Seeking to stabilize an economy that has shed tens of millions of jobs over the past three weeks, the Federal Reserve has announced a series of programs to provide up to $2.3 trillion in loans to households, businesses, and state and local governments struggling to deal with the COVID-19 pandemic.
For accountants, the part of the package that most bears watching is the new Main Street Lending Program, which provides for up to $600 billion in loans to small and midsize businesses. The Fed also will supply liquidity and certain regulatory relief to financial institutions in an effort to bolster the effectiveness of the U.S. Small Business Administration’s (SBA’s) Paycheck Protection Program (PPP).
The Main Street program fills a need for middle-market business funding not covered by the PPP, which was authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, to make $349 billion in forgivable loans to businesses with up to 500 employees. The Main Street program is available to U.S. companies with up to 10,000 employees and less than $2.5 billion in 2019 revenue that were in good financial standing before the COVID-19 crisis sparked widespread stay-at-home orders and stalled the American economy, leading to nearly 17 million people filing new claims for unemployment benefits over the past three weeks.
“The intention is to get money into the middle market to keep people employed,” said John D. Lanza, CPA, a partner with accounting firm CohnReznick and co-author of the firm’s summary of the Main Street program.
Lanza sees the Main Street loans as the logical next step in the federal government leveraging funds from the CARES Act to keep American workers off the unemployment rolls.
“Midsize firms are facing a lot of the same problems as small firms,” Lanza said. “They need liquidity over the next 90 days to keep people employed.”
Start with the banks
As with PPP loans, businesses seeking Main Street funding will need to apply through banks and other lenders authorized to process the loans. The opening of the PPP application window on April 3 prompted a tsunami of small businesses to seek the funding through SBA-authorized lenders. The deluge of applications, as many per day as the SBA usually receives in a year, overwhelmed the agency’s staff and antiquated technology, resulting in many delays. Despite that, demand for the funds was so overwhelming that Treasury Secretary Steven Mnuchin announced Tuesday that the Trump Administration was already asking Congress for an additional $250 billion in funding for the program, though the funding was held up in negotiations going into Monday.
Based on the PPP’s experience, Lanza expects a similar rush of applications for Main Street funds.
“You’ve got to expect there will be pressure on that, similar to the PPP, where it truly was first-come, first-served, at least initially,” Lanza said. “Once we see an application, you have to expect there will be a run to lenders who can provide access to the $600 billion.”
The Fed did not release a timeline for the Main Street program, but Vice Chairman Randal Quarles, the Fed’s chief banking supervisor, told CNBC it would probably take two to three weeks for the Fed to get the program up and running through the banks.
CPAs, especially those advising midsize companies, should be watching the Fed closely for new information, including the application, to be issued soon, Lanza said. If they haven’t already, firms should start gathering the information clients will need to apply to the Main Street program. This will be particularly urgent for clients that were ineligible for the PPP, though eligible companies can receive funds from both the PPP and the Main Street program.
CPAs should be advising clients to reach out to their bank and other lenders about whether they will be able to apply for Main Street funding through those institutions. Many small businesses, especially those that have never had to take on debt, have struggled to find banks willing to take them on as a new lending client so they can apply for PPP assistance. While midsize businesses tend to have more complex balance sheets with debt instruments, they need to make sure as soon as possible that their bank is participating in the program and, if the bank is not, reach out to other lenders.
“Companies will only get access to this program through lenders,” Lanza said. “Like the PPP, they will need to find a participating lender, and there may be a bottleneck as businesses scramble to get into this program.”
The Main Street loans have a four-year term with principal and interest payments deferred for the first year. Eligible banks may originate new Main Street loans or use Main Street funding to increase the size of existing loans they have with businesses. The loans have an adjustable rate of the secured overnight financing rate (SOFR) plus 250 to 400 basis points, with prepayment of the loan permitted without penalty.
New Main Street loans must be for at least $1 million and no more than the lesser of $25 million or an amount, when added to the borrower’s existing outstanding and committed but undrawn debt, four times the borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA). Main Street loans added to existing loans must be at least $1 million and no more than the lesser of $150 million, 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA.
The Main Street program requires companies borrowing the funds to make “reasonable efforts” to maintain their payroll and retain their employees during the term of the loan. Borrowers also must commit to not using the funds to repay or refinance preexisting loans and lines of credit.
Provisions for the PPP
The Fed also has taken actions to help bolster the effectiveness of the PPP. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. In addition, the Fed, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. issued an interim final rule permitting banks to not include PPP loans made under the PPPLF with any of their required capital ratios, meaning that the loans won’t be counted against the banks when examiners review their books.
In addition, the Fed said PPP lenders would not be held liable for representations made by borrowers in connection with a borrower’s request for loan forgiveness under the PPP.
These moves could encourage banks to make more PPP loans.
“The Federal Reserve is certainly doing what they can to allow banks to go beyond typical capacity,” said Carl Peterson, CPA, CGMA, the AICPA’s vice president–Small Firm Interests.
Lanza also sees reason for optimism.
“I think providing the banks leeway in their reporting will allow them some flexibility to accept some debt they wouldn’t before,” he said.
In addition to the Main Street program, the Fed has designated funds to:
- Increase the flow of credit to households and businesses through capital markets by expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) as well as the Term Asset-Backed Securities Loan Facility (TALF). These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection provided by Treasury; and
- Help state and local governments manage cash flow stresses caused by the coronavirus pandemic by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities. Treasury will provide $35 billion of credit protection to the Federal Reserve for the Municipal Liquidity Facility using funds appropriated by the CARES Act.
For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA’s coronavirus resources page.
The AICPA's SBA Paycheck Protection Program Resources for CPAs page houses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.
— Jeff Drew (Jeff.Drew@aicpa-cima.com) is a JofA senior editor.