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By David Brooke
NEW YORK, Aug 12 (LPC) - US lawmakers are pushing the US Federal Reserve (Fed) to relax guidelines on its Main Street lending program to make it more inclusive for small and mid-size borrowers and their lenders.
The program came under fire during Friday's Congressional Oversight Commission hearing, where lawmakers expressed concerns mid-sized companies in need of financial assistance could not easily access federal funds. So far, just US$189m of loans across 29 transactions have either been committed or settled since the program’s introduction.
Both the Main Street New Loan Facility (MSNLF) and Main Street Priority Loan Facility (MSPLF) were introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March in to help middle market businesses respond to the coronavirus impact on the US economy.
The Fed is administering the US$600bn program overseen by the Federal Reserve Bank of Boston. While banks originate the loans, 5% is held by the lenders and 95% is held by the government under the program.
The Congressional Oversight Commission is a bipartisan committee established under the CARES Act to regularly review the impact of the Main Street lending programs.
Republican Representative French Hill of Arkansas said that the affiliation rules of both programs are a “significant barrier” for banks providing credit to mid-market companies.
Under both programs, companies that employ less than 15,000 people and generate revenues below US$5bn can qualify. But companies are deemed affiliated if one entity owns more than 50% of a separate company, therefore boosting the overall employee count. Many private equity-owned companies therefore cannot qualify for a loan.
Republican Senator Pat Toomey of Pennsylvania raised the point that loans made under the scheme are likely too risky for banks and suggested that the program should be extended to business development companies to act as lenders, who are “more inclined and willing to take more credit risk.”
Democratic Representative Donna Shalala of Florida said the trend of banks increasing restrictions on loan documentation to reflect the wider uncertainty related to the pandemic “undermines” the goal of the program of getting financing to struggling middle market borrowers.
Eric Rosengren, chief executive officer of the Federal Reserve Bank of Boston, spoke on behalf of the program and said it is still in its early stages due to the bespoke nature of bank loans compared with public securities. The deadline of both schemes is December 31, 2020.
“We’re slowly seeing an increase in volume. One of the challenges of dealing with bank loans is that it doesn’t happen quickly and can frequently take many, many months before they get the negotiation completed,” Rosengren said.
At the hearing, Vince Foster, executive chairman of Main Street Capital Corp, a private debt firm, said that the program “is not responsive to their (middle market companies) needs as currently structured.”
Under both programs, loans are limited to a spread of 300bp over Libor at a maximum 4 times earnings before interest, taxes, depreciation and amortization (Ebitda) for companies borrowing under the MSNLF and 6 times Ebitda under the MSPLF. This means that for the risk lenders take they are not generating a sufficient return.
Instead, he suggests that spreads should be increased to 400bp over Libor with maximum leverage for MSNLF increased to 6 times Ebitda and to 7.5 times Ebitda for MSPLF.
Foster was also critical of the “onerous” amortization restrictions and the five-year tenor limits. Loans under the program require 15% of the principal be paid off at the end of the third year after issuance, a further 15% at the end of the fourth year, and the remaining 70% at maturity.
As a remedy, Foster recommended that tenors on loans be extended to seven years with amortization not beginning until the end of the fourth year, providing extra time for companies to manage their cash flows.
Foster pointed to the requirement that existing debt must be subordinate to or pari passu, in the case of the MSPLF, with the new loans made under both programs as a key barrier for more lenders tapping the program. Instead, loans made under both programs should be unsecured and rank junior to existing senior debt facilities.
“The lending facilities as currently structured are unattractive to those borrowers that are reasonably creditworthy as less restrictive financing is likely to be available from conventional sources,” Foster said at Friday’s hearing.
“Yet the facilities remain unavailable due to lender reluctance to accept balance sheet exposure with respect to less creditworthy borrowers,” he added. (Reporting by David Brooke. Editing by Michelle Sierra and Kristen Haunss.)