4/10/20

Federal Reserve to the Rescue of Main Street

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On April 9, 2020, the United States Federal Reserve issued guidance for the distribution of $2.3 trillion in loans to support the economy.  The Federal Reserve has continually promised to use its full range of tools to support the flow of credit to households and businesses to counter the economic impact of COVID-19 and to promote a swift economic recovery.  The programs unveiled by the Federal Reserve have been expected since the CARES Act was passed two weeks ago and this alert highlights the guidance for the Main Street Lending Program, funded with $600 billion in loans from the Federal Reserve, and also discusses the other programs discussed in the Federal Reserve’s guidance.

Main Street Lending Program

The Federal Reserve’s Main Street Lending Program provided guidelines for two loan categories: (i) the Main Street New Loan Facility, to issue new loans (MSNLF), and (ii) the Main Street Expanded Loan Facility, to increase the size of existing loans (MSELF), both of which are intended to further facilitate lending to small and medium-sized businesses by eligible Lenders to eligible Borrowers.  Under the Program, Lenders will retain 5% of (i) the new loan with respect to MSNLF Loans and (ii) the upsized tranche of the loan with respect to MSELF Loans (Loan) and will sell the remaining 95 percent of the Loan to the Main Street SPV, which will purchase up to $600 billion of Loans through September 30, 2020.

Who is Eligible?

Eligible Borrowers are businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues.  Each Borrower must be a business that is created, organized, or operating under the laws of the United States and has significant operations in and a majority of its employees based in the United States.

Borrowers that have taken advantage of the PPP may also take out a Main Street Loan but may only participate in one of the (i) MSNLF, (ii) MSELF or the Primary Market Corporate Credit Facility.

What are the Loan Terms?

Main Street Loans must be made by an “Eligible Lender(s)” to an “Eligible Borrower” and must:

Are There Any Restrictions?

In addition to certifications required by applicable statutes and regulations, the following attestations will be required with respect to each Loan:

As of the date of this alert, the Main Street Lending Program is not yet in effect.  The Federal Reserve has released this initial guidance, but the terms may change as additional details are provided. 

Paycheck Protection Program Lending Facility

To bolster effectiveness of the Small Business Administration's Paycheck Protection Program (PPP) the Federal Reserve Banks (Reserve Banks) will lend to depository institutions in such Reserve Bank’s district that originate PPP Loans on a non-recourse basis, taking only PPP Loans as collateral – which will be valued at the principal amount of the PPP Loan.

The extension of credit under this Facility will be made at a rate of 35 basis points and there are no fees associated with the Facility

The maturity date of credit under the Facility will equal the maturity date of the PPP Loan pledged to secure the extension of credit and will be accelerated (i) if the underlying PPP Loan goes into default and the eligible borrower sells the PPP Loan to the SBA to realize on the SBA guarantee or (ii) to the extent of any loan forgiveness reimbursement received by the eligible borrower from the SBA.

As the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation communicated in their interim final rule on April 9, 2020 to allow banking organizations to neutralize the effect of PPP Loans financed under the Facility on leverage capital ratios, a PPP Loan will be assigned a risk weight of zero percent under the risk-based capital rules of the federal banking agencies.

No new extensions of credit will be made under this Facility after September 30, 2020, unless the Federal Reserve and the Department of the Treasury determine to extend the Facility.

Market Corporate Credit Facilities

To increase the flow of credit to households and businesses through capital markets, the Federal Reserve has expanded the size and scope of the Primary and Secondary Market Corporate Credit Facilities, as well as the Term Asset-Backed Securities Loan Facility (see below). These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Department of the Treasury.

Term Asset-Backed Securities Loan Facility

To support further credit flow to households and businesses, the Federal Reserve will broaden the range of assets that are eligible collateral for the Term Asset-Backed Securities Loan Facility (TALF). TALF-eligible collateral will now include the AAA rated tranches of both outstanding commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility will remain $100 billion, and TALF will continue to support the issuance of asset-backed securities that fund a wide range of lending, including student loans, auto loans, and credit card loans.

Municipal Liquidity Facility

The Municipal Liquidity Facility is designed to help state and local governments better manage cash flow pressures in order to continue to serve households and businesses in their communities. The facility will purchase up to $500 billion of short term notes directly from U.S. states (including D.C.), U.S. counties with a population of at least two million residents, and U.S. cities with a population of at least one million residents. Eligible state-level issuers may use the proceeds to support additional counties and cities. The Federal Reserve will also continue to evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments.

Final Rules and Additional Guidance

The Federal Reserve and the Department of the Treasury are taking comments on these programs until April 16, 2020 at which time it is expected formal rules and additional guidance will be provided. 

If you have questions about the Main Street Lending Program or the CARES Act and how they apply to your business or investment, please contact Christopher DePizzo, Marty Gates, Drew Parobek, Elia Woyt, or your regular Vorys attorney.

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