Bankers, borrowers fret over details of middle-market rescue

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Ever since the Federal Reserve announced a $600 billion loan program to help midsize companies survive in a pandemic-stricken economy, bankers have been trying to make sense of how exactly it will work.

Details of the Main Street Lending Program are still being tweaked, but already some lenders and borrowers seem hesitant to dive into the program with the same enthusiasm shown for the federal government’s highly sought-after Paycheck Protection Program for small businesses.

Why? Because of strings attached that might be too much to bear — including requirements for banks to retain a 5% interest in each loan, and for borrowers to repay potentially significant debt within four years.

M&T Bank in Buffalo, N.Y., is taking the wait-and-see approach. The $124.6 billion-asset bank helped more than 27,700 customers get approved for $6.4 billion in PPP loans. Chief Financial Officer Darren King said the company’s involvement in Main Street Lending is less certain.

“The details of the Main Street Lending Program are still being finalized and as such, our level of participation in the program, if any, remains unclear,” King told investors this week.

The Fed announced the Main Street Lending Program on April 9 as part of a $2.3 trillion loan package to support the economy, which has been largely halted to curb the spread of the coronavirus. The central bank said it would create two facilities — one for new loans and one for the expansion of existing loans —and pledged to buy up to $600 billion in loans that will be backstopped by $75 billion in Treasury funds.

Under the initial framework, eligible borrowers would be businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Loan amounts would start at $1 million and must be paid back over the course of four years. Banks would retain a 5% share and sell the remaining 95% to one of the facilities.

Some of the terms and conditions raised concern among banks and the industry groups that represent them. Last Friday, several organizations submitted letters to the Fed making suggestions such as dropping the minimum loan amount to as little as $50,000 and eliminating banks’ 5% stake.

The letter from the American Bankers Association said “the rapid development and launch of the Federal Reserve’s lending program is critical to reducing the COVID-19 pandemic’s economic damage.” But “to help ensure that the U.S. banking industry can effectively deploy [the program] to assist small and medium-size businesses in need,” it suggested a range of changes such as expanding the scope of eligible borrowers to include branches and agencies of foreign banks and permitting borrowers that have existing revolving credit lines — but not current term loans — to participate in the program.

Hu Benton, vice president of banking policy at the ABA, said more answers are needed from the Fed.

“I think everybody wants it to work and wants it to work from the beginning,” he said. “That’s why there are so many questions.”

The Independent Community Bankers of America made other recommendations, including loan amounts starting at $100,000 and reducing lenders’ responsibility in making sure borrowers use the money according to program requirements.

“The program itself is extremely complicated,” said Paul Merski, executive vice president of congressional relations at the ICBA. “I think a lot of lenders, without additional guidance and instructions, will find it very challenging to participate in this lending program.”

Borrowers are cautious as well. For starters, even though payments and interest are deferred for one year, the loans cannot be forgiven and cannot be used to pay back other debt, except mandatory principal payments. Secondly, a $1 million minimum loan amount means potentially significant debt for borrowers, which could complicate their recovery efforts in a post-pandemic economy.

Bankers are trying to come to grips with the program even as they await guidance. During first-quarter earnings calls, several have said they are ready to help customers get access to cash.

The questions are: When, and under what terms?

KeyCorp President and Chief Operating Officer Christopher Gorman said the Cleveland bank and others are giving input to the Fed on how to structure the program. KeyCorp has $156.2 billion in assets.

“We have a whole team around it, and we think it’s going to be helpful to some of our clients that really need some incremental funding,” said Gorman, who noted the program has received little attention.

With $600 billion in funding available, “it’s not inconsequential,” he said.

At Regions Financial, a $133 billion-asset bank in Birmingham, Ala., a team of bankers is trying to understand the details of the program, CEO John Turner Jr. told investors this week.

“I don’t know that we have a real good feel yet for how many customers will be awfully interested and how that might affect our customer base,” Turner said. “But clearly it’s one of a number of programs that the government and Congress have made available to customers that will be helpful over time.”

Andy Cecere, chairman and CEO of U.S. Bancorp in Minneapolis, said the bank is ready to support loan demand for programs including Main Street Lending. Bank of Hawaii CEO Peter Ho said the Honolulu bank is “committed to exploring emerging loan products” such as the Main Street Lending program. And Western Alliance Bancorp. President and CEO Kenneth Vecchione said the initiative, when implemented, would provide “incremental liquidity for [the bank’s] large clients as well as PPP participants.”

But the actual demand for the program “remains to be seen,” Western Alliance Vice Chairman and CFO Dale Gibbons said.

One bank is ready to go, even as the government fine-tunes the program. In an interview, Centennial Bank Chairman and CEO John Allison said the $15 billion-asset Arkansas bank has processed 5,500 PPP loans for small businesses and now wants to help bigger customers.

A lot of Centennial’s business customers “got cut off” from PPP because it is limited to companies with 500 or fewer employees, Allison said. Main Street Lending opens up opportunities for larger firms.

“I think [the demand] will be there because it’s an opportunity for survival for some people that probably won’t [survive] otherwise,” Allison said. “And we as bankers will aggressively help them understand it because it benefits the customer, our institution and the country as well.”

Laura Alix contributed to this article.

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