Main Street Lending Program Expands Access to Capital For Mid-sized to Large Companies

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The Federal Reserve announced on April 9, 2020 the Main Street Lending Program for firms that are too large to receive Payroll Protection Program (PPP) loans, but too small to access low-cost public debt markets.

The program has been in the works since Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in late March.  The details must be finalized in the next few weeks.  However, the Federal Reserve has issued initial rules and expect to quickly refine the program and formally deploy capital.

Legal basis.  The Board of Governors of the Federal Reserve System receives authority from both the CARES Act as well as legacy statutes under the Dodd-Frank legislation following the 2008 financial crisis.  Many of the qualifications and conditions for the Main Street Lending Program financing will come from the Federal Reserve Act, as amended by the legislation from the prior financial crisis. 

New programs.  The Federal Reserve announced two parallel loan programs - Main Street New Loan Program and the Main Street Expanded Loan Program.  The Main Street New Loan Program will provide new loans that are seeded with Federal funds, fully-funded by banks, and largely assumed by the Federal government.  The Main Street Expanded Loan Program will provide “supersize me” credit expansion to borrowers that already had outstanding bank loans before April 8, 2020.   The Expanded Loan Program will provide similar seeding and funding, but targeted only at increasing the borrowings under existing business loans. 

How it works.  The money will initially come from the borrowing power of the U.S. Treasury and the printing press of the Federal Reserve banks.  Then, the funds will be provided to banks, which will in turn lend the money to firms.  The government will purchase a 95% interest in the loans at par value from the lenders on a pari passu basis.  The private bank lenders keep 5% of the loans and 5% of the risk that comes with it.  Thus, banks can lend money when they do not have the money in the bank vault, since they can count on the Federal government to remit 95% of the money after-the-fact.  For the Supersize-me Expanded Loan Program, the Federal Reserve will buy the additional funds lent on top of an existing loan (but not the prior underlying loan). 

How much and who pays.  The CARES Act authorized $454 billion of funds for direct loans to companies, indirect loans through banks, and market back-stops through open-market purchases of public debt.  One portion of the allocation is the creation of a special purpose entity to hold $75 billion.  These funds will be placed in commercial banks and other regulated financial institutions.  These banks will in turn lend $5 to $10 dollars for every dollar received from the special purpose entity.  As a result, this program will generate up to $600 billion of additional lending.  This $75 million of seed money will be allocated to each of the New Loan Program and the Expanded Loan Program.

Eligible lenders.  Eligible lenders are insured depository institutions, bank holding companies, and savings banks.  Conspicuously absent: non-bank lenders that have become nearly ubiquitous in middle market and private equity lending since the financial crisis.  The focus on regulated lenders is a refrain from prior crises: The government can pull many regulatory strings over insured and highly-regulated institutions, versus uninsured and unregulated lenders that receive no insurance from the government, and far fewer restrictions on their activities.  Banks may make loans under both the New Loan Program and the Expanded Loan Program.

How Fast.  In the Payroll Protection Program, the government is trying to get money to companies as fast as water on a burning building.  However, the Main Street programs will be more deliberate.  Loans will not be forgiven; documentation will be more burdensome; oversight by banks will be more intense.  As a result, rules will not be written and applied as quickly.  While there is no precise timeline for these loans, the capital may be deployed within several weeks or several months.

Deadlines for application.  Funds are available until September 30, 2020.

Eligible Borrowers – both programs.  Firms that meet the following criteria:

Use of Funds.  Borrowers must commit to the following regarding the use of funds:

Required lender covenants.  May not cancel or reduce any existing lines of credit outstanding to the borrower.   

Basic Loan Terms – New Loan Program.  The general terms of the loans under the New Loan Program are as follows:

Fees – New Loan Program.

Basic Terms – “Supersize Me” Expanded Loan Program.

Fees – Expanded Loan Program.

Coordination with other government loans.

Basic loan covenants.

Special compensation and financing covenants.

Compensation restrictions.

During the term of the loan and for one year thereafter:

The Federal Reserve is accepting comments regarding these loan programs through April 16, 2020.  Shortly thereafter, the Federal Reserve will likely clarify the rules of the programs and initiate the formal process of making funds available to banks and borrowers.

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