Federal Reserve expanding Main Street loan programme to aid more firms

[WASHINGTON] The US Federal Reserve said on Thursday it is expanding its business loan programme to reach more firms as companies struggle to weather the impact of the coronavirus shutdowns.

The Main Street Lending Programme, which the Fed announced but has not yet launched, was designed to reach small and medium-sized businesses that are too big to benefit from the Paycheck Protection Program run by the Treasury Department.

The Fed in recent weeks has rushed out a series of emergency programmes to pump liquidity into the US economy amid the severe downturn caused by the effort to contain the spread of the coronavirus, including buying unlimited amounts of US Treasury debt, corporate bonds and mortgage-back securities.

After hearing from thousands of firms about the Main Street programme, the Fed board "decided to expand the loan options available to businesses, and increased the maximum size of businesses that are eligible for support under the programme."

With the expansion, businesses with up to 15,000 employees or as much as US$5 billion in annual revenue are now eligible, compared to the initial programme terms, which limited the size to 10,000 employees and US$2.5 billion in revenue.

In addition, the Fed lowered the minimum loan size to US$500,000 from US$1 million.

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The central bank said it decided to open the aperture of the loan program to aid companies too big for PPP but too small to have routine access to capital markets to generate financing.

However, the firms benefitting from the US$600 billion in available loans are subject to the restrictions Congress required under the US$2.2 trillion CARES Act: they cannot issue dividends or buy their own shares until one year after the conclusion of the loan, and there are restrictions on executive pay.

But too many restrictions would discourage firms from applying and limit the potential benefit of the loans. Even so, Fed Chair Jerome Powell on Wednesday cautioned that demand might be constrained by firms reluctant to take on more debt.

"We are deploying these lending powers to an unprecedented extent," Mr Powell said, noting that the Fed will continue to look for more ways to expand lending.

EXPANDING PPP FINANCING

Unlike PPP loans, which turn into grants as long as most of the funds are used to pay workers, the Main Street loans are not forgivable and go only to businesses that were solvent before the crisis.

Officials are working around the clock to finalise the details of the Main Street programme, and "a start date for the programme will be announced soon," the Fed statement said.

It also is considering a separate programme to help nonprofit organisations, which play a "critical role" in the economy, the statement said.

Later Thursday the Fed announced it was expanding the programme to backstop PPP loans, to allow more financial institutions to participate beyond traditional banks.

That means community development institutions as well as members of the Farm Credit System - which provides financing to American farmers and ranchers - and other lenders approved by the Small Business Administration are now eligible to participate in the Fed's PPP Liquidity Facility.

The facility offers unlimited low-cost financing to the lenders using PPP loans as collateral, for terms of two years.

AFP