities
2020
Note 3
129,309
Note 3
Note 3
5,625,000
31,888,629
Note 3
16,509,968
50,088
(2,413,286)
14,146,770
51,789,708
Note 4
Note 6
Note 6
Note 2
Note 9
Commitments and contingencies
Note 9
Members' equity
Note 7
Total liabilities and members' equity
$
16,501,590
1,722
4,331
165,637
8,504
10,329
16,692,113
35,097,595
$ 51,789,708
The accompanying notes are an integral part of these financial statements.
5
MS Facilities LLC
Statement of Operations
For the period May 18, 2020 to December 31, 2020
(Amounts in thousands)
2020
INCOME
Interest income
Transaction fees
Total operating income
EXPENSES
Loans interest expense
Loan participation servicing costs
Provision for loan losses
Professional fees
Other non-interest expense
Total operating expense
Net operating loss
$
Note 6
1,722
4,331
2,413,286
49,171
10,329
2,478,839
Note 4
Note 9
Note 8
72,901
3,533
76,434
$
(2,402,405)
The accompanying notes are an integral part of these financial statements.
6
MS Facilities LLC
Statement of Changes in Members’ Equity
For the period May 18, 2020 to December 31, 2020
(Amounts in thousands)
Members'
contributed equity
Members' equity, beginning of period
Members' contributions
Net operating loss
Members' equity, December 31, 2020
$
Note 7
Note 8
Undistributed net
operating loss
Total members'
equity
$
37,500,000
$
37,500,000
$
(2,402,405)
(2,402,405)
$
37,500,000
(2,402,405)
35,097,595
The accompanying notes are an integral part of these financial statements.
7
MS Facilities LLC
Statement of Cash Flows
For the period May 18, 2020 to December 31, 2020
(Amounts in thousands)
2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net operating loss
$
(2,402,405)
Adjustments to reconcile net operating loss to net cash provided by (used in)
operating activities:
Provision for loan losses
Capitalization of interest on loan participations
Increase in interest payable
Increase in service fees payable
Increase in transaction fees, deferred revenue
(Increase) in principal and interest receivable and other assets
Increase in professional fees payable and other liabilities
Cash provided by operating activities
2,413,286
(9,554)
1,722
4,331
165,637
(50,088)
18,833
141,762
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchases of loan participations
Proceeds from loan repayments
Cash used in investing activities
(16,501,704)
1,290
(16,500,414)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from contributed capital
Proceeds from loans payable to FRBB
Repayment of loans payable to FRBB
37,500,000
16,503,547
(1,957)
54,001,590
Cash provided by financing activities
Net increase in cash and cash equivalents, restricted cash and cash equivalents
Beginning cash and cash equivalents, restricted cash and cash equivalents
Ending cash and cash equivalents, restricted cash and cash equivalents
$
37,642,938
37,642,938
The accompanying notes are an integral part of these financial statements.
8
MS Facilities LLC
Notes to the Financial Statements
(1) ORGANIZATION, NATURE OF BUSINESS, AND FINANCING
In accordance with section 13(3) of the Federal Reserve Act and with prior approval from the Secretary of
the Treasury, the Board of Governors of the Federal Reserve System established the Main Street Lending
Program (the “MSLP” or “Main Street”) and authorized the Federal Reserve Bank of Boston (“FRBB”) to
establish MS Facilities LLC (“the LLC”), a limited liability company. The LLC was created to support
lending to small and medium-sized businesses and nonprofit organizations that were in sound financial
condition before the onset of the COVID-19 pandemic. The MSLP operates through five facilities: the Main
Street New Loan Facility (“MSNLF”), the Main Street Priority Loan Facility (“MSPLF”), the Main Street
Expanded Loan Facility (“MSELF”), the Nonprofit Organization New Loan Facility (“NONLF”) and the
Nonprofit Organization Expanded Loan Facility (“NOELF”) (collectively the “Facilities”). Main Street’s
purpose is to provide credit to eligible borrowers by purchasing participations in eligible loans originated
by eligible lenders. An eligible lender is a U.S. federally insured depository institution (including a bank,
savings association, or credit union), a U.S. branch or agency of a foreign bank, a U.S. bank holding
company, a U.S. savings and loan holding company, a U.S. intermediate holding company of a foreign
banking organization, or a U.S. subsidiary of any of the foregoing (“Eligible Lender”). Eligible Lenders
retained 5% of each loan in which the LLC purchased a participation. Eligible Lenders were able to
originate new loans (under MSNLF, MSPLF and NONLF) or increase the size of (or upsize) existing loans
(under MSELF and NOELF) made to eligible borrowers. All loan participations purchased for all five
Facilities are held by the LLC. The authorization to purchase loan participations through the MSLP
terminated on January 8, 2021.
