Key facts about the Fed’s $ 2.3 trillion loan initiative
Seeking to stabilize an economy that has shed tens of millions of jobs over the past three weeks, the Federal Reserve has announced a series of programs to provide up to $ 2.3 trillion in loans to households, businesses, and state and local governments struggling to cope with the COVID-19 pandemic.
For accountants, the part of the package that deserves the most attention is the new Main Street loan program, which provides up to $ 600 billion in loans to small and medium-sized businesses. The Fed will also provide liquidity and some regulatory relief to financial institutions in an effort to boost the effectiveness of the US Small Business Administration’s (SBA) Paycheck Protection Program (PPP).
The Main Street program addresses a financing need of middle market companies not covered by the PPP, which was authorized under Law PL 116-136 on Coronavirus Aid, Relief and Economic Security, to grant $ 349 billion in forgivable loans to businesses with up to 500 employees. The Main Street program is available to U.S. businesses with up to 10,000 employees and sales of less than $ 2.5 billion in 2019 that were in good financial health before the COVID-19 crisis triggered Numerous stay-at-home orders and cripples the US economy, causing nearly 17 million people to file new claims for unemployment benefits in the past three weeks.
“The intention is to inject money into the middle market to keep people working,” said John D. Lanza, CPA, partner at the accounting firm CohnReznick and co-author of the firm report. abstract of the main street program.
Lanza sees the Main Street loans as the next logical step in mobilizing federal government funds from the CARES Act to keep American workers out of unemployment.
“Mid-sized businesses face many of the same issues as small businesses,” Lanza said. “They need cash over the next 90 days to keep people working.”
Start with the banks
As with PPP loans, businesses seeking financing on Main Street will need to apply to banks and other lenders authorized to process the loans. The opening of the PPP application window on April 3 prompted a tsunami of small businesses to seek financing from SBA-approved lenders. The deluge of applications, as many per day as the SBA usually receives in a year, overwhelmed agency staff and archaic technology, causing numerous delays. Despite this, the demand for funds was so overwhelming that Treasury Secretary Steven Mnuchin announced on Tuesday that the Trump administration was already asking Congress for $ 250 billion in additional funding for the program, although the funding was stuck in negotiations go into monday.
Based on the PPP experience, Lanza expects a similar rush of fundraising requests for Main Street.
“You have to expect that there will be pressure on this, similar to PPP, where it was really first come, first served, at least in the beginning,” Lanza said. “Once we see a demand, you should expect there to be a race for lenders who can provide access to the $ 600 billion.”
The Fed has not released a timetable for the Main Street program, but Vice President Randal Quarles, the Fed’s chief banking supervisor, told CNBC that it would likely take the Fed two to three weeks to put the program in place and make it work through the banks.
CPAs, especially those who advise midsize companies, should watch the Fed closely for new information, including the demand, to be released shortly, Lanza said. If they haven’t already, businesses should start collecting the information customers will need to enroll in the Main Street program. This will be especially urgent for clients who were not eligible for the PPP, although eligible businesses may receive funds from both the PPP and the Main Street program.
CPAs should advise clients to contact their bank and other lenders to see if they will be able to apply for Main Street financing through these institutions. Many small businesses, especially those that have never had to go into debt, have struggled to find banks willing to accept them as new lending customers so they can apply for PPP assistance. While midsize companies tend to have more complex balance sheets with debt instruments, they should make sure their bank is on the program as soon as possible and, if the bank does not, contact other lenders. .
“Businesses will only have access to this program through lenders,” Lanza said. “Like the PPP, they will need to find a participating lender, and there may be a bottleneck as companies scramble to enter this program.”
Main Street loans have a term of four years and payments of principal and interest are deferred in the first year. Eligible banks can make new Main Street loans or use Main Street financing to increase the size of existing loans they have with businesses. The loans have an adjustable rate of the guaranteed overnight financing rate (SOFR) plus 250 to 400 basis points, with prepayment of the loan allowed without penalty.
New Main Street loans must be at least $ 1 million and no more than the lesser of $ 25 million or an amount, when added to the borrower’s existing and committed debt but unused, four times the borrower’s 2019 profit before interest, taxes, depreciation, and amortization (EBITDA). Main Street loans added to existing loans must be at least $ 1 million and no more than the lesser of $ 150 million, 30% of the borrower’s existing bank debt outstanding and committed but not used , or an amount which, when added to the outstanding amount and debt committed but not drawn, does not exceed six times the borrower’s 2019 EBITDA.
The Main Street program requires companies borrowing the funds to make “reasonable efforts” to maintain payroll and retain employees for the life of the loan. Borrowers must also agree not to use the funds to repay or refinance pre-existing loans and lines of credit.
Arrangements for PPP
The Fed has also taken steps to help strengthen the effectiveness of the PPP. The Paycheck Protection Program (PPPLF) liquidity facility will extend credits to eligible financial institutions that issue PPP loans, taking the loans as collateral at face value. In addition, the Fed, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. have issued an interim final rule allowing banks not to include PPP loans made under the PPPLF with any of their required capital ratios, meaning that the loans will not be charged to banks when examiners review their books.
In addition, the Fed has said that PPP lenders will not be held responsible for statements made by borrowers in connection with a borrower’s loan cancellation request under the PPP.
These measures could encourage banks to grant more PPP loans.
“The Federal Reserve is certainly doing what it can to allow banks to go beyond their usual capacity,” said Carl Peterson, CPA, CGMA, vice president of AICPA – Small Firm Interests.
Lanza also sees reasons for optimism.
“I think giving banks leeway in their reporting will allow them some flexibility to accept certain debts that they would not have previously,” he said.
In addition to the Main Street program, the Fed has designated funds for:
- Increase the flow of credit to households and businesses through the capital markets by expanding the size and scope of primary and secondary market business credit facilities (PMCCF and SMCCF) as well as the asset-backed securities lending facility. term assets (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 the cash flow strains caused by the coronavirus pandemic by establishing a municipal liquidity facility that will provide up to $ 500 billion in loans to states and municipalities. The Treasury will provide $ 35 billion in credit protection to the Federal Reserve for the municipal liquidity facility using funds earmarked by the CARES Act.
For more information and stories on the coronavirus and how CPAs can handle the challenges of the pandemic, visit JofA‘s coronavirus resource page.
AICPA SBA Paycheck Protection Program Resources for CPAs The page houses resources and tools produced by the AICPA to help cope with the economic impact of the coronavirus.
– Jeff drew ([email protected]) is a JofA senior editor.