Exploring Government Assistance Programs for Larger Businesses
There has been quite a bit of attention paid over the last two weeks to the Paycheck Protection Program (PPP) -- the small business assistance facility established by Congress under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act and administered by the U.S. Small Business Administration (SBA). For good reason: according to JPMorgan Chase, small businesses employ approximately 48 percent of all workers across the U.S. economy. And, with the SBA reporting last night that the PPP has exhausted nearly all of the $347 billion Congress has provided to it, the focus on this one element of the CARES Act is understandable.
But to provide support to the employers of the rest of the American workforce, the Federal Reserve and Department of the Treasury are working to stand up another set of lending programs for larger businesses (though small firms also will be eligible for these loans as well). Like the PPP, these programs also were authorized under the legislation Congress enacted just a few weeks ago.
Specifically, the CARES Act allotted $500 billion for Treasury to give loans, guarantees, and other financial support to eligible businesses, and local and state governments. About 10 percent of that sum, $46 billion, is reserved for airlines and other businesses “deemed critical to national security.” The remaining money will go to all types of businesses. Like with the PPP, the loans will originate with the banks. And, like the PPP, “The intention is to get money into the middle market to keep people employed,” as accountant John D. Lanza told the Journal of Accountancy.
The Fed will buy up almost all of the value these loans, which as SmartAsset explains, will “help banks give money more freely to businesses” since the purchases will “free” banks “of most of the risk.” And, as The New York Times reported as the CARES Act was working its way through Congressional approval, the Fed’s ability to leverage these loans could provide “a $4 trillion booster shot to the economy.”
Last week, the Fed announced the specifics of this effort, which is called the Main Street Lending Program (MSLP). The MSLP has two components: the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF). These two new facilities will, between them, businesses that employ up to 10,000 workers, have annual revenues of less than $2.5 billion, and were “in good financial standing” prior to the pandemic to gain access to significant capital.
But, as the law firm Steptoe & Johnson explains, these loans will come with substantially more stipulations than the PPP. In fact, some pundits are arguing that some of the caveats attached to the funding might keep potential borrowers from being interested.
For example, non-airline and non-national security related businesses that receive these loans must certify they are domiciled in the United States, have significant operations here, and base most of their employees in the United States. During the term of the loan, they also must not increase compensation for anyone already earning more than $425,000 and must not pay executives who made more than $3 million in 2019 more than $3 million plus half of the amount they made over $3 million last year in 2020. (A little math for that last, incredibly confusing, stipulation: say an executive earned $4 million last year. For 2020, and until the end of the term of the loan, the executive would be prohibited from earning more than $3.5 million.)
Firms that receive this assistance must retain at least 90 percent of their workforces at full compensation and benefits until at least September 30, 2020 and “restore not less than 90 percent of its pre-February 1, 2020 workforce with full compensation and benefits no later than four months after the termination date of the public health emergency.” These organizations also must not have “otherwise received adequate economic relief in the form of loans or loan guarantees provided under” other CARES Act provisions.
Even that list does not encompass all the burdens on borrowers.
Firms that receive loans under the program also will have to agree not to pay dividends to their common stockholders or to repurchase an equity security of the company or its parent. They will have to agree not to outsource or offshore jobs for the term of the loan and two years after completing repayment. During that same period, they also will have to agree not to abrogate existing collective bargaining agreements and, during the term of the loan only, they will have to remain neutral in any union organizing effort.
The Wall Street Journal editorial board doesn’t like these “strings.” After last week’s Fed announcement, it wrote, “The better solution would be no-strings loans to all-comers with good collateral and only for the short-term.”
Steptoe & Johnson seems to agree. The firm notes, “There will be significant reporting requirements for all participants … In these respects, and many others, program participants need to exercise great care to make sure their submissions are accurate.” And what happens if a company does not fulfill the obligations, or does not make accurate submissions? According to the firm, “The unwary may unwittingly expose themselves to criminal prosecution and very substantial civil liability …”
Any potential borrower still interested? Then here are the terms:
The maximum loan term is four years, but a borrower can defer payment of principal and interest for a year;
There are fees, specifically an origination or upsizing fee of 100 basis points of the principal amount of the loan with the MSNLF or of the upsized tranche of the MSELF;
The eligible borrower also will pay an annual loan servicing fee of 25 basis points of the principal amount of a lender’s participation in new loans under the MSNLF or in the upsized tranche of an expanded loan under the MSELF;
The interest rate is an adjustable-rate of Secured Overnight Financing Rate (SOFR) plus 250-400 basis points, but the rate is capped at two percent for not-for-profits; and
Loans are not forgivable.
Even with less forgiving terms than the PPP, and the myriad of stipulations explained above, John Lanza, the accountant interviewed by the Journal of Accountancy, expects a lot of competition for this program. He said, “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.”
The good news (if there is any)? Borrowers have time to prepare their paperwork. The rush will start in two to three weeks when the Fed expects to have the Main Street Lending Program up and running.