MS Facilities LLC is a Delaware LLC formed in connection with the implementation of MSLP on May 18,
2020. The LLC has two members: FRBB, which is the LLC’s managing member and the U.S. Department
of the Treasury (“Treasury”), which is the preferred equity member. The managing member has the
exclusive rights to manage the LLC. The preferred equity member contributed capital to the LLC using
funds from the Exchange Stabilization Fund under section 4027 of the Coronavirus Aid, Relief, and
Economic Security Act (“the CARES Act”).
FRBB also serves as the lender to the LLC. FRBB extended $16.5 billion in loans to the LLC to fund the
purchase of loan participations during the period July 15, 2020 to December 31, 2020. The loans made by
FRBB are full recourse obligations of the LLC and secured by all assets of the LLC. The LLC records a
liability in the Statement of Financial Condition when FRBB funds a loan to the LLC. Interest on the loans
is paid on the repayment date of the relevant loan or in order of priority set forth in the credit agreement
between the LLC and FRBB.
To be eligible for purchase by the LLC, eligible loans must have met certain requirements specified in
program term sheets. These term sheets require loans to have been originated after specified dates, have a
maturity of 5 years, charge a specified LIBOR based floating interest rate, defer interest and principal
payments on a set schedule, permit prepayment without penalty, maintain a certain level of priority and
meet other program-specific eligibility requirements. Upon the LLC’s purchase of a loan participation, the
Eligible Lender was required to pay the LLC a non-refundable transaction fee of 100 basis points of the
principal amount of the MSNLF, MSPLF, NONLF loan, and 75 basis points of the principal amount of the
MSELF and NOELF increased loan amount at the time of upsizing. No transaction fees were paid to the
LLC on loans with an initial principal amount of less than $250,000. In addition, the LLC pays an eligible
lender an annual servicing fee on the original principal amount of the loan participation of 25 basis points
for loans with an initial principal amount of $250,000 or more and 50 basis points for loans with an initial
9
MS Facilities LLC
Notes to the Financial Statements
principal amount of less than $250,000. The servicing fee is paid by the LLC to the Eligible Lender annually
in arrears within sixty (60) days of each one-year anniversary of the loan participation agreement date.
All available cash receipts of the LLC are used to pay its obligations as described in Note 8. Distributions
of residual proceeds to the members will occur after all loans from FRBB are repaid in full. During the life
of the LLC, undistributed net operating income or loss is reported as “Undistributed net operating income
(loss)” in the Statement of Changes in Members’ Equity.
The LLC invests unused cash receipts from transaction fees and related investment earnings in a
government money market fund.
Various service providers for legal, accounting, custodial, credit administrative, and workout advisor
services were engaged to provide services to the LLC. State Street Bank and Trust Company (“State Street”)
provides custodian and accounting administrator services for the LLC. Guidehouse, Inc., working in
partnership with PricewaterhouseCoopers LLP provides credit administration services and FTI Consulting,
Inc. provides workout advisor services to the LLC. The LLC does not have any employees and therefore
does not bear any employee-related costs.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with the accounting principles generally
accepted in the United States of America (“GAAP”), which require the managing member to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts
of income and expense during the reporting period. Significant items subject to such estimates and
assumptions include the carrying value of investments and allowance for loan losses. Actual results could
differ from those estimates.
