Awkward Shadow U.S. Fed’s Main Street lending facility

A man rides a motorized skateboard on a nearly deserted Church Street in the financial district of lower Manhattan during the outbreak of the coronavirus disease (COVID-19) in New York City, New York, U.S.

The Federal Reserve’s most ambitious and complicated crisis relief program is set to launch in coming days but it is far from certain that the small and mid-sized businesses the $600 billion “Main Street Lending Facility” is meant to help will come clamoring for loans.

Two months into the economic crisis spurred by the novel coronavirus pandemic, some lobbyists, bankers and small business consultants say the loans may be too large to help many struggling businesses and some borrowers are worried about coming under public scrutiny.

Some lenders also say they are concerned about the balance sheet risks they could face by participating.

“From our lenders, I’m seeing very limited interest because of the large minimum loan size of a half million,” said Paul Merski, an executive vice president at the Independent Community Bankers of America.

The program aims to provide credit to businesses that are too large for the Paycheck Protection Program, which targets companies with fewer than 500 employees, and too small to directly benefit from the Fed’s corporate bond buying programs.

As with the PPP, the Main Street facility loans will be distributed via participating banks, but unlike the PPP those loans are not forgivable and will have to be repaid.

The program, which is being administered by the Federal Reserve Bank of Boston, will lend to U.S. businesses with up to 15,000 employees or revenues capped at $5 billion. Loans can range in size from $500,000 to $200 million. Borrowers have four years to repay the loans, with no payments due the first year and no penalty on prepayment.

The Main Street program is part of the federal government’s unprecedented effort to shore-up the U.S. economy and help companies retain workers after the coronavirus shutdown put more than 20 million Americans out of work.

Data from the 2017 Census business survey suggests more than 38,000 companies employing about 30.2 million people could make use of the program, including more than half of the S&P 500.

“It is far and away the biggest challenge of any of the 11 facilities that we’ve set up,” Fed chair Jerome Powell said last month during a Princeton University webcast in which he also said the central bank is open to adjusting the program.

With Congress ramping up scrutiny of bailout funds, the Main Street program has already attracted controversy. In April, lawmakers accused the Fed of bowing to the oil and gas lobby after the central bank changed the facility’s terms to better accommodate highly indebted industries.

Since then, many companies have grown wary of the scrutiny that comes with tapping federal aid, especially after many publicly-listed companies were widely criticized for taking PPP loans, according to bankers and lobbyists.

The Fed plans to publish the names of lenders and borrowers, the amounts borrowed and interest rates charged, along with other details.

“There’s the potential for future scrutiny with hindsight that we don’t have today,” said Matt Kulkin, co-chair of the financial services group at Steptoe & Johnson.

He added that some businesses may also hold off from applying until they get clarity on the conditions the Fed will impose on borrowers, in particular a requirement that companies make “a reasonable effort” to retain workers.

Other limits on executive compensation, dividends or stock buybacks will also put some companies off, said Kulkin.

The Fed expanded the program in April after receiving more than 2,200 comment letters by lowering the minimum loan amount to $500,000 from $1 million and by raising the cap on employees and revenue. But some small banks say they are likely to sit the program out because its loan sizes are still too large.

The ICBA and American Bankers Association had pushed for the minimum loan size to be no more than $100,000.

“I still don’t understand why a minimum is even needed,” tweeted Jill Castilla, President and CEO of Citizens Bank of Edmond in Oklahoma last month regarding the facility.

Large and small banks are also worried about the risks they could face. The Fed will purchase 85% or 95% of qualifying loans, depending on the type, and the bank will keep the rest of the loan on its balance sheet.

Because they are taking on some of the risk, banks can set their own underwriting standards but even holding 5%-15% of a loan in a troubled business may be too much, said bankers and lobbyists.

“It may be something that the largest banks and businesses will take up but really the loan terms may need to be adjusted for a more robust participation,” said Merski.

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