What does the $600B middle-market rescue plan mean for banks?
Bankers spent much of Thursday trying to unravel details of the central bank’s new loan-purchase program aimed at helping middle-market businesses survive the economic shock from the coronavirus pandemic.
As part of its broader effort to step up economic relief, the Federal Reserve pledged to facilitate $600 billion in loans to midsize businesses under the Main Street Lending Program. The move spotlighted a sector of the economy that has gotten less attention than small businesses’ struggles to obtain much-needed aid.
“These midsize businesses are having the same issues that the small businesses are having because of the government-mandated shutdowns,” said John Corbett, CEO of the $17.1 billion-asset CenterState Bank in Winter Haven, Fla. “Their revenues have fallen off a cliff.”
Corbett, who attended a call with other executives hosted by the Federal Reserve Bank of Atlanta while the program was under development, said banks with assets between $10 billion and $250 billion were likely to be the chief participants in the Main Street program.
Specifically, the Fed is creating two special-purpose vehicles funded by an investment from the Treasury Department under the authority of the Coronavirus Aid, Relief, and Economic Security Act that was enacted in March. Through these facilities, the Fed will guarantee 95% of expanded loans or entirely new loans to midsize businesses; borrowers won’t have to start paying them back for one year.
Existing loans can be increased by up to $150 million in some cases under the Fed’s Main Street Expanded Loan Facility. Fresh financing provided under the “Main Street New Loan Facility” will be capped at $25 million. Limits would be adjusted so that no business taking out these loans would exceed a total outstanding debt of four times earnings before interest, tax, depreciation and amortization, according to the Fed’s term sheets.
Businesses that have up to 10,000 employees or as much $2.5 billion in 2019 annual revenues may qualify. The loans carry terms of up to four year.
Fed officials told reporters Thursday they expect demand will come in under what they are offering and that they believe their Main Street lending facilities are appropriately sized.
Corbett at CenterState said banks did not anticipate the kind of “stampede” from middle-market businesses that they have seen from smaller ones, partly because some of these bigger businesses want to avoid restrictions on stock dividends, executive compensation or other strings attached by the Fed.
“The real question is, are borrowers going to be willing to have the government involved in those kinds capital allocation and compensation issues?” Corbett said.
Jon Winick, CEO of Clark Street Capital, a bank advisory firm in Chicago that specializes in loan sales, loan due diligence and valuation and specialty asset management, said he has “so many questions” about the program, especially around the idea that the Fed is going to take on credit risk.
Fed officials generally avoid that, but “now they’re setting up a program with substantial credit risk,” Winick said. “We are not clear yet what the intent is for these loans and their creditworthiness. The term sheet mentions 2019 EBITDA, but is it the intent here to make loans that don’t have current cash flow?”
“If that’s the case, then these are essentially projection loans,” he said.
Several banks contacted for this story either did not respond to requests for comment or said they were still trying to figure out what it all means.
Tom Iadanza, chief banking officer at Valley National Bancorp in Wayne, N.J., said the $37.4 billion-asset bank “continues to review all federal and state programs.”
The bank, which has already been involved with the lending program for smaller businesses, will keep its local business leaders and consumers informed of "other federal and state programs and assess [those programs] on their merits" so that businesses of all sizes get the relief they need, Iadanza said in an email.
The American Bankers Association and the New York Bankers Association both said they too are trying to get their arms around the Fed’s announcements.
Taken together with expanded efforts to boost financing for municipalities, new securities under the Term Asset-Backed Securities Loan Facility and the Small Business Administration’s Paycheck Protection Program, the central bank is providing up to $2.3 trillion in financing. Barclays Capital researchers said in a note Thursday that the Fed has turned its support of the financial markets to “11.”
ABA President and CEO Rob Nichols said in a statement that the Fed’s move Thursday was “unprecedented” and that he had “no doubt” banks would step up to play a critical role in the program for midsize businesses.
Winick said he expects the Fed will have to provide more clarity to banks in coming days.
“The No. 1 question here for bankers is under what circumstances is my participation in jeopardy?” Winick said. “What do I have to do as a lender to make absolutely certain that I don’t have any recourse on the 95% originated and sold?”
The launch of the program for more businesses comes as the prospects of a quick recovery from the shutdown are dimming. Meanwhile, the U.S. has seen 10% of workers lose their jobs in the last three weeks, according to Labor Department data released Thursday.
A survey of corporate treasurers conducted for the week that ended April 8 by the Treasury Coalition, an industry group, showed that businesses do not expect to get back to normal financially for another eight months after suggesting the week before they could recover in seven months.
“Still, respondents see a light at the end of the tunnel as central bank efforts are viewed positively and as health issues associated with COVID-19 are expected to begin to improve in the coming months,” said Michele Marvin, global vice president of GTreasury, a technology company that is involved with the coalition.
There were 427,460 confirmed and presumptive COVID-19 cases in the U.S. as of Thursday and 14,696 deaths linked to the disease, according to the Centers for Disease Control and Prevention. However, there are signs the rate of the virus’ spread is flattening in hard-hit areas like New York.
Joseph Lynyak III, a partner at the law firm Dorsey & Whitney, said in a statement that the Fed has begun to “look down the road” with the announcement of these programs to jump-start these businesses.
“The intention is twofold: First, the facilities will provide necessary liquidity to banks to extend the credit,” Lynyak said. “More importantly, however, the facilities will effectively function as working capital loans for businesses as the nation emerges from the COVID-19 emergency.”
Hannah Lang contributed to this story.