Significant accounts and accounting policies are explained below.
a. Cash and Cash Equivalents, Restricted Cash and Cash Equivalents
The LLC defines investments in money market funds and other highly liquid investments with original
maturities of three months or less, when acquired, as cash equivalents.
For the LLC, cash is received from transaction fees and earnings from purchases of loan participations and
investments. This cash is used primarily for the payment of operating expenses. The funds are invested in
a government money market fund registered under the Investment Company Act of 1940. As of December
31, 2020, the LLC had approximately $129 million invested in a government money market fund.
Investments in money market funds are valued at their closing net asset value (NAV) each business day.
In accordance with the terms of the LLC Preferred Equity Investment Agreement, Treasury provided an
initial equity contribution of $37.5 billion, of which approximately 85 percent was invested in overnight
non-marketable securities issued by Treasury to the LLC. In accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 230-10, Statement of Cash Flows,
the Treasury’s contributions are reported as restricted cash and cash equivalents as there are contractual
limitations and restrictions on the use of the funds and ability to withdraw the funds. Investments in
overnight non-marketable Treasury securities are recorded at amortized cost and shown as “Restricted cash
and cash equivalents: Short-term investments in non-marketable securities” in the Statement of Financial
Condition and are included in "Net increase in cash and cash equivalents, restricted cash and cash
10
MS Facilities LLC
Notes to the Financial Statements
equivalents " in the Statement of Cash Flows. The remaining equity contribution of approximately 15
percent of the initial equity contribution was held in cash on deposit at FRBNY to support the liquidity
needs of the LLC and is reported separately as “Restricted cash and cash equivalents: Cash deposit” in the
Statement of Financial Condition and is included in "Net increase in cash and cash equivalents, restricted
cash and cash equivalents " in the Statement of Cash Flows. Due to the short-term nature of cash equivalents
and non-marketable securities, the cost basis is estimated to approximate fair value.
b. Loan Participations
Under the MSLP, the LLC purchases 95 percent participation interests in loans originated by Eligible
Lenders. Purchased loan participations are recorded at cost of purchase, plus capitalized interest, less any
principal paydowns and treated as loans. The LLC recognizes interest income on loan participations daily
based on the underlying contractual terms of the loans. Interest income on the purchased loan participations
is reported as “Interest Income” in the Statement of Operations.
c.
Credit Impairments / Allowance for Loan Losses
The allowance for loan losses consists of loans collectively evaluated for impairment and specific reserves
for impaired loans and reflects management's estimate of probable loan losses inherent in the loan portfolio
at reporting date and calculated in accordance with FASB ASC 310-10, Receivables and FASB ASC 45020, Loss Contingencies.
Loan participations that meet a certain threshold and meet triggers tied to performance, credit rating, or
value are evaluated for impairment under ASC 310-10. A loan is considered impaired, when it is
determined to be probable that the LLC will be unable to collect all of the contractual interest and principal
payments as scheduled in the loan agreement. For purposes of the MSLP, a loss is generally deemed
probable when (1) an individual loan is assigned a doubtful classification or below or (2) it is placed on
nonaccrual status due to delinquency status (90 days past due) or management judgment for factors
including a decline in its fair value to 80 percent of its outstanding balance (or below) that is determined to
be credit-related. For loans purchased by the LLC that have been deemed impaired, a loss allowance is
measured at the individual loan level on a quarterly basis. Loans reviewed through this process deemed
not to be impaired and all other loans not subject to individual evaluation are subject to a general reserve
under FASB ASC 450-20 – Loss Contingencies. The LLC’s general reserve includes both quantitative and
qualitative components.
d. Interest Income
Interest income on short-term investments in non-marketable securities is recorded when earned and
received daily based on an overnight rate established by the Treasury’s Bureau of Fiscal Services. Interest
income earned on the portion of the preferred equity contributions invested in non-marketable securities for
the period ended December 31, 2020 is approximately $13.6 million and is reported as a component of
“Interest income” in the Statement of Operations.
