June 9, 2020 - As reported in the WSJ, early this week, the Federal Reserve Board announced an expansion of its Main Street Lending Program (“MSLP”). The Fed lowered the minimum loan amount on two of the MSLP facilities and raised the maximum loan limit under all three. It also extended the tenor to five years from four years and will allow businesses to defer principal payments for the first two years of the loan, instead of the first year. Importantly, it reduced the risk retention portion on the Priority Loan Facility from 15% to 5% (in line with the other two facilities). The Fed has published revised FAQs about the revised program as well as revised term sheets for the New Loan Facility, the Priority Loan Facility and the Expanded Loan Facility.
How have the MSLP facilities changed? in order to expand access to the MSLP facilities, the minimum loan size for the New and Priority loans was decreased from $500K to $250K and the maximum size of each facility was increased, to $35MM for the New Loan Facility (from $25MM), $50MM for the Priority Loan facility (from $ $25MM), and $300MM for the Expanded Loan Facility (from $200MM). To make the loans more attractive to borrowers, the tenor of all of the loans was increased from four years to 5 and amortization of principal was deferred for two years rather than one. One change and one clarification were made for the benefit of the lenders. The “risk retention” rate for Priority Loans was reduced to 5% (from15%) and is now in line with the risk retention rate for the other two facilities. And, presumably in response to concerns raised by potential lenders, the Fed also clarified that loan participations under the MSLP are “true participations” eligible for “true sale” accounting treatment and qualifies for the FDIC’s “safe harbor” which provides protection to the transfer of financial assets by an insured depository institution under a properly structured participation by providing that the FDIC (as conservator or receiver of the institution) will not reclaim or recover any such transferred financial assets.
What is behind the changes? Even after the Fed’s earlier attempt to expand the MSLP in late April, there has been growing public skepticism that the program would work. In announcing the additional changes Fed Chairman Jerome Powell said the program was designed to help firms rehire workers as the economy exits a deep freeze designed to stop the spread of the coronavirus. “I am confident the changes we are making will improve the ability of the Main Street Lending Program to support employment during this difficult period,” he said in a statement.
More background. We have written extensively about the MSLP and hosted numerous webinars on the topic. Links to the articles and webinars are available at our MSLP Archives page.