Explore The Main Street Lending Program - InvestingChannel

Explore The Main Street Lending Program

In a complex and expansive slew of market intervention, the Federal Reserve made history by announcing limitless QE, and the launch of the Main Street Lending Program – one of the central bank’s most complex financial undertakings.

To aid the virus-hit economy, the program will offer up to $600 billion in loans through participating lenders to small and medium-sized businesses. The program will operate through three facilities:

  1. MSNLF: Main Street New Loan Facility
  2. MSPLF: Main Street Priority Loan Facility
  3. MSELF: Main Street Expanded Loan Facility

It will be administered by the Boston Fed and will be implemented through a special purpose vehicle (SPV). New loans can be originated via MSNLF and MSPLF while existing loan amounts can be “upsized” under the MSELF.

The Main Street Lending Program comes as an additional credit facility for banks, credit unions, and small businesses, who can apply for funding even if they have used other Fed lending programs. For businesses, the two major qualifying criteria to seek funding are:

  1. 15,000 employees or fewer
  2. Revenue <$5 billion in 2019

In contrast to loans offered through the Paycheck Protection Program, loans originating from the Main Street Lending Program cannot be forgiven. Moreover, the Paycheck Protection Program limits eligibility to businesses with fewer than 500 employees. Loans offered via the PPP can be turned to grants (forgiven) if businesses meet certain requirements.

When catering to small banks and credit unions, the Main Street Lending Facility will simply purchase 95% of the loan amount, leaving 5% to be held on the firm’s balance sheet to avoid excessive or predatory lending.

Loan amounts can range from $250,000 to $300 million and will carry adjustable interest based on LIBOR (1 month or 3 months) + 300 basis points. The loans will have a five-year term where principal payments can be deferred up to two years and interest payments deferred for a year.

However, the ethical dilemma of the lending facility factors in when we account for participation by the US Treasury. In accordance with the CARES act, and with the approval of the Treasury Secretary, $75 billion in equity has been provided for the SPV in the Main Street Lending Program.

Traditionally, an SPV has the legal status of an independent entity with its own balance sheet and is often used as a holding company for the securitization of debt. For a small, privately-owned business that borrowed from a credit union, it could mean that the debtholder (albeit for five years) and direct creditor for the firm could be the US Treasury or the Federal Reserve. Depending on the capital structure of the business, in the instance of bankruptcy, the government could have first rights to the asset(s).

From a macroeconomic perspective, a constantly expanding balance sheet and increasing national debt poses significant threats, including but not limited to inflation, increasing asset prices, and the creation of long-term, cyclical debt bubbles. Moreover, such action threatens to put policy pressure for fiscal intervention for future generations through higher taxes.


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