11
MS Facilities LLC
Notes to the Financial Statements
The LLC recognizes interest income on loan participations based on the underlying contractual terms of
the loans. Interest income recognition ceases when the underlying loan is placed on nonaccrual status. The
accrual of interest income on a MSLP loan is suspended when it is probable that the LLC will be unable to
collect all or some of the amounts due, including both the contractual interest and principal payments under
the loan agreement. A loan is placed on nonaccrual status if the instrument becomes due and unpaid for 90
days, or earlier if LLC management determines that full collection of all amounts due is not probable, such
as when a loan is deemed impaired. The LLC prospectively discontinues the recognition of interest income
when a loan is placed on nonaccrual status. Interest income earned on loan participations for the period
ended December 31, 2020 totaled approximately $59.3 million and is reported as a component of “Interest
income” in the Statement of Operations.
e. Transaction and Service Fees
The transaction fee collected upon the purchase of an eligible loan participation from an eligible lender is
recorded separately from the loan participation and reported as "Transaction fees, deferred revenue" in the
Statement of Financial Condition and as "Transaction fees" in the Statement of Operations when earned.
In accordance with ASC 310-20, Receivables-Nonrefundable Fees and Other Costs, transaction fees are
deferred and amortized over the term of the loan. Servicing fees are reported as “Service fees payable” in
the Statement of Financial Condition and as "Loan participation servicing costs" in the Statement of
Operations.
f.
Professional Fees
Professional fees consist primarily of fees charged by the LLC’s credit administrator, custodian and
accounting administrator, workout advisor, external legal counsel, and independent auditors. Professional
fees are accrued as incurred and reported as “Professional fees” in the Statement of Operations. Amounts
incurred and unpaid are reported as “Professional fees payable” in the Statement of Financial Condition,
and include approximately $1.6 million in external legal counsel fees related to LLC activities billed to the
FRBB that the LLC was due to reimburse as of December 31, 2020. Throughout the period, the
LLC also reimbursed FRBB for external legal counsel fees related to LLC activities totaling approximately
$5 million.
g. Taxes
The LLC was formed by FRBB and the Treasury. It is not subject to an entity level income tax. Accordingly,
no provision for income taxes is made in the financial statements.
h.
Fair Value Measurements
Certain assets of the LLC, including cash equivalents and restricted short-term investments in nonmarketable securities, are measured at amounts approximating fair value in accordance with FASB ASC
820, Fair Value Measurement & Disclosures, which defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. FASB ASC 820, Fair Value Measurement & Disclosures establishes a three-level fair
value hierarchy that distinguishes between assumptions developed using market data obtained from
independent sources (observable inputs) and the LLC’s assumptions developed using the best information
available in the circumstances (unobservable inputs). The three levels established by FASB ASC 820, Fair
Value Measurement & Disclosures are described as follows:
12
MS Facilities LLC
Notes to the Financial Statements
•
Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets.
•
Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in the market.
•
Level 3 – Valuation is based on model-based techniques that use significant inputs and assumptions
not observable in the market. These unobservable inputs and assumptions reflect the LLC’s
estimates of inputs and assumptions that market participants would use in pricing the assets and
liabilities. Valuation techniques include the use of option pricing models, discounted cash flow
models, and similar techniques.
The inputs or methodologies used for valuing the financial instruments are not necessarily an indication of
the risk associated with investing in those financial instruments.
i.
