April 10, 2020

Fed moves to provide $2.3T in loans

moneyThe Federal Reserve Thursday announced additional efforts to support the economy amid the coronavirus pandemic, including providing up to $2.3 trillion in loans to households and businesses of all sizes. The Fed has taken several steps to address economic concerns and has committed to using the full range of its authorities.

Of note, the Fed created the Main Street Lending Program, which will offer 4-year loans to companies with up to 10,000 workers or revenues less than $2.5 billion. Businesses that receive loans through the Small Business Administration's paycheck protection program can also apply for Main Street loans.

Eligible lenders under the Main Street Lending Program are U.S. insured depository institutions, bank holding companies, and savings and loan holding companies. The program is funded with $600 billion, with the Treasury Department providing $75 billion from funds allocated by the CARES Act, and is scheduled to run through Sept. 30, 2020.

The Fed will purchase 95 percent participations in the loans while lender retains 5 percent. Other terms of the Main Street loans include:

  • principal amortization and interest deferred for one year;
  • an adjustable rate of the Secured Overnight Financing Rate (SOFR) + 250-400 basis points;
  • minimum loan size of $1 million;
  • maximum loan size is lesser of:
    • $25 million; or
    • an amount that, when added to existing committed but undrawn bank debt, does not exceed four times the eligible borrower's 2019 earnings before interest, taxes, depreciation, and amortization;
  • prepay permitted without penalty;
  • borrower pays lender a fee of 100 basis points while the Fed pays 25 basis points per year; and
  • lender must attest that funds will not be used to pay down existing lines with the lender from the business.

There is also a separate facility, the Main Street Expanded Loan Facility, which allows mid-sized firms that have existing lines with a lender to scale up the existing loan, rather than take out a new loan with a potentially different lender. The terms under the expanded facility are slightly different.

In addition to the Main Street Lending Program, the Fed also announced efforts to:

  • bolster the paycheck protection program by creating the Paycheck Protection Program Liquidity Facility that will extend credit to eligible financial institutions that originate these loans, taking the loans as collateral at face value;
  • 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, as well as the Term Asset-Backed Securities Loan Facility, which combined 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 by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities, with the Treasury providing $35 billion of credit protection to the Fed for the facility.

NAFCU will continue to analyze how Fed actions will impact credit unions and the economy. The association's coronavirus economic brief is available here.