Banks, borrowers still on fence about middle-market rescue plan

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A batch of updates last week to the Federal Reserve’s forthcoming $600 billion loan-purchase program for midsize businesses provided much-needed clarity for banks and borrowers.

Now, a key question remains: Will the tweaks make them more willing to try the program?

By and large, bankers say they are still assessing the Main Street Lending Program, a financing option announced last month as part of the federal government’s $2 trillion coronavirus relief package to support the economy. The changes include the creation of a third loan facility for larger companies and a lower minimum loan size for one of the existing facilities; the goal is to expand the number of lenders and borrowers that would be eligible to participate.

Daniel Reininga, president and CEO of Lake Shore Savings Bank in Dunkirk, N.Y., said his $628.3 million-asset bank has not received any inquiries from customers about the program. He is unsure what to expect when it comes to demand, especially given the fact that the loan must be repaid in four years.

“It’s definitely something we’ll look at if borrowers are qualified and interested in the terms and conditions, but there’s no forgiveness associated with it,” Reininga said. “So if I was a business owner, I would go for the program with forgiveness. If I’m looking for working capital, I’d look at Main Street.”

The Main Street program is not yet operational, but early reaction to it was lukewarm as banks and businesses waited for more details from the Fed, which pledged to buy up to $600 billion in loans that will be backstopped by $75 billion in Treasury funds. It has been viewed as a way to provide financial help to businesses that may be too large to participate in the popular Paycheck Protection Program, which is only available to businesses with 500 or fewer employees.

Last week, when the new guidelines were released, the central bank said its calls for feedback to the original proposal yielded more than 2,200 letters from individuals, businesses and nonprofits.

In response, the Fed reshaped the program in ways that make more businesses eligible to seek funding. Among the major refinements:

  • The creation of a third loan option called the Priority Loan Facility for businesses with up to 15,000 employees or 2019 revenues of $5 billion: Previously, there were two loan options — the New Loan Facility for new loans and the Expanded Loan Facility for existing loans — for businesses with up to 10,000 workers or revenues of $2.5 billion. For priority loans, lenders will retain 15% compared to 5% retention for the other two facilities.
  • A reduction in the minimum loan amount for the new-loan facility from $1 million to $500,000: That is the same limit given to the priority loans. The minimum for the expanded facility rose to $10 million from $1 million.
  • An expansion of eligible lenders to include U.S. branches or agencies of foreign banks and U.S. intermediate holding companies of foreign banking organizations: Nonbank financial institutions are still not considered eligible lenders, though the Fed said it may expand the list in the future.

Immediate reaction to the changes was mixed.

Several banks contacted for this story said they are reviewing the program. A spokeswoman for Fifth Third Bank said the Cincinnati lender is working with industry trade groups to understand the details.

“Though we believe enhancements have been made to the program, certain operational, legal, economic and structural issues remain unknown or unclear, and we are working hard with all stakeholders to assist in making this program beneficial for our customers,” the spokeswoman for the $185.4 billion-asset bank said.

There were several changes made to the Main Street program that could open the door for more energy companies to qualify, according to a May 4 report from the Washington partners of the law firm Kirkland & Ellis.

Especially important was the maximum size that the Fed established for priority loans, the report said. It is the lesser of $25 million, or an amount that when added to outstanding and undrawn available debt does not exceed 6x earnings before interest, taxes, depreciation and amortization. That cap is higher than the one for the new-loan option.

Under the more generous cap, more indebted companies — like energy companies — can participate and use the money to pay off or refinance existing loans, the report said. Companies that were recently downgraded from investment grade to junk are more likely to participate, too. The Fed said in announcing the changes that “lenders will be able to apply their industry-specific expertise and underwriting standards to best measure a borrower's income.”

Kirkland and Ellis said in the report that the Fed and Treasury were likely to continue tweaking the program. For instance, new guidance could be provided for asset-based borrowers, which “would open up the program to additional energy and infrastructure companies in the oil and gas and renewables subsectors,” according to the firm.

Chris Nichols, chief strategy officer of $18.6 billion-asset CenterState Bank in Winter Haven, Fla., referred to the changes as “an extra shot of adrenaline” for companies in need of emergency funding during the downturn.

"More energy companies will participate,” Nichols said in an email. “These changes will increase demand and increase our flexibility to help put capital back into America."

Two banks in Texas — the $76.3 billion-asset Comerica and the $34.1 billion-asset Frost Bank —said they are going through the details of the program. Frost said it is not sure if it will go forward with any Main Street loans.

Industry trade groups largely commended the Fed for making adjustments, though some hope for more.

The American Bankers Association said it wants the Fed and Treasury to lower the minimum loan size even further; increase flexibility in loan terms; and offer more reference rate options than the current Libor plus 3%, such as a publicly quoted prime or base rates.

Making those changes "would increase bank participation and allow this program to reach even more small and midsize businesses in need," ABA President and CEO Rob Nichols said in a statement.

In the letter it submitted last month to the Fed, the Independent Community Bankers of America encouraged the central bank to lower the minimum loan amount to $100,000 to encourage more businesses to apply.

That didn’t happen. But Paul Merski, executive vice president of congressional relations at the ICBA, said the $500,000 limit “will make the program more attractive to smaller borrowers.” And while he praised the Fed for seeking input on the program, he wishes the payback period was more than four years.

New York Bankers Association President and CEO Michael Smith said the Fed’s adjustments are “largely positive” because the more flexibility in the program, the more businesses that banks will be able to help. Meanwhile, a spokeswoman for Western Bankers Association in Sacramento said the group is “not hearing much with regard to [Main Street Lending] as bankers are currently “highly focused” on PPP.

Some banks may fear reprisals from regulators for not participating, but they are under no obligation to make loans under the program, said Reena Sahni, an attorney at New York City-based Shearman & Sterling who advises financial institutions.

Reininga of Lake Shore Savings said his bank’s participation may ultimately be affected by the fact that Lake Shore has a legal lending limit of $12.3 million per borrower.

Still, he said his team will try to help customers however it can. That could include teaming up with other banks to make larger loans.

“The bottom line is a lot of this stuff is driven by customer need and if the customer says, ‘We’ve read about it and we’re thinking about it,’ then we’re going to do what we can to meet their needs,” he said.

Jon Prior contributed to this article.

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Commercial lending Middle market Coronavirus Federal Reserve Main Street Lending Program