Recently Issued Accounting Standards
The following items represent recent GAAP accounting standards relevant to the LLC.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. This update revises the methodology for assessing
expected credit losses and requires consideration of reasonable and supportable information to inform credit
loss estimates. Although earlier adoption is permitted, this update is effective for the LLC for the year
ending December 31, 2023. The LLC is evaluating the effect of this guidance on the LLC’s financial
statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the
Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients to apply
to contract modifications and hedging relationships that reference the London Inter-Bank Offered Rate
(“LIBOR”) or another reference rate expected to be discontinued. The LLC has not yet adopted the new
standard as the LLC is continuing to evaluate the effect of this new guidance on the LLC’s financial
statements.
(3) FACILITY ASSETS
Facility assets consist of both restricted and unrestricted cash and cash equivalents and loan participations.
At December 31, 2020 cash equivalents and short-term investments in non-marketable securities had
maturities within 15 days and all loan participations mature within 4 to 5 years.
The fair value of the LLC’s holdings is subject to market risk, arising from movements in market variables
such as interest rates and credit risk. Cash equivalents of $128,553 (in thousands) are included in “Cash
and cash equivalents” in the Statement of Financial Condition and are classified within level 1 of the fair
value hierarchy.
The estimated fair value for loan participations, which are recorded at the cost of purchase, plus capitalized
interest, less any principal paydowns in the Statement of Financial Condition, is $14,038,342 (in thousands)
at December 31, 2020. Because external price information is not available, a market-based discounted cash
flow model is used to value loan participations. Key inputs to the model include market spread data for
13
MS Facilities LLC
Notes to the Financial Statements
each credit rating, collateral type, and other relevant contractual features. Because there is lack of
observable pricing information, the loan participations are classified within level 3.
The following table presents Main Street’s loan participation activity from May 18, 2020, the LLC’s
inception date, to December 31, 2020 (in thousands):
MSELF
Principal amount outstanding, beginning of period
$
Loan participations purchased
1,714,357
Loan participations principal paydowns
$
Loan participations, principal amount outstanding1
Principal and interest receivable
2,546,157
(82)
NOELF
-
$
12,201,275
NONLF
-
$
-
Total
-
39,915
$
16,501,704
(1,199)
-
(9)
2,603
6,084
-
21
9,554
$ 1,715,203
$ 2,548,678
$ 12,206,160
39,927
$ 16,509,968
9,180
(316,112)
2
$
846
6,326
Allowance for loan losses
MSPLF
-
-
Capitalized interest
Loan participations, net of allowance, December 31, 2020
MSNLF
-
$ 1,405,417
(402,350)
$ 2,155,508
$
-
$
34,528
54
(1,691,596)
$ 10,549,092
$
1
Reported at principal amount outstanding, including interest capitalized in accordance with contractual schedules and principal paydowns.
2
Reported at principal amount outstanding, net of allowance and including interest receivable.
-
(3,228)
$
36,753
(1,290)
50,088
(2,413,286)
$ 14,146,770
(4) ALLOWANCE FOR LOAN LOSSES
Management’s estimate of probable losses in the LLC’s loan portfolio is recorded in the allowance for loan
losses (the “Allowance”) and the reserve for unfunded commitments. On a quarterly basis, the LLC
evaluates the adequacy of the Allowance by performing reviews of certain individual loans, analyzing
changes in the composition, size and delinquency of the portfolio, reviewing previous loss experience and
considering current and anticipated economic factors.
The Allowance is established in accordance with the LLC’s credit reserve policies and the adequacy of the
reserve is reviewed and approved by the LLC Credit Subcommittee. The Allowance is maintained at a level
that the LLC considers reflective of probable losses and is established through charges to earnings in the
form of a provision for loan losses.
