The Main Street Lending Program, unveiled earlier this month, will now allow larger businesses to participate in the program, and it will relax minimum loan amounts to help more small businesses.
Under the program, businesses can solicit loans of up to four years from banks at below-market rates. Unlike loans under the Small Business Administration’s Paycheck Protection Program, these must be repaid, but payments can be deferred in their first year.
Businesses with up to 15,000 employees and $5 billion in annual revenue in 2019 are now eligible, up from earlier limits of 10,000 employees and $2.5 billion in revenue. The minimum loan size will also decline to $500,000, from $1 million.
The Fed had initially unveiled two different loan options, one for new debt and one for existing loans. Each of those require banks that make loans and sell them to the Fed to retain a 5% piece of the debt.
On Thursday, the Fed said it would create a third option for firms with higher debt loads. Under that program, banks will have to maintain a larger 15% stake in the debt sold to the Fed.
The Fed hasn’t said when the program will be up and running but said Thursday a start date would be announced soon. The program will be run by the Federal Reserve Bank of Boston.
The central bank had asked for public comment when it produced initial term sheets for the programs on April 9 and said it had received more than 2,000 responses. Several industries, including retailers, energy firms and transportation companies, had lobbied the Fed to expand the programs to include more flexible loan terms and larger businesses.
The changes announced Thursday will allow borrowers to calculate their earnings using measures that account for industry-specific idiosyncrasies, which could allow more indebted firms to qualify. The new loan program will also allow borrowers to use loans to refinance other debt.
But the rules tightened other eligibility requirements. The Fed is adopting definitions of eligible businesses used by the SBA that are likely to exclude private-equity firms and the businesses they own from being eligible for loans.
The Fed also didn’t create an option for firms that rely on asset-based lending instead of term loans, which means many oil-and-gas companies, which had mounted a lobbying effort to be included in the program, will find it difficult to gain access, lawyers and analysts said.
With oil prices down sharply over the past two months, “the shale players are carrying too much leverage,” said Constance Hunter, chief economist at accounting firm KPMG LLP. Banks will be reluctant to extend loans to indebted firms with a bleak revenue outlook given the requirement that they retain 15% of the loan, she said.
“When the Fed is asking the banks to take anywhere from a 5% to 15% stake, they are telling you, ‘We are lending to good companies that are in a tough situation because of the virus,’” said Steven Blitz, chief U.S. economist at research firm TS Lombard. “This is not about helping out levered, distressed sectors.”
The Fed said it is evaluating a separate approach that would extend the program to nonprofit institutions, such as hospitals and universities.
The lending program is designed to fill a void for middle-market firms that are too large to qualify for the Paycheck Protection Program but too small to access debt markets where large corporations borrow and where the Fed is launching separate programs to backstop debt that was rated investment grade as of March 22.
The Fed has backstopped a range of debt markets with nine different emergency lending programs, but the Main Street Lending Program will be its most complicated task, current and former Fed officials say. For the first time since the Great Depression, the central bank has stepped into lending broadly to American businesses through the banks it oversees.
“This is a broad area of the economy with many different kinds of credit needs. So we’re going to keep at that for some time, adding in sectors and lending products,” Fed Chairman Jerome Powell said at a news conference Wednesday. “We’re well aware of the importance of doing it as quickly as possible.”
The Treasury Department is providing $75 billion to backstop any losses on loans the Fed makes in the program.