The Federal Reserve may have to lower the price for businesses to access its Main Street Lending Program and tweak other details so that more firms can tap into the $600 billion emergency loan pool.
That is the assessment that the Fed received from several key trade groups and lawmakers of both parties, who suggested ways the Fed can improve on its Main Street facility to ensure it helps more businesses affected by the coronavirus pandemic.
The lending facility marks a major step for the U.S. central bank, taking it further from its conventional role of setting interest rates into developing a loan program aimed at more directly helping small and medium-sized businesses.
The Fed is relying on banks to operate the program. Banks will make four-year loans to businesses that have at most 10,000 employees or $2.5 billion in revenues 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, the Main Street loans are not forgivable and will need to be paid back, although any payments are deferred for a year.
The Main Street program is not up and running yet, and the Fed is reviewing roughly 2,000 comments it received suggesting potential changes. Below are five key issues to watch as the Fed prepares to launch the program.
Minimum loan size
Under the preliminary terms the Fed released this month, companies would need to borrow at least $1 million to participate in the Main Street program, a figure that several stakeholders said is too high and may shut out businesses that require smaller loans.
The American Bankers Association told the Fed that small businesses "often have borrowing needs far below $1 million, even in healthy economic conditions," suggesting the Fed lower the minimum size of loans to $50,000.
Sen. Mike Crapo, R-Idaho, who chairs the Senate Banking, Housing and Urban Affairs Committee, also suggested adjusting the minimum figure, as did House Financial Services Committee Chair Maxine Waters, D-Calif. The current $1 million minimum "may skew the program toward larger entities and should be revised to have more of an emphasis on small and minority-owned businesses that may have trouble accessing credit," she wrote.
The Fed may also need to lower the interest rate on those loans to ensure more businesses can participate, said Joe Brusuelas, chief economist at the accounting firm RSM US LLP, which focuses on middle-market firms.
Right now, the adjustable rate on those loans is tied to the new secured overnight financing rate, or Sofr, which is currently at 0.01%, plus an extra 250 to 400 basis points.
Lowering the interest rate to Sofr plus 100 to 350 basis points would draw more interest from businesses, helping ensure some smaller firms do not "fall between the cracks," Brusuelas said in an interview.
Switch to Libor
Banking industry groups are also asking the Fed to avoid using Sofr as the benchmark rate in the Main Street lending program and instead stick with the London interbank offered rate, or Libor.
U.S. officials and market participants developed the Sofr rate as an alternative to Libor, which is gradually being phased out after a rate-rigging scandal in London sparked an uproar. But most U.S. corporate loans still use Libor as their benchmark today, the Bank Policy Institute wrote.
"As a result, most borrowers are familiar with LIBOR-based lending and have not yet prepared for a transition to an alternative rate," the group wrote. "Requiring that eligible loans use Sofr would result in a need for significant borrower education, adding complexity at an already challenging time."
The Fed may also consider adjusting the criteria for firms to become eligible for Main Street loans and lift hurdles that would prevent some from participating.
Waters, for example, said the Fed needs to 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 may be shut out of Main Street loans because they either have too many employees or their 2019 revenues were above $2.5 billion. Although investment-grade firms can turn to other Fed programs for funding, nearly 200 firms are not investment grade and therefore are not currently eligible for Fed assistance, the group wrote.
"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 impacted by the pandemic," the NRF wrote.
The Independent Petroleum Association of America also wrote a letter to the Fed asking for changes to a provision that says borrowers "must commit to refrain from using" their loans to repay existing debts. IPAA President and CEO Barry Russell wrote that providing flexibility on that provision may help avoid defaults in the industry, which has been squeezed by historically low oil prices and a slump 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 on by Reuters.
Another group seeking changes to the Main Street program is the National Venture Capital Association, which wrote that the current program "risks excluding virtually all companies who are in their growth phases," including startups backed by venture capital firms.
Right now, companies that get new Main Street loans must ensure that their total debt loads do not exceed four times their 2019 earnings before interest, taxes, depreciation and amortization.
"The absence of free cash flow does not mean that the company is not in good financial standing," NVCA President and CEO Bobby Franklin said. "Rather, the fact that the venture-backed growth company has capital and an equity valuation means the business has real promise."
The CARES Act had said the Fed and Treasury Department should "endeavor" to implement a lending facility for businesses of between 500 and 10,000 employees but that borrowers would face some restrictions, such as retaining at least 90% of their employees, remaining neutral in union organizing efforts and agreeing to not outsource or offshore jobs.
But the Fed and Treasury were not required to follow those restrictions line-by-line in setting up their lending programs, and the limitations are different under the actual Main Street term sheet. The program does impose restrictions on compensation, share repurchases and dividends, and it says borrowers need to make "reasonable efforts" to retain their employees.
Sen. Elizabeth Warren, D-Mass., is pressing the Fed to add stronger commitments such as one to maintain at least 95% of their payrolls and another to implement a minimum wage of $15 an hour.
"Absent these protections, it is not clear how these bailouts will help American families and workers," she wrote.
The U.S. Chamber of Commerce, meanwhile, asked the Fed to avoid restrictions on dividends and share buybacks for companies that get Main Street loans, as those limitations "would only exacerbate the financial squeeze that many companies are currently experiencing."
"Furthermore, investors — particularly retail investors that rely on dividend income for retirement savings — would be unduly harmed if thousands of companies were forced to suspend capital distributions for several years," the group wrote.