The evaluation of the adequacy of the Allowance and reserve for unfunded commitments is primarily based
upon internal risk rating models that assess probability of default, loss given default and exposure at default
for each loan. The models are primarily driven by individual borrower financial characteristics, such as
measures of profitability, leverage and interest coverage. The models are validated against historical
industry experience. Participations were grouped using North American Industry Classification System
(“NAICS”) codes into Services and Non-services segments for rating purposes. The Services segment
includes and is not limited to industries such as accommodation and food services, retail, health care,
information, and professional scientific and technical services. The Non-services segment includes and is
not limited to manufacturing, construction, and agriculture, forestry, fishing, and hunting. Given significant
differences in historical and expected performance, models differ for service and non-service industry loans.
Loan participations are pooled into internal risk rating categories. The allowance considers relevant
estimates of probability of default (“PD”), loss given default (“LGD”) and exposure at default (principal
amount outstanding) factors in light of credit ratings, and other loan characteristics (e.g. collateral
positions). A formula-based credit evaluation approach is applied primarily by loss factors, which includes
estimates of incurred losses over an estimated loss emergence period ("LEP"), assigned to each risk rating
pool. Qualitative factors (including changes in economic and business conditions) are assessed so that loss
14
MS Facilities LLC
Notes to the Financial Statements
rates (product of PD and LGD) appropriately reflect risks within the then-current environment. Additional
overlays can be made based upon additional factors.
After the aggregation of individual borrower incurred loss calculations, the Allowance may be adjusted to
reflect the LLC’s current assessment of various qualitative risks, factors and events that may not be
measured in the analysis, with particular consideration being given to changes in economic conditions, the
potential for adverse selection risk in an emergency lending facility, and industry concentrations within the
portfolio. The process to determine the allowance for loan losses requires the LLC to exercise considerable
judgment regarding the risk characteristics of the loan portfolios and the effect of relevant internal and
external factors. While the LLC evaluates currently available information in establishing the allowance for
loan losses, future adjustments to the allowance for loan losses may be necessary if conditions differ
substantially from the assumptions used.
For loans with an outstanding balance of $15 million or greater and meeting certain triggers tied to
performance, credit rating, or value, the LLC conducts further analysis to determine the probable amount
of loss and establishes a specific allowance for the loan, if appropriate. A specific allowance is generally
set for those loans that meet the threshold and fall in the Ca rating category, indicating that collection is
doubtful. However, other factors such as payment history, may also lead to an impairment assessment.
When a loan is deemed to be impaired, the LLC estimates the impairment amount by comparing the loan’s
carrying amount to the estimated present value of its future cash flows, the fair value of its underlying
collateral, or some combination as appropriate. Refer to Note 5 for further discussion on risk ratings in the
loan participation portfolio.
Amounts determined to be uncollectible are deducted from the Allowance and subsequent recoveries, if
any, are added to the Allowance.
In addition to the Allowance, the LLC also estimated probable credit losses associated with unfunded loan
commitments, or those loans for which the LLC had issued a binding commitment to purchase the
participation that was outstanding as of December 31, 2020. Potential losses associated with these loans
were evaluated utilizing the same method for on balance sheet loans and recorded as a reserve for unfunded
loan commitments. See Note 9.
The Allowance and the reserve for unfunded loan commitments are reported in the Statement of Financial
Condition as “Allowance for loan losses” and in “Other liabilities,” respectively. Provision for loan losses
related to the portfolio and the unfunded loan commitments are reported in the Statement of Operations as
“Provision for loan losses” and “Other non-interest expense,” respectively.
a.
Charge-Offs and Non-Performing Assets
As of December 31, 2020, there have been no amounts contractually due on loan participations, no loan
participations are delinquent, and there have been no charge-offs, troubled debt restructurings, or
recoveries.
Nonperforming loans are those on which accrual of interest has been suspended. Loans are placed on
nonaccrual status and considered nonperforming when full payment of principal and interest is in doubt.
