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Fed expands scope of loan program to Main Street

·Reporter
·3-min read
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The Federal Reserve announced more details on its $600 billion lifeline to Main Street businesses on Thursday morning, expanding the scope of its facility by increasing the amount of eligible businesses and lowering the minimum loan size.

Companies with up to 15,000 employees or up to $5 billion in annual revenue will now be eligible for the Fed’s four-year, low-cost loans under the Main Street Lending Program. When the Fed originally announced the program, the central bank set the eligibility requirements at 10,000 employees and $2.5 billion, respectively.

The Fed also lowered the minimum loan size available under the program, to $500,000 from $1 million.

“With the changes, the program will now offer more options to a wider set of eligible small and medium-size businesses,” the Fed said.

The Fed says it is also “evaluating a separate approach” to meet the needs of nonprofit organizations. Colleges and universities, for example, are facing massive funding gaps as the coronavirus keeps students at home.

Three different types of loans

The Main Street Lending Program will allow lenders to underwrite three types of loans with different maximum loan sizes.

Under the Fed’s “new loan” facility, borrowers can borrow up to $25 million or an amount equal to four times the company’s 2019 adjusted EBITDA. The lender would retain 5% of the loan and sell the remaining 95% to the Fed’s facility.

Under a “priority loan,” the borrower can borrow up to $25 million or six times the company’s 2019 adjusted EBITDA. Because of the higher ceiling for risk, the lender would have to retain 15% of the loan.

Lastly, an “expanded loan” is targeted at larger borrowers and would allow a lender to restructure an existing loan of a minimum size of $10 million. The maximum loan size would be the lesser of $200 million or 35% of outstanding and undrawn available debt.

The Fed says it will announce a start date “soon.”

All three of the loans are four-year loans with deferred principal and interest payments for the first year. The interest rate terms will be LIBOR plus 3%, a slight change from the program’s original plan to index rates against the Secured Overnight Financing Rate.

The program will not allow the loans to convert to grants, as is the case for the Paycheck Protection Program established by Congress through the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The Fed’s program, to be backed by $75 billion of equity from the U.S. Treasury, hopes to target companies larger than those that sought help through the PPP but are too small to access capital markets.

In a press conference yesterday, Fed Chair Jerome Powell had said the program would be launched soon and said demand could be weaker as a result of the fact that they are not grants.

But unlike the PPP, Powell said funding would not be an issue for its facility.

“We won’t run out of money,” Powell said.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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