Federal Reserve expands Main Street Lending Program: Changing market and financial structure for middle market firms

The Federal Reserve on Thursday updated the terms of its soon-to-be-launched Main Street Lending Program targeted at middle market companies, expanding eligibility for lending to a broader group. The Fed said businesses with annual revenues of up to $5 billion and staff of up to 15,000 employees may be eligible, up from a prior $2.5 billion in revenue, and 10,000 employees, respectively. The minimum loan size has been dropped to $500,000 from $1 million. The expanded program should capture a super majority of middle market firms, which will at the very least put an economic and financial floor under Main Street USA. The FAQ released by the Fed around the MSLP states that the program is only designed for one year. However, we think that given the program’s design and structure, that is likely not the case. If it was not clear before, it should be now that this program requires more than a “one year and done” effort. It is going to be a part of the Fed’s tool kit and balance sheet for years to come. If the Main Street Lending Program is extended beyond the pandemic, it will change the financial options available to middle market firms; over time, we think it will result in the construction of private sector financial intermediation for businesses that have been traditionally shut out of the corporate bond market and traditional bank lending. If such options are the long-term result of the crisis actions taken by the Fed, then the middle market and the U.S. economy will be better for it. The Fed noted that it will soon put forward a separate program for non-profits. Unfortunately, there was no definitive launch day provided. While many think that it is imminent, given the scale of the changes made to the program, the addition of a new lending facility and the promise to roll out another soon, it may be a number of days or weeks before a definitive launch date is announced.

Updated terms, broader eligibility

The expansion of the program plus more generous terms—LIBOR (1 or 3 month) plus 3%—compared to the prior SFOR plus 250 to 400 basis points, and a reduction in minimum loan size are clearly directed at medium-size companies that otherwise would have fallen in between the previous framework of the SBA-directed Paycheck Protection Program and the Treasury/Fed-directed Main Street Lending Program. The Fed added language around what it means to make a reasonable effort to keep workers, part of the eligibility criteria. “Eligible Borrowers should make commercially reasonable efforts to retain employees during the term of the MSNLF Loan, MSPLF Loan, or MSELF upsized tranche. Specifically, an Eligible Borrower should undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor. Borrowers that have already laid-off or furloughed workers as a result of the disruptions from COVID-19 are eligible to apply for Main Street loans.” The lending program now includes a Main Street Expanded Facility, Main Street Priority Facility and Main Street New Lending Facility. Term finance and repayment has been updated inside both the MSELF and MSNLF The Main Street Priority Facility is the new portion of the program targeted a businesses with higher leverage: Banks take a 15% stake in the loans and the Fed 85%. That contrasts with the other two lending facilities where the bank takes 5% and the Fed 95%. The priority program implies that the Treasury and Fed are willing to take on riskier types of loans on the central bank’s balance sheet, allowing debt to EBITDA of six times, compared to four times in the New Loan program. Banks now have underwriting flexibility to determine a borrower’s earnings under EBITDA. Finally, non-banks are not currently eligible to lend under the program, however, the central bank is considering expanding eligibility of lenders going forward.