COVID-19: Federal Reserve Announces $2.3 Trillion in Loans

On April 9, 2020, acting with the approval and consent of the Secretary of the U.S. Treasury, the Federal Reserve took unprecedented additional action using its statutory emergency lending powers to provide immediate support to the national economy. In so doing, the Board of Governors of the Federal Reserve adopted a series of measures that will provide up to $2.3 trillion in credit facilities and loans to households, employers, and state and local governments, consistent with the Federal Reserve’s emergency lending powers under Section 13(3) of the Federal Reserve Act (12 U.S.C. 343(3)). In particular, the Federal Reserve will adopt or expand on the following programs:

Main Street New Loan Facility (MSNLF) and Expanded Loan Facility (MSELF): The Federal Reserve will purchase up to $600 billion in loans, and the Department of Treasury, through Section 4027 of the Coronavirus Aid, Relief, and Economic Securities Act (“CARES Act”), will make a $75 billion equity investment in a single common special purpose vehicle (SPV) in connection with the MSNLF and MSELF, both of which are designed to facilitate lending to small and medium sized businesses by eligible lenders (i.e., US insured depository institutions, US bank holding companies, and US savings and loan holding companies).

The MSELF will provide four-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion, with principal and interest payments deferred for one year. Banks retain a five percent share and sell the remaining 95 percent to the Fed’s SPV, which will purchase, in combination with the MSNLF, up to $600 billion of loans. Companies obtaining Main Street loans must attest that, in using the proceeds of the loan, they will make reasonable efforts to maintain their payrolls and retain their employees during the terms of the loans. Firms that have taken the Small Business Administration’s Paycheck Protection Program (PPP) loans are eligible for Main Street Lending Program (MSLP) loans. Borrowers must comply with CARES Act restrictions regarding compensation, stock repurchase, and dividend restrictions.

The programs are designed by the Fed to address the variety of financing needs faced by small and mid-size businesses during this national emergency by providing participating banks and financial institutions the ability to originate new Main Street loans or use the Main Street loans to increase the size of existing loans to businesses. New Main Street loans are unsecured terms loans that originated on or after April 8, 2020, whereas expanded Main Street loans allow the Federal Reserve to purchase upsized tranches from lenders of loans that originated before April 8, 2020.

Main Street New Loan Facility (MSNLF):

  • Intended for small and medium-sized businesses created or organized in the US, or under the laws of the US, with significant operations in and a majority of its employees based in the US
  • Applies to loans that are originated on or after April 8, 2020
  • A Federal Reserve Bank will commit to a single common SPV on a recourse basis. The SPV purchases 95 percent participations in eligible loans from eligible lenders, and eligible lenders retain five percent of each eligible loan. Eligible lenders include US insured depository institutions, US bank holding companies, and US savings and loan holding companies. Eligible businesses may not participate in the MSELF or the Primary Market Corporate Credit Facility.
  • Minimum loan size of $1 million; maximum loan size the lesser of (i) $25 million; or (ii) an amount that, when added to the eligible borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the eligible borrower’s 2019 earnings before EBITDA
  • Four-year maturity; principal and interest amortization deferred for one year
  • Adjustable interest rate based on Secured Overnight Financing Rate + 250 – 400 basis points
  • An eligible lender must pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV, which the eligible lender may require the eligible borrower to pay. An eligible borrower will also pay the eligible lender an origination fee of 100 basis points of the principal amount of the eligible loan. The SPV will pay the eligible lender 25 basis points of the principal amount of its participation in the eligible loan per annum for loan servicing.

Main Street Expanded Loan Facility (MSELF):

  • Similar to the MSNLF; however, applies to loans that were originated before April 8, 2020
  • Minimum loan size of $1 million with intended maximum loan size the lesser of (i) $150 million; (ii) 30 percent of the eligible borrower’s existing outstanding and committed but undrawn bank debt; or (iii) an amount that, when added to the eligible borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the eligible borrower’s EBITDA
  • Four-year maturity; principal and interest amortization deferred for one year
  • Adjustable interest rate based on Secured Overnight Financing Rate + 250 – 400 basis points
  • The eligible borrower pays the eligible lender a fee of 100 basis points of the principal amount of the upsized tranche of the eligible loan at the time of upsizing.

For both the MSNLF and MSELF, the SPV will cease purchasing participants in eligible loans on September 30, 2020, unless otherwise extended by the Board of Governors of the Fed and Treasury Department.

Paycheck Protection Liquidity Facility (PPLF): The PPLF will supply financial institutions participating in the PPP with liquidity with term financing. This includes extending credit to qualifying financial institutions that originate PPP loans and taking the PPP loans as collateral at face value. The principal amount of the extension of credit equals the principal amount of the PPP loan pledged as collateral.

Expanded Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF); Term Asset-Backed Securities Loan Facility (TALF): The Federal Reserve will expand the size and scope of the existing PMCCF, SMCCF, and TALF programs to support up to $850 billion in credit backed by $85 billion in credit protection provided by Treasury.

PMCCF:

  • The Federal Reserve Bank of New York will lend to an SPV on a recourse basis, which will (i) purchase qualifying bonds as the sole investor in a bond issuance; and (ii) purchase portions of syndicated loans or bonds at issuance.
  • Eligible corporate bonds as sole investor must be issued by an eligible issuer and have a maturity of four years or less.
  • Eligible syndicated loans and bonds purchased at issuance must be issued by an eligible issuer and have a maturity of four years or less, and the now may purchase over 25 percent of any loan syndication or bond issuance. The initial allocation of the equity will be $50 billion toward the PMCCF.

SMCCF:

  • The Federal Reserve Bank of New York will lend to an SPV that will purchase in the secondary market corporate debt issued by eligible issuers. The SPV will purchase in the secondary market eligible individual corporate bonds and eligible corporate bond portfolios in the form of exchange-traded funds.
  • The initial allocation toward the SMCCF will be $25 billion, and the combined size of the PMCCF and SMCCF will be up to $750 billion.

TALF:

  • The Federal Reserve will expand the assets eligible as collateral under the TALF to include triple-A rated tranches of both outstanding commercial mortgage-backed securities and newly issued collateralized loan obligations. The TALF will remain at $100 billion and continue to fund lending, including student loans, auto loans, and credit card loans.

Municipal Liquidity Facility (MLF): The Federal Reserve will offer up to $500 billion in lending to states, counties, and municipalities to manage cash flow stresses and their capital needs. The MLF will lend to an SPV which will purchase up to $500 billion of short term notes directly from US states, counties (with populations of at least two million residents), and cities (with populations of at least one million residents). Those entities may use these proceeds to lend funds to additional counties and municipalities for the purposes described above.

In remarks made on April 9, 2020, Fed Chair Jerome H. Powell explained the Fed’s use of these emergency measures, commenting that they “are reserved for truly rare circumstances, such as those we face today,” and that “[t]he challenge we face today is different in scope and character from those we have faced before. ” He further noted that the Fed “will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.” (Speech, Fed Chair Jerome H. Powell, April 9, 2020, “COVID-19 and the Economy,” at the Hutchins Center of Fiscal and Monetary Policy, The Brookings Institution, Washington, D.C. [via webcast]; at www.federalreserve.gov)

In enacting these new measures, the Federal Reserve and Treasury are accepting comments from the public until April 16, 2020. For more information about these programs, including term sheets and Chairman Powell’s speech, please see the Federal Reserve website news page.

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