3 Min Read
WASHINGTON (Reuters) - The U.S. Federal Reserve responded fast to the coronavirus crisis with open-ended programs to keep financial markets running and ensure major companies could raise cash as they usually do through large capital markets.
By forcing major parts of the economy to simply stop operating, however, the current crisis poses a direct threat to the hundreds of thousands of small and medium-sized businesses that don’t raise money by issuing stocks or bonds, but rely on myriad combinations of bank loans, owner’s capital and, in some cases, personal credit cards or home equity loans.
The Fed, in coordination with the Treasury Department, has now announced a Main Street Lending Facility as one of its linchpin programs in the crisis.
Here are the details:
In the $2.3 trillion emergency response bill enacted on March 27, $454 billion is set aside for the U.S. Treasury to use for new programs at the Fed, including the one for “Main Street.” The Fed has only accessed a portion of that, with about $250 billion still available for programs yet to be determined.
The Fed is being provided with a $75 billion equity stake from the Treasury and will use that to provide $600 billion in credit to companies.
The Fed gets its punch through “leverage,” in this case taking the money from Treasury and allowing financial institutions to create about eight times that amount in loans. The Fed is not supposed to take losses, since that would amount to laying out taxpayers’ money that it is not authorized to spend. But most loans don’t go bad: in effect every dollar provided by Treasury allows many more dollars of lending, because most of it will be repaid. The Treasury’s funds are there to cover only the small portion expected to go bad.
Banks will make loans to companies. The loans are for four years, for a minimum of $1 million, with payments deferred for a year and an expectation that payrolls and wages will be kept largely intact. The bank can then sell up to 95% of that loan to a new Fed “special purpose vehicle.” The Fed is restricted from lending directly to companies or individuals, but it can use “SPVs” to lend or in this case to purchase loans from banks. Because those lending institutions know they can send the loans to the SPV, they are willing to make deals with companies and consumers even in a risky environment.
In theory any company with fewer than 10,000 workers or less than $2.5 billion in revenue. But in practice this is designed to help firms that are too big for a Small Business Administration program open to businesses with up to 500 workers, and too small to raise money on public capital markets. According to federal data there were about 18,000 companies as of early 2019 with more than 500 workers. The firms are supposed to have been “in good financial standing” before the crisis. The Fed will lean heavily on banks to document that: lenders are required to keep a 5% stake in each loan, and thus be exposed to losses, to help ensure so.
Reporting by Howard Schneider; Editing by Dan Burns and Andrea Ricci
