The Federal Reserve Steps in to Help Small and Medium-Sized Businesses

Carol Beaumier, Senior Managing Director Risk and Compliance
Michael Brauneis, Managing Director Risk and Compliance, U.S. Financial Services Practice Leader

During the week of April 6, we saw the Federal Reserve take several decisive actions to try to stabilize the economy. Three of these actions were specifically focused on assisting small and medium-sized businesses by making participation in the paycheck protection loan program (PPP program) more palatable for the banking industry and by introducing and expanding loan programs for small and medium businesses.

Payment Protection Program Liquidity Facility

To address lenders’ claims that they could make more PPP loans if they did not have to keep the loans on their books, the Federal Reserve on April 6 announced that it will open a facility to purchase SBA loans offered under PPP. Through this facility, the Federal Reserve Banks will extend non-recourse loans to institutions eligible to make PPP loans. Additional details on this facility are expected soon.

On April 9, the Federal Reserve, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation announced an interim final rule, which is effective immediately and subject to a 30-day comment period,  that modifies the agencies’ capital rules to neutralize the regulatory capital effects of participating in the Federal Reserve’s PPP facility because there will be no credit or market risk in association with PPP loans pledged to the facility described above. Consistent with the agencies’ current capital rules and the Coronavirus Aid, Relief and Economic Security Act (CARES Act), the interim final rule also clarifies that for capital purposes a zero percent risk weight applies to loans covered by the PPP.

(Refer to Protiviti’s Flash Report, Treasury Department Issues More Detailed Guidelines for Small Business Paycheck Protection Program, for additional details on the PPP loan program.)

Main Street Lending Program

On April 9, the Federal Reserve committed to purchase up to $600 billion in loans through the Main Street Lending Program (the Program). The lending program is part of a $2.3 trillion funding effort to address the financial impact of COVID-19, which will be supported by a $75 billion equity injection from the Treasury Department using funding made available by the CARES Act. 

The Main Street Lending Program includes two facilities – the Main Street New Facility and the Main Street Expanded Facility – that will support lending to both investment-grade and below-investment-grade borrowers. The Federal Reserve has published term sheets describing the Main Street New Facility and the Main Street Expanded Facility.

Eligible Borrowers

The Program will provide support for small and mid-sized businesses, i.e., companies employing up to 10,000 workers or with revenues of less than $2.5 billion that that are organized in the U.S. with significant operations and a majority of their employees in the U.S. and that were in good financial standing before the crisis. Eligible borrowers may apply for new loans or may apply to increase existing loans.    

Eligible Lenders

Eligible Lenders include U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.  

Loan Terms

Main Street New Facility

An Eligible Loan is an unsecured term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated on or after April 8, 2020, provided that the loan has the following features:

  • 4-year maturity
  • Deferred principal and interest payments for one year
  • Minimum loan size of $1 million and maximum loan size that is the lesser of $25 million or an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation and amortization (EBITDA)
  • Interest rate at the Secured Overnight Financing Rate (SOFR) + 250-400 basis points
  • Origination fee of 100 basis points of the principal amount of the loan
  • No prepayment penalty

Loans will be subject to the following attestations:

  1. The Eligible Lender must attest that the proceeds of the Eligible Loan will not be used to repay or refinance pre-existing loans or lines of credit made by the Eligible Lender to the Eligible Borrower.  
  2. The Eligible Borrower must commit to refrain from using the proceeds of the Eligible Loan to repay other loan balances and to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Eligible Borrower has first repaid the Eligible Loan in full.
  3. The Eligible Lender must attest that it will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower. 
  4. The Eligible Borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the Eligible Lender or any other lender.  
  5. The Eligible Borrower must attest that it requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and that, using the proceeds of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.
  6. The Eligible Borrower must attest that it meets the EBITDA leverage condition stated above in the required features of Eligible Loans. 
  7. The Eligible Borrower must attest that it will follow compensation, stock repurchase and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act.
  8.  Eligible Lenders and Eligible Borrowers will each be required to certify that the entity is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.

Main Street Expanded Facility

An Eligible Loan is a term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated before April 8, 2020, provided that the upsized tranche of the loan has the same features as a Main Street New Facility loan and includes the following attestations:

  1. The Eligible Lender must attest that the proceeds of the upsized tranche of the Eligible Loan will not be used to repay or refinance pre-existing loans or lines of credit made by the Eligible Lender to the Eligible Borrower, including the pre-existing portion of the Eligible Loan.  
  2. The Eligible Borrower must commit to refrain from using the proceeds of the upsized tranche of the Eligible Loan to repay other loan balances. 
  3. The Eligible Borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Eligible Borrower has first repaid the Eligible Loan in full.
  4. The Eligible Lender must attest that it will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower. 
  5. The Eligible Borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the Eligible Lender or any other lender.
  6. The Eligible Borrower must attest that it requires financing due to the exigent circumstances presented by COVID-19 pandemic, and that, using the proceeds of the upsized tranche of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the upsized tranche of the Eligible Loan. The Eligible Borrower must attest that it meets the EBITDA leverage condition stated above in the required features of Eligible Loans.
  7.  The Eligible Borrower must attest that it will follow compensation, stock repurchase and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act.  
  8.  Eligible Lenders and Eligible Borrowers will each be required to certify that the entity is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.

Loan Participations

A Special Purpose Vehicle (SPV) established by the Federal Reserve will purchase a 95% participation in an Eligible Loan at par value, and the Eligible Lender will retain 5% of the Eligible Loan. The SPV and the Eligible Lender will share risk on a pari passu basis. An Eligible Lender will pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. The Eligible Lender may require the Eligible Borrower to pay this fee. The SPV will pay an Eligible Lender 25 basis points of the principal amount of its participation in the Eligible Loan per annum for loan servicing.

The SPV will cease purchasing participations in Eligible Loans on September 30, 2020, unless the Board and the Treasury Department extend the Facility. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.

The Federal Reserve and the Treasury recognize that businesses vary widely in their financing needs, particularly at this time, and that the program may present challenges to banking organizations that are already struggling with fully implementing the PPP program and meeting the resourcing demands that program presents. As the program is being finalized, they will continue to seek input from lenders, borrowers and other stakeholders to make sure the program supports the economy as effectively and efficiently as possible while also safeguarding taxpayer funds. Comments may be sent to the feedback form until April 16.

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