The Federal Reserve is preparing to lend directly to middle-market businesses, filling a hole left by the government’s economic crisis relief efforts, and it is shaping up to be one of the trickiest things it has ever done.
The risk for the Fed is that it goes where the central bank has rarely ventured and that not many businesses seek help, creating both financial and political headaches, The Wall Street Journal reports.
The Maine Street Lending Program is designed to assist companies like LMI Aerospace, a Missouri-based maker of airplane parts that is too large to get help under the Small Business Administration’s loan program but too small to benefit from the Fed’s other corporate-lending backstops.
Under the Fed’s middle-market program, a company would get a loan from a bank, which would then sell up to 95% of the debt to the Fed. This leaves the bank with less additional debt on its books and free to make more loans to other borrowers.
After credit markets started seizing up amid the coronavirus pandemic, the Fed responded in March and April with promises to backstop them—including corporate and municipal debt markets—reducing borrowing costs and lifting stocks.
With the midsize business program, a key challenge is setting the terms so the Fed doesn’t become a dumping ground for bad loans—but not so onerous that companies don’t want to participate.
“The Main Street program is going to be tremendously complicated,” says former Fed Chair Janet Yellen. “One of the problems with this program is that it may turn out to be insufficiently generous.”
The Main Street program is open to companies with up to 15,000 employees or less than $5 billion in revenue last year. More than 19,000 U.S. firms had between 500 and 15,000 employees in 2017, and they collectively employed between 30 million and 40 million Americans, according to Census Bureau data.
Banks can lend up to $25 million in new loans or refinance up to $200 million in an existing loan if a firm’s total debt, relative to its 2019 earnings, is below certain thresholds. Borrowers face restrictions on executive compensation and distributions to shareholders. Read the full story.