When the LLC places a loan on nonaccrual status, the accrued unpaid interest receivable is offset through
the provision for loan losses and all future income accruals are suspended. Interest collections on
nonaccruing loans for which the ultimate collectability of principal is uncertain are generally applied to first
reduce the carrying value of the loan. Otherwise, interest income may be recognized to the extent of the
15
MS Facilities LLC
Notes to the Financial Statements
cash received. A loan may be returned to accrual status if (i) principal and interest payments have been
brought current, and the LLC expects repayment of the remaining contractual principal and interest, (ii) the
loan has otherwise become well-secured and in the process of collection, or (iii) the borrower has been
making regularly scheduled payments in full for a certain period of time and the LLC is reasonably assured
that the loan will be brought fully current within a reasonable period. Loan participations are generally
placed on nonaccrual status when contractually past due 90 days or more, or earlier if management believes
that the probability of collection is insufficient to warrant further accrual. As of December 31, 2020,
principal amount outstanding of loan participations placed on nonaccrual was approximately $2.0 billion.
The following table shows the breakout of the allowance for loan losses at December 31, 2020 (in
thousands):
Allowance for loan losses
Individually evaluated
General allowance
Nonaccrual interest allowance
Total allowance
Service industry
$
907,178
1,039,253
5,692
$
1,952,123
Total loan participations, individually
evaluated
Total loan participations, general allowance
Total principal and interest receivable
Total evaluated balance
Allowance (% of evaluated balance)
Reserve for unfunded commitments
$
$
$
Non-service
industry
$
78,032
382,539
592
461,163
$
1,298,814 $
10,880,518
36,791
12,216,123 $
16.0%
9,009
$
$
$
166,123 $
4,164,513
13,297
4,343,933 $
10.6%
1,320
$
Total
985,210
1,421,792
6,284
2,413,286
1,464,937
15,045,031
50,088
16,560,056
14.6%
10,329
(5) RISK PROFILE
As of December 31, 2020, the LLC’s portfolio of investments consisted primarily of cash equivalents and
short-term investments. The value of the LLC’s cash equivalents and short-term investments with overnight
maturities totaled approximately $32 billion as of December 31, 2020.
The average internal risk rating for loan participations held as of December 31, 2020 was equivalent to a
Moody’s rating of B2. The following table shows rating distribution using internally derived risk ratings
on a scale comparable to a Moody’s rating scale as of December 31, 2020:
Rating
Ba or higher
B
Caa
Ca
Total
% of Loan
participations,
principal amount
outstanding
27%
41%
20%
12%
100%
16
MS Facilities LLC
Notes to the Financial Statements
In addition to loan participations held at December 31, 2020, a total of $38.6 million in loan participations
were included in unfunded commitments at period end.
Cash equivalent holdings of approximately $129 million are not rated and short-term investments in nonmarketable securities of approximately $31.9 billion are rated as government/agency. All these holdings
are reflected in the Statement of Financial Condition.
(6) LOANS PAYABLE TO THE FEDERAL RESERVE BANK OF BOSTON
FRBB has extended loans to the LLC and the loan proceeds financed the LLC’s purchase of eligible loan
participations. In addition to loans for the purchase of eligible assets, the LLC may borrow from the FRBB
for temporary liquidity needs.
The assets of the LLC are used to secure the loans from FRBB. These assets include loan participations and
the restricted assets that the Treasury has contributed to the LLC to function as credit protection for FRBB’s
loans to the LLC.
Each loan made by the FRBB to the LLC bears interest, accrued daily, at a rate per annum equal to the
interest rate on excess reserves in effect on such day. Repayment of the principal and interest on the loans
is made from proceeds of payments on, or maturity of, the purchased eligible assets.
