Fed Widens Main Street Loan Program to Reach More Businesses

(Bloomberg) -- The Federal Reserve is expanding the scope of its lending facility for small and medium-sized businesses to include more borrowers as it seeks to keep credit flowing to the U.S. economy during the coronavirus pandemic.

Businesses with up to 15,000 employees or up to $5 billion in annual revenue will now be able to access loans through the Main Street Lending Program, doubling the revenue limit and raising the employee limit by 50%, the central bank said Thursday. A start date will be announced soon.

The move follows calls from U.S. lawmakers and the business community for the program to be widened after the Fed initially announced terms of who would qualify -- including heavy lobbying from key industries that have been hammered by the economic lock down. A comment period following publication of the program's initial terms on April 9 yielded more than 2,200 letters from individuals, businesses and nonprofits, the Fed said.

It is one of the most ambitious emergency-lending facilities launched so far by the Fed to aid the U.S. as the economy shutters during the pandemic. It can buy up to $600 billion in eligible loans from potentially hundreds of companies -- each with their own unique set of risks -- and extends coverage to more highly-indebted borrowers than initially envisaged.

The breadth of the package is in keeping with Fed Chair Jerome Powell's intent to assure credit support is extended to small businesses critical to U.S. employment, which is being savaged by the lock down with more than 30 million people claiming unemployment benefits in the last six weeks.

Political Capital

Powell “has been in Washington a long time. He understands that the Federal Reserve lost some political capital in 2008 and 2009 as it was seen helping Wall Street and not Main Street,” said Vincent Reinhart, chief economist at Standish Mellon Asset Management in Boston. “He is not going to make that same mistake.”

Unlike the government's Paycheck Protection Program to help support small businesses during the crisis, the Main Street facility loans need to be paid back. In contrast, the PPP loans can be forgiven if firms comply with rules such as maintaining or rehiring workers. The Fed said participation may not be as high as the PPP program because these loans are full-recourse, meaning the lenders have a claim to the company's assets if they aren't paid back.

The minimum loan size for Main Street was reduced to $500,000 from $1 million, and another loan option for companies with more leverage was added, meaning the program now has three facilities: new loans, priority loans and expanded loans.

Under the option for more-levered firms, lenders retain a 15% share on loans that when added to existing debt do not exceed six times earnings adjusted for interest, taxes and depreciation.

Three Options:

The New Loan Facility has a maximum loan size of $25 million or four times 2019 adjusted EBITDA. Lenders will retain a 5% stake in the loan. The minimum loan size is $500,000.
The Priority Loan Facility has a maximum loan size of $25 million or six times 2019 adjusted EBITDA. Lenders will retain a 15% stake and the minimum loan size is $500,000.
The Expanded Loan Facility will lend out as much as $200 million, 35% of a borrower's outstanding debt or six times 2019 adjusted EBITDA. Lenders will retain a 5% stake. The minimum loan size is $10 million.

In 2019, middle-market borrowers on average carried net total leverage exceeding five times, according to Covenant Review. Still, borrowers and their sponsors may elect not to pursue the loans, which carry restrictions related to stock repurchases, dividends and employee retention.

‘Commercially Reasonable'

The Fed specified that participants in the three Main Street facilities must “make commercially reasonable efforts to maintain its payroll and retain its employees.” The language makes it such that companies don't have to keep a certain amount of employees on their payrolls, as they do in the Paycheck Protection Program, in order to borrow.

The Fed said firewalls will be observed between the lending programs and its supervisory staff. That's because the Fed has an inherent conflict in this and other bank lending programs: it is a regulator that routinely scrutinizes how banks categorize loans in terms of performance and yet now it is becoming a stakeholder in a large-scale loan program.

The Fed also said that it permitted London Interbank Offered Rate-based loans in the interest of speed and after it received comments in favor of that benchmark, though it is including a fall-back provision to use the Secured Overnight Financing Rate if Libor fades in importance. The Fed has for many months has been trying to encourage banks to shift to SOFR.

Oil Industry

Treasury Secretary Steven Mnuchin said last week he's considering an additional lending facility for troubled U.S. energy companies. The adjustments to the Main Street program announced Thursday might encompass some of those firms. The central bank's reading of its emergency lending authority has been that it doesn't permit the central bank to erect a facility to support a specific industry.

Oil industry allies on Capitol Hill welcomed the changes.

Senator Ted Cruz, a Republican from Texas, is “encouraged to see the Fed taking these steps,” according to an emailed statement from his office. “Without providing this critical lifeline, the U.S. risks bankrupting a vast majority of its roughly 9,000 energy producers, adding hundreds of thousands of blue-collar workers to the unprecedented number of Americans who have already lost their jobs as a result of this crisis.”

The central bank has announced nine emergency loan programs to help keep credit flowing during the pandemic, of which four are now up and running. Once the Main Street program is operational, policy makers will be monitoring demand carefully.

“To the extent the Main Street facility becomes a success and needs more capital, I would absolutely give more capital to that,” Mnuchin said Wednesday during a video conference with reporters.

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