Responding to escalating economic side effects of the coronavirus pandemic, on Thursday, April 9, the U.S. Federal Reserve announced that it will create a wide range of loan programs worth up to $2.3 trillion. Jerome Powell, the Fed chair, said, “Our country's highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus. The Fed's role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible."
The announcement said the Fed’s actions will:
- Bolster the effectiveness of the Small Business Administration's Paycheck Protection Program (PPP) by supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value;
- Ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program. The Department of the Treasury, using funding from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) will provide $75 billion in equity to the facility;
- Increase the flow of credit to households and businesses through capital markets, by expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) as well as the Term Asset-Backed Securities Loan Facility (TALF). These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury; and
- Help state and local governments manage cash flow stresses caused by the coronavirus pandemic by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities. The Treasury will provide $35 billion of credit protection to the Federal Reserve for the Municipal Liquidity Facility using funds appropriated by the CARES Act.
Main Street Lending Program
The Main Street Lending Program targets businesses with up to 10,000 employees and up to $2.5B in revenue, using larger financial institutions to execute the loans. Like the PPP, the Main Street loans require firms to make reasonable efforts at maintaining payroll and retaining workers. Borrowers must also comply with compensation, stock repurchase and dividend restrictions that apply to direct loan programs under the CARES Act. Firms are allowed to take out loans under both the PPP and the Main Street programs.
These are the primary loan terms:
- Four-year maturity
- Amortization of principal and interest deferred for one year
- Adjustable rate of Secured Overnight Funding Rate (SOFR) + 250-400 basis points
- Minimum loan size of $1 million
- Maximum loan size up to $25 million, so long as the loan, when added to the borrower’s existing debt commitments, does not exceed four times the company’s 2019 earnings before interest, taxes, depreciation, and amortization
- Prepayment permitted without penalty
Help for State and Local Governments
Part of the Fed’s announcement said it would provide loans and credit protection for cities, counties and states. Through a Municipal Liquidity Facility that will offer up to $500 billion in funds, the Fed will buy short-term debt from cities with at least 1 million people and counties with 2 million or more. Some of that funding is provided by $35 billion appropriated by the Treasury under the CARES Act.
Help for Banks
For banks participating in the PPP loan program, the Fed will supply financing to keep loans flowing to businesses that need it.
We will continue to post updates and specific guidance as more information becomes available about the various actions taken by the Fed. Contact us, we're here to help.