The Federal Reserve's Main Street Lending Program, aimed at companies with up to $5 billion in annual revenue or fewer than 15,000 employees, will launch within days. And it just got more attractive for smaller companies.
The central bank on Monday announced a number of changes that widen eligibility for companies and sweeten loan terms, making borrowing more palatable for smaller companies. The Fed program is expected to run directly through federally insured depository institutions, including banks, savings associations, and credit unions, and the Fed says it will support up to $600 billion in new loans. Business owners who have received PPP loans are permitted to apply, but any business that applies must demonstrate that it was in good order before the Covid-19 crisis.
"Supporting small and midsize businesses so they are ready to reopen and rehire workers will help foster a broad-based economic recovery," Federal Reserve chair Jerome H. Powell said in a statement regarding the program changes. "I am confident the changes we are making will improve the ability of the Main Street Lending Program to support employment during this difficult period."
Just as before, the Fed plans to support three lending facilities: one for new borrowers, one for borrowers who may have existing debt but lower fiscal needs, and one for borrowers who have an existing loan or credit line with outsize fiscal needs.
The changes to the Main Street Lending Program are as follows:
- Increases the maximum loan size. Banks can now lend up to $35 million or $50 million in new loans or refinance up to $300 million in an existing loan if a firm's total debt, relative to its 2019 earnings, is below noted thresholds. To access one of the three loan facilities, a company needs to have a minimum of just under $42,000 in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2019 and no debt. Previously, companies had to have generated at least $83,000 in adjusted 2019 EBITDA to be eligible, and the maximum loan values were $25 million and $200 million.
- Lowers the minimum loan amounts. The minimum borrowing is now $250,000, down from $500,000 for two of the programs. The third offers loans that start at $10 million.
- Extends the repayment period to five years from four years. The new rules also allow for two years of deferred payments and one year with no interest charges. The repayment terms are now standard across the three facilities: Borrowers must repay 15 percent in years three and four. In year five, borrowers must repay 70 percent. Previously, repayment terms differed by facility.
- Raises the Fed's participation to 95 percent for all loans. Banks need only keep 5 percent of a loan's value on their books. The rest will get sold to a special purpose vehicle, housed by the Fed. Previously, one of the loan facilities required banks to hold 15 percent of the loan's value.
In recent weeks, lawmakers held hearings with business groups and financial experts, questioning the program's uptake, which financial professionals suggested would be limited because of the loan restrictions. Main Street loans restrict executive compensation and require that companies make "reasonable efforts" to retain their employees during the loan term, among other things.
The business lobby had been pushing for changes, which included unraveling the compensation limits, extending the repayment period to six years from four years, reducing the minimum loan amount to $250,000 from $500,000, lowering interest rates or making them fixed, and making the repayment schedule more flexible.
While the business groups didn't get everything on their wish list, organizations such as the American Bankers Association expressed approval for the changes. "We appreciate the Federal Reserve's willingness to make additional changes to the Main Street Lending Program," Rob Nichols, the ABA president, said in a statement. "By adjusting the loan terms, including lowering the minimum loan size, more creditworthy small and midsize businesses should be able to access this program and hopefully weather the economic challenges caused by Covid-19."
The Main Street Lending Program was first announced on March 23 and a working proposal was unveiled on April 9. The program is funded with $75 billion in aid from the Coronavirus Aid, Relief, and Economic Security (Cares) Act.