The LLC’s loans payable to FRBB is reported as “Loans payable to FRBB” in the Statement of Financial
Condition. The related interest payable is reported as “Interest payable” in the Statement of Financial
Condition; the amount of interest expense during the period is reported as “Loans interest expense” in the
Statement of Operations. Loans outstanding to FRBB as of December 31, 2020 were (in thousands):
Loan Type
Funding
Operating
Total
Loans payable to
FRBB
$
$
16,501,590
16,501,590
Interest Payable
$
1,722
$
1,722
Interest Rate
0.1%
Maturity Dates
9/30/2025 to 12/31/2025
(7) EQUITY CONTRIBUTIONS
As of December 31, 2020, the preferred equity member contributed $37.5 billion in capital as credit
protection to the LLC for loans needed to fund purchases of loan participations or operations of the LLC,
and the managing member was deemed to have contributed $10 in capital. The preferred equity member,
subject to the consent and agreement of the managing member in its sole discretion, may make additional
contributions to the capital of the LLC.
Preferred equity member contributions are held in cash deposits and non-marketable securities, as mutually
agreed upon by the managing member and the preferred equity member and consented to by FRBB, and
are reported as “Members’ contributions” in the Statement of Changes in Members’ Equity.
(8) DISTRIBUTION OF PROCEEDS
Amounts available, due to interest, fees, payments on investments and other receipts of income are applied
on the dates and in the order of priority set forth in the credit agreement between the LLC and FRBB, with
Treasury contributed equity absorbing all losses, if any.
17
MS Facilities LLC
Notes to the Financial Statements
At the conclusion of the MSLP, when the credit agreement has been terminated and all obligations of the
LLC repaid, any remaining net assets will be allocated and distributed in accordance with the limited
liability company agreement of the LLC. That agreement contemplates the distribution, upon the LLC’s
liquidation, of the preferred equity account balance, inclusive of any investment earnings accrued on those
amounts, and 90 percent of remaining net assets to the preferred equity member and 10 percent of remaining
net assets to the managing member.
The following table presents the allocation of undistributed net operating income (loss) to equity members
as of December 31, 2020 (in thousands):
Managing
member
Net operating loss
$
-
Preferred
equity member
$(2,402,405)
Total undistributed
net operating loss
$
(2,402,405)
(9) COMMITMENTS AND CONTINGENCIES
As of December 31, 2020, the LLC entered into commitments to purchase loan participations that had not
yet been funded or fully purchased by the LLC. Since a commitment may expire without resulting in a loan
and these agreements had not been fully executed, they are not reflected in the Statement of Financial
Condition. In accordance with ASC 825-10, Financial Instruments and ASC 450-20, Loss Contingencies,
the LLC recorded a contingent liability for possible credit losses associated with these unfunded loan
commitments. Total contingent liabilities as of December 31, 2020 were approximately $10.3 million
associated with total unfunded commitments of approximately $38.6 million. The contingent liability is
included in “Other liabilities” in the Statement of Financial Condition.
The LLC has agreed to pay the reasonable out-of-pocket costs of certain service providers incurred in
connection with their duties. The LLC has also generally agreed to indemnify its service providers for
certain losses, expenses, and other liabilities under the agreements it has with those service providers,
subject to customary exceptions such as for losses caused by the service providers’ misconduct. These
indemnity obligations survive termination of those agreements. As of December 31, 2020, the LLC did not
have any prior claims or losses pursuant to these agreements. This risk of loss was remote.
(10) SUBSEQUENT EVENTS
The LLC ceased purchasing participations in eligible loans on January 8, 2021. As a result, the LLC
returned a portion of the Treasury’s equity investment in the LLC. The return of these funds occurred on
January 8, 2021. This interim distribution reduced the Treasury’s preferred equity to approximately the
maximum risk to the FRBB. The following table presents on a pro forma basis the effect of the interim
distribution of capital on members’ equity (in thousands):
18
MS Facilities LLC
Notes to the Financial Statements
Members’ contributions, December 31, 2020
Return of Treasury equity investment
Members’ contributions, as adjusted
Members' contributed
equity
37,500,000
$
(20,927,945)
16,572,055
$
Subsequent events were evaluated through March 17, 2021, which is the date that these financial statements
were available to be issued.
19