More than a week after Congress approved the largest fiscal stimulus in U.S. history, many companies still don't know if it will provide the financial lifeline they need to stay afloat.
Since the legislation passed on March 27, industry groups have been pressing policymakers to ensure a large chunk of their firms can actually benefit from a major lending program at the heart of the new law. Under the CARES Act, the Treasury is getting $454 billion in funds to provide credit protection for the Fed's emergency lending operations, a backstop expected to lead to about $4.5 trillion in Fed lending.
Real estate groups, retailers and other sectors under pressure are closely watching for any guidance the Treasury and Fed will put out in the coming days, as the details will determine what kinds of businesses can get Fed loans to help them through the coronavirus pandemic. State and local governments, whose revenues are falling sharply and whose expenses are set to spike due to the pandemic, are also expected to get some chunk of the roughly $4.5 trillion in Fed loans.
Anthony Renzi, a partner at Akin Gump, said the firm is getting calls from companies of all sizes and industries on the issue.
"They're all looking at the programs, they all have need for this financing, and they're very interested in getting more information on how this works," Renzi said.
How quickly the agencies will roll out those details is unclear. The Treasury Department's initial focus has been on providing assistance to airlines and rolling out a separate $350 billion lending program with the Small Business Administration that launched today after some last-minute scrambling from agency officials.
Bert Ely, a bank consultant, said there will likely be similar "bumps along the road" as the Treasury and Fed lending efforts move forward, partly because the types of companies under major stress this time are much broader than during the 2007-09 financial crisis.
Under the loan programs, the Fed will be the so-called "lender of last resort" for those firms — essentially creating money so it can lend to businesses that were solvent before the pandemic but need cash to get through the current period. Those firms would have to put up collateral to get loans and would be required to pay them back after they are able to return to normal business operations.
The CARES Act requires the Treasury Department to invest $454 billion into the Fed's lending programs to protect the central bank against credit losses. Fed Chairman Jerome Powell told NBC's Today Show on March 26 that $1 of credit protection from Treasury "is enough to support $10 worth of loans" from the central bank, which is how the $454 billion that the CARES Act allocated to Treasury turns into roughly $4.5 trillion in overall lending from the Fed.
The two agencies already coordinated in that manner last month with the existing funds that Treasury had, leading to several Fed lending facilities that were aimed at easing liquidity strains in some critical financial markets. The new funds to Treasury will let the Fed expand those existing facilities and potentially launch new ones, such as a Main Street Business Lending Program that the central bank has been working on that is intended to complement the SBA program.
Municipal bond issuers — such as states, local governments and specialty districts that help finance infrastructure projects — are hoping that the Fed will use some of the $4.5 trillion in lending to launch a new Municipal Securities Purchasing Facility that will buy both shorter-term and longer-term muni bonds. That would expand the Fed's current focus on only shorter-dated municipal securities.
State and local governments are "on the frontlines of this national crisis," three groups that represent state treasurers, auditors and other government finance officers wrote in a March 31 letter to Treasury Secretary Steven Mnuchin and Powell.
"Absent support for the municipal debt market, state and local government budgets will be further stressed at the most inopportune time, particularly as revenues decline as a result of business closures and rising unemployment," the groups wrote.
Business groups are also eyeing the $4.5 trillion in Fed lending in hopes it will help companies that were solvent before the pandemic spread but whose revenues have frozen since.
Perhaps the loudest calls for assistance have come from the real estate industry, including nonbank mortgage servicers whose balance sheets would be strained if millions of borrowers are unable to pay their mortgages.
Industry groups had pushed for the CARES Act to include a provision directing the Fed to launch a liquidity facility specifically aimed at mortgage servicers. Although the final bill did not include that facility, many analysts expect the Fed to direct some of its lending efforts toward non-bank mortgage servicers, who, unlike banks, do not have easy access to the Fed's traditional lending windows.
In 2019, nonbanks accounted for 47% of total mortgage servicing, up from 6% a decade earlier, according to the Treasury Department.
The commercial real estate industry has also urged the Fed to expand its Term Asset-Backed Securities Loan Facility, which is aimed at enabling issuance of asset-backed securities backed by several types of business loans, auto loans, student loans and SBA-guaranteed loans. The facility, known as TALF, lends to holders of certain AAA-rated asset-backed securities but thus far is not accepting commercial mortgage-backed securities as eligible collateral.
Expanding the TALF program to include those securities would help support "small and medium-sized businesses, hotels, multifamily apartments, medical facilities, restaurants, and retailers," CRE Finance Council Executive Director Lisa Pendergast said in a March 31 news release.
The National Retail Federation has also asked the Fed to broaden the eligibility criteria for its liquidity facilities.
In a March 27 letter, NRF CEO Matthew Shay asked the Fed to open those facilities up to smaller retailers and rethink its current credit ratings requirement under its Commercial Paper Funding Facility. That facility, which buys short-term debt from companies, is largely focused on helping investment-grade issuers and may therefore provide limited benefits to some large retailers whose credit ratings do not meet that threshold.
"These restrictions may prevent expeditious access to needed funding by all sizes of retailers, preventing employers from making payroll and taking money directly out of the pockets of the very employees retailers are trying to keep on the payroll, consistent with the intent of the CARES Act," Shay wrote.
Other consumer-facing trade groups encouraging their members to seek loans under the Fed facility include the National Association of Theatre Owners, whose major members have shuttered their doors due to the pandemic, and the American Gaming Association, whose members include casinos and other gaming operations.
U.S. Sen. Lisa Murkowski, R-Alaska, also asked Mnuchin to ensure that oil and gas companies are "able to fully participate" in the loan programs. The sector has been "one of the hardest-hit industries" given that demand for oil has dropped just as supply has jumped due to a price war between Russia and Saudi Arabia, Murkowski wrote in a letter to Mnuchin.
Asked about the issue at an April 2 news conference, Mnuchin said he expects those energy companies will be able to participate in the Fed's "broad-based lending facilities," just like any other company would.
But the restrictions the legislation puts on companies getting Fed loans may detract from its usage, as would potential reluctance from already indebted firms to add more debt to their balance sheets.
The law, for example, limits the ability of firms to buy back their shares and pay dividends to shareholders while their loan is still outstanding, plus an extra year.
Additional restrictions apply to companies that borrow through a lending facility specifically aimed at companies with 500 to 10,000 employees. Some of the details surrounding that facility are unclear, and the legislation says Treasury should "endeavor to seek the implementation of" that facility with the Fed rather than requiring the agencies to do so. But the restrictions attached to it include limits on outsourcing of jobs and a requirement that firms stay neutral in any union organizing efforts.
Those CARES Act limitations may prevent some companies from tapping into the Fed facilities, Leslie Preston, senior economist at TD Economics, wrote in a research note.
"Many businesses may find these conditions unacceptable, and so uptake on the $454 billion is highly uncertain," Preston wrote.