The Federal Reserve is expanding the scope of its Main Street Lending Programme to include more borrowers as it seeks to keep credit flowing to the US economy during the coronavirus pandemic.
Businesses with up to 15,000 employees or up to $5 billion (Dh18.3bn) in annual revenue will now be able to access loans through the programme, in effect doubling the revenue limit from previous guidelines and raising the employee limit by 50 per cent, the central bank announced Thursday.
It also said a start date for the programme, which can support lending of up to $600bn, will be announced soon.
The move follows calls for the programme to be widened from US lawmakers and the business community 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 initial term sheet on April 9 yielded more than 2,200 letters from individuals, businesses and nonprofits, the Fed said.
Unlike the government’s Paycheck Protection Programme 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 programme 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.
Under the new loan option for more-levered firms, lenders would retain a 15 per cent share on loans that when added to existing debt do not exceed six times earnings adjusted for interest, taxes and depreciation.
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.
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 Programme, in order to borrow.
The Fed said firewalls will be observed between the lending programmes and its supervisory staff. That’s because the Fed has an inherent conflict in this and other bank lending programmes: it is a regulator that routinely scrutinizes how banks categorise loans in terms of performance and yet now it is becoming a stakeholder in a large-scale loan programme.
The Fed also said that it permitted London Interbank Offered Rate-based loans in the interest of speed and after it received comments in favour 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 the SOFR.
Treasury Secretary Steven Mnuchin said last week he’s considering an additional lending facility for troubled US energy companies. The adjustments to the Main Street programme 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.
“To the extent the Main Street facility becomes a success and needs more capital, I would absolutely give more capital to that,” Mr Mnuchin said Wednesday during a video conference with reporters.
The central bank has announced nine emergency loan programmes to help keep credit flowing during the pandemic, of which four are now up and running. Once the Main Street programme is operational, policy makers will be monitoring demand carefully.
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 US risks bankrupting a vast majority of its roughly 9,000 energy producers, adding hundreds of thousands of blue-collar workers to the unprecedented number Americans who have already lost their jobs as a result of this crisis.”
