The Federal Reserve made history on Thursday by moving aggressively to provide up to $2.3 trillion in liquidity commitments to support the economy. This policy intends to bolster households, small and medium-sized firms, and the ability of state and local governments to float debt to ensure critical services during the pandemic.
But the liquidity commitment put forward by the Fed strongly suggests that this is the latest in a series of policy steps to address the economic fallout of the pandemic and is not the final word. The Fed is clearly not out of ammunition, nor is it done exhausting its potential liquidity commitments based on the congressional backstop inside the CARES Act.
From our vantage point, the most important and historical development was the construction of the Main Street Lending Program that will permit small and medium-size businesses to obtain bridge financing through eligible lenders.
The loan facility is backstopped by $75 billion in equity investments that will support up to $600 billion in liquidity commitments by the Federal Reserve. Under the Main Street Expanded Loan Facility, the central bank has committed to lend to a single common purpose vehicle on a recourse basis.
In our estimation, this a robust first step toward providing a lending facility that will stem what was a likely solvency crisis inside the critical small and medium-size commercial community. Like the Paycheck Protection Program, we anticipate that the Main Street program will experience greater-than-expected demand and will very likely be oversubscribed.
Based on our interaction with RSM’s core client base of small and medium-size businesses, Congress will likely move to increase the size of the its equity investment and the Fed will need to boost its liquidity commitments. We think that once all is said and done that this facility will likely see demand for bridge financing at greater than a $1 trillion pace.
The special purpose vehicle will commit to purchasing 95% of loans made by eligible lenders — U.S. insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies — that will hold 5% of each eligible loan.
Eligibility is based on firms with revenues of less than $2.5 billion in 2019, or firms with up to 10,000 employees. Each firm must be a business that is created or organized in the United States with significant operations and a majority of its employees in the U.S.
Loan terms are a four-year maturity at an adjustable rate of SOFR plus 250-400 basis points with the minimum size of $1 million. Amortization of principal and interest will be deferred for one year. The maximum size will be the lesser of $25 million or an amount that, when added to the borrower’s existing and committed but undrawn debt, does not exceed four times the borrower’s 2019 EBITDA. Prepayment will be permitted without penalty.
The facility does contain some loose conditions around efforts to maintain payroll and retain its employees during the term of the loan, as well as not cancel or reduce any existing lines of credit to the eligible lender or any other lender. In addition, loans obtained through the facility will not be used to repay or refinance pre-existing loan balances.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
