The Federal Reserve may need to lower the price for businesses to access its Main Street lending program and change other details so more businesses can tap into the $ 600 billion emergency loan pool. of dollars.
This is the assessment the Fed has received from several key trade groups and lawmakers on both sides, who have suggested ways the Fed can improve its Main Street facility to ensure it helps more businesses. affected by the coronavirus pandemic.
The loan facility marks a major step for the US central bank, moving it away from its conventional role of setting interest rates to develop a lending program aimed at helping small and medium-sized businesses more directly.
The Fed relies on the banks to make the program work. Banks will provide four-year loans to companies with no more than 10,000 employees or $ 2.5 billion in revenue in 2019. The Fed will then buy 95% of each loan, with banks keeping the remaining 5%. Unlike the Small Business Administration’s paycheck protection program, Main Street loans are not forgivable and will need to be repaid, although all payments are deferred for one year.
the Main Street Program is not yet operational and the Fed is reviewing about 2,000 comments it received suggesting potential changes. Below are five key questions to watch as the Fed prepares to launch the program.
Minimum loan amount
According to preliminary terms released by the Fed this month, companies should borrow at least $ 1 million to participate in the Main Street program, a figure that several stakeholders say is too high and could exclude companies that need it. smaller loans.
American Bankers Association Told the Fed that small businesses “often have borrowing needs well below $ 1 million, even in sound economic conditions,” suggesting that the Fed lower the minimum loan amount to $ 50,000.
Senator Mike Crapo, R-Idaho, who chairs the Senate Committee on Banking, Housing and Urban Affairs, also suggested by adjusting the minimum figure, as did the Chair of the House Financial Services Committee, Maxine Waters, D-Calif. The current minimum of $ 1 million “may skew the agenda in favor of large entities and should be revised to put more emphasis on small businesses and minority-owned businesses that may have difficulty accessing credit”, she declared. wrote.
The Fed may also need to lower the interest rate on these loans to ensure more businesses can participate, said Joe Brusuelas, chief economist at accounting firm RSM US LLP, which focuses on businesses in the United States. middle market.
Currently, the adjustable rate for these loans is tied to the new Guaranteed Overnight Funding Rate, or Sofr, which is currently 0.01%, plus an additional 250 to 400 basis points.
Lower interest rate at the Sofr increased from 100 to 350 basis points would draw more interest from business, which helps ensure that some small businesses do not “fall through the cracks,” Brusuelas said in an interview.
Switch to Libor
Banking groups are also asking the Fed to avoid using the Sofr as a benchmark rate in the Main Street lending program and instead stick to the London Interbank Offered Rate, or Libor.
U.S. officials and market participants have developed the Sofr rate as an alternative to Libor, which is being phased out after a rate-rigging scandal in London sparked an uproar. But most US business loans still use Libor as a benchmark today, Bank Policy Institute wrote.
“As a result, most borrowers are familiar with LIBOR-based loans and have not yet prepared for a transition to an alternative rate,” the group wrote. “Requiring eligible loans to use Sofr would create a significant need for borrower education, which would add complexity to an already difficult time.”
The Fed could also consider adjusting the criteria for businesses to become eligible for Main Street loans and removing barriers that would prevent some from participating.
Waters, for example, said the Fed must ensure that nonprofit groups, churches and universities are not “left behind” in its lending efforts.
The National Retail Federation, which represents both small and large retailers, wrote that many retailers could be excluded from Main Street loans because they have too many employees or their 2019 revenues were over $ 2.5 billion. Although investment grade companies can look to other Fed programs for financing, nearly 200 companies are not investment grade and therefore are not currently eligible for Fed assistance. writes the group.
“Expanding the eligibility criteria for these programs will provide much needed support to some of America’s most recognizable brands and, most importantly, their workers who have been severely affected by the pandemic,” the NRF wrote.
The Independent Petroleum Association of America has also produced a letter to the Fed demanding changes to a provision that borrowers “must pledge not to use” their loans to repay existing debts. IPAA President and CEO Barry Russell wrote that offering flexibility on this provision could help avoid defaults in the industry, which has been squeezed by historically low oil prices and a drop in demand for travel.
“This can only be helpful in containing the negative economic impact of the COVID-19 crisis,” Russell wrote in the letter, which was first reported by Reuters.
Another group that wants to make changes to the Main Street program is the National Venture Capital Association, which wrote that the current program “risks excluding virtually all companies that are in the growth phase”, including startups backed by venture capital firms.
Right now, businesses getting new loans on Main Street need to make sure their total debt does not exceed four times their 2019 profits before interest, taxes, depreciation, and amortization.
“The lack of free cash flow doesn’t mean the company is not in good financial health,” said Bobby Franklin, president and CEO of NVCA. “On the contrary, the fact that the venture capital-backed growth company has capital and an equity valuation means that the company is really promising.”
The CARES Act had said that the Fed and the Treasury Department should “strive” to set up a loan facility for businesses with 500-10,000 employees, but borrowers would face certain restrictions, such as keeping at minus 90% of their employees, remain neutral in the union. organize efforts and agree not to outsource or outsource jobs.
But the Fed and the Treasury weren’t required to follow these restrictions line-by-line when setting up their lending programs, and the limitations are different depending on the actual Main Street conditions sheet. The program places restrictions on compensation, share buybacks and dividends, and it says borrowers should make “reasonable efforts” to retain their employees.
Senator Elizabeth Warren, D-Mass., Is pressing the Fed to add stronger commitments such as one to maintain at least 95% of their payroll and another to implement a minimum wage of $ 15 an hour.
“In the absence of these protections, it is not clear how these bailouts will help American families and workers,” she wrote.
The United States Chamber of Commerce, for its part, request the Fed to avoid restrictions on dividends and share buybacks for companies that get Main Street loans, as these restrictions “would only exacerbate the financial pressure that many companies are now experiencing.”
“In addition, investors, especially retail investors who rely on dividend income to save – would be unduly harmed if thousands of companies were forced to suspend distributions of capital for several years, ”the group wrote.