The Federal Reserve Bank’s $600 billion Main Street Lending Program promises to offer small and mid-sized businesses hurt financially by the COVID-19 pandemic with another option to access credit and operating capital.
However, borrower interest in the loans may be limited given the strings attached, according to sources contacted for this report.
Created under the federal CARES Act that Congress enacted in late March in response to the pandemic, the Main Street Lending Program offers three varying credit options, or facilities, that are available through banks.
The loans are intended for companies that were in sound financial condition prior to the pandemic, “and now face economic uncertainty and liquidity constraints, but are otherwise bankable in the eyes of their lenders,” said attorney Seth Ashby, a partner in the business and corporate services practice at Varnum LLP in Grand Rapids.
The Main Street loans are available to private and public for-profit companies that have 15,000 or fewer employees, or 2019 revenues of $5 billion or less, and have not yet received support under the CARES Act.
At Independent Bank in Grand Rapids, commercial lending head Jim Mack considers the Main Street Lending Program “another tool that we can look at using to help companies get through all of this.”
“We’ll be assessing it, understanding it better, educating our customer base and seeing where it might fit in for customers and for prospects as well,” Mack said. “It does fit in well with our larger small business customers and our middle market customers.”
The three loan options share some similar features, although each differs somewhat.
The New Loan Facility allows an eligible business to borrow from $500,000 to $25 million. The maximum amount depends on a company’s existing debt. The New Loan Facility is limited to four times a borrower’s 2019 adjusted EBITDA, Ashby said. The bank can sell up to 95 percent of the loan to the Federal Reserve.
In the Priority Loan Facility, eligible businesses also can borrow $500,000 to $25 million with a cap of six times 2019 EBITDA. The bank retains more of the loan, 15 percent, and may sell the remaining 85 percent to the Federal Reserve.
The Expanded Loan Facility allows a borrower to increase the amount of an existing loan with a lender and borrow $10 million to $200 million, with a cap of six times 2019 EBITDA, or 35 percent of existing, undrawn debt. Lenders can sell 95 percent of Expanded loans to the Fed, Ashby said.
The Main Street Lending Program follows the Paycheck Protection Program that Congress created under the CARES Act and the U.S. Small Business Administration quickly put into operation in April.
Through May 26, the SBA approved more than 4.4 million loans for small businesses nationwide totaling $511.2 billion. In Michigan, the SBA approved 113,067 loans totaling $15.7 billion through May 26.
The PPP was designed to help borrowers keep employees on the payroll for an eight-week period. If they did, they can become eligible to have all or part of their loan forgiven by the SBA.
The key difference with the Main Street Lending Program is that unlike PPP, the loans are not forgivable. That may limit the program’s appeal, Mack said. He expects a demand for the program that’s “nowhere close” to what Independent and other banks experienced with the PPP.
“It’ll be more selective because it’s real debt for people to take on,” he said. “They’re going to take it on because they have a use for it to help bridge them through and get to the next side. I think it’ll really be used for ramp up, so when they really see things coming back and they need some more capital support, maybe some equipment they want to do, it’ll fit in in that regard.”
The Main Street Lending Program has a four-year repayment period with borrower payments deferred in the first year.
In loans through the Priority Loan Facility and Expanded Loan Facility, 15 percent of the principal is due at the end of year two, another 15 percent at the end of year three, and then a balloon payment of 70 percent at the end of the fourth year, according to the Federal Reserve. Borrowers through the New Loan Facility will have to pay one-third of the principal at the end of the second, third and fourth year.
While the first-year payment deferral is a “clear advantage of the program,” the overall payback period is “fairly quick” and “may be a hesitation for people,” Mack said.
“They have to be comfortable being able to generate the cashflow to pay it back over a four-year timeframe,” he said. “One year with no payments is good, but then you have three years to pay it back after that.”
Fifth Third Bank, the market leader in West Michigan, does “not see near the demand for this that you saw with PPP” because of the lack of forgiveness and the four-year repayment term, according to Mike Chaffin, the bank’s senior commercial executive in the region. Fifth Third Bank has a team of lenders ready to work with commercial clients interested in considering the Main Street Lending Program, Chaffin said.
The Federal Reserve requires lenders to apply all of their customary underwriting standards to Main Street applicants, plus their usual collateral and guarantees, Varnum’s Ashby said. That’s another difference from the PPP.
“The Fed has indicated very clearly that it’s not willing and it doesn’t expect to take any losses on the program,” said Ashby, who wonders how many companies will actually use the Main Street Lending Program to access credit.
“The reality is going to be that not too many banks are going to be willing to participate and borrowers are going to find it fairly challenging to obtain credit under this program because of the underwriting,” he said. “It’s going to be interesting to see what businesses actually take advantage of this. It’s going to be a narrow band of borrowers who are still in relatively good condition, but they have tapped out their lines of credit and still have a good outlook.”
Some banks that dealt with “quite a bit” of changes in PPP rules even as that program was in progress also may prove reluctant to jump into the Main Street Lending Program, Ashby said, adding they may opt “to take a wait-and-see approach.”
“The banks and borrowers alike have been somewhat surprised and taken off guard by the way that the SBA and Treasury have seemed to change the rules on them. I think there may be some leeriness of jumping into another program,” he said. “Quite honestly, the PPP will pale in comparison to the complexity of the Main Street program. It’s going to be the most complex lending facility the Fed ever endeavored to establish. That means also lenders are going to think carefully about what is in it for them.
“The intent for this is to have broad appeal, but I think in practice it’s going to have limited appeal and limited participation, and that’s unfortunate.”
Main Street Lending Program loans come with restrictions on the ability of borrowers to pay dividends to owners and do stock repurchases and also place limits on executive compensation. Those restrictions would remain in effect a year after a loan is repaid and may lead some prospective borrowers to pass on the program.
“That’s going to give a lot of owners and management teams pause before they jump into this program,” Mike Stapleton, a senior vice president and commercial lender at Mercantile Bank, said during a podcast last month with accounting and consulting firm Rehmann.
As of late May, Chemical Bank was “still evaluating this program to see how we can best do this with our customers. We do plan to participate (and are) figuring out the how at this point,” a spokesman wrote in an email to MiBiz.
At Kalamazoo-based First National Bank of Michigan, “we are very, very interested” in the Main Street Lending Program, said Jefra Groendyk, executive vice president, senior lender and Grand Rapids market president.
“We have a select handful of customers that we think could benefit from it,” Groendyk said.
As the Federal Reserve developed the Main Street Lending Program following adoption of the CARES Act, changes were made from the original plan.
A few weeks ago, Chairman Jerome Powell told the U.S. Senate Committee on Banking, Housing, and Urban Affairs that based on public comment, the Federal Reserve lowered the minimum and raised the maximum loan amounts for each of the three lending options, and expanded the size of the companies that can borrow to up to 15,000 employees.
“These changes should help the program meet the needs of a wider range of employers that may need bridge financing to support their operations and the economic recovery,” Powell said in his committee testimony. “We will continue to adjust facilities as we learn more.”