Further economic measures provide support for small and mid-sized businesses, as well as state and local economies facing pandemic hardships.
By Alan W. Avery, Pia Naib, and Deric Behar
The Federal Reserve, in its continuing efforts to safeguard financial markets, provide stability to the financial system, and support the flow of credit in the economy, has announced an additional series of emergency measures to assist private markets and institutions that are continuing to be impacted by the COVID-19 pandemic. Federal Reserve Chair Jerome H. Powell, in his remarks on the impact of COVID-19 and the economy, noted that the Federal Reserve can “contribute in important ways … by providing a measure of relief and stability during this period of constrained economic activity,” including “by using its [emergency] tools to ensure that the eventual recovery is as vigorous as possible.”
The most recent measures, which provide up to US$2.3 trillion in loans to support the economy, include:
- Establishment of a Facility to Facilitate Lending to Small Businesses Pursuant to the SBA’s Paycheck Protection Program (PPP): The PPP Lending Facility (discussed in a previous post on April 7) is intended to facilitate lending to small businesses that receive a loan pursuant to the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) by establishing a facility to provide eligible SBA lenders with term financing backed by PPP loans. PPP loans are 100% guaranteed by the SBA through December 31, 2020, and are subject to loan forgiveness up to the entire loan amount, subject to certain restrictions. As of April 16, the PPP Lending Facility is fully operational and available to provide liquidity to eligible PPP lenders in order to facilitate their support of small businesses.
- Establishment of the Main Street Lending Program: The Federal Reserve’s Main Street Lending Program facilities — the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF) — are intended to support small and mid-sized businesses that were “in good financial standing” prior to the COVID-19 emergency. The Federal Reserve will establish a single common special purpose vehicle (the Main Street Facility SPV) which will purchase 95% participations in eligible loans from eligible lenders. The combined size of the Main Street Lending Program will be up to US$600 billion, which will consist of a US$75 billion equity investment in the Main Street Facility SPV from the Department of the Treasury (using a portion of the $454 billion appropriated in Title IV of the CARES Act to support programs or facilities established by the Federal Reserve) and up to US$525 billion to be lent to the Main Street Facility SPV by the Federal Reserve. The Main Street Lending Program will be available to US businesses with up to 10,000 employees or with less than US$2.5 billion in 2019 annual revenues. The Federal Reserve invited comments on the MSNLF and MSELF from industry participants through April 16 and is expected to provide additional guidance on the program soon. For a detailed discussion of the initial terms and conditions of the MSNLF and MSELF, please see Latham’s related Client Alert.
- Establishment of a Municipal Liquidity Facility: The Municipal Liquidity Facility is intended to help state and local governments manage cash flow stresses by offering up to US$500 billion in loans to states and municipalities. The facility will be able to purchase up to US$500 billion of short-term notes directly from states, counties (with a population of at least two million residents), and cities (with a population of at least one million residents). The Federal Reserve has also pledged to further support the flow of credit and liquidity to state and local governments, if additional assistance becomes necessary.
- Expansion of the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF): The Federal Reserve established the PMCCF (discussed in a previous post on March 24), to provide eligible issuers that are struggling to maintain business operations and capacity due to COVID-19 with access to credit to continue payments to employees and suppliers. As of April 9, the types of eligible issuers from whom the PMCCF will purchase qualifying bonds has been expanded to “fallen angels” (defined to include issuers that were rated at least BBB-/Baa3 as of March 22, 2020, but have subsequently been downgraded to at least BB-/Ba3 at the time the PMCCF makes a purchase). The SMCCF (discussed in previous post on March 24) was established to provide liquidity for outstanding corporate bonds. The SMCCF will purchase in the secondary market corporate bonds issued by eligible issuers and certain US-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for US investment grade corporate bonds. As of April 9, the types of eligible issuers from whom the SMCCF will purchase qualifying corporate bonds has also been expanded to “fallen angels” (defined to include issuers that were rated at least BBB-/Baa3 as of March 22, 2020, but have subsequently been downgraded to at least BB-/Ba3 at the time the SMCCF makes a purchase). Under the current expansion, the Department of the Treasury’s initial US$10 billion equity investment in each facility’s SPV will be increased to US$50 billion for the PMCCF and US$25 billion for the SMCCF. Additionally, the Federal Reserve will lend up to US$675 billion to the SPVs, making the combined size of the PMCCF and the SMCCF up to US$750 billion.
- Expansion of the Term-Asset Backed Securities Loan Facility (TALF): The Federal Reserve established the TALF (discussed in a previous post on March 24), to provide credit support to consumers and businesses. Through the TALF, the Federal Reserve will lend on a non-recourse basis to holders of certain AAA-rated asset-based securities (ABS) backed by newly and recently originated consumer and small business loans, including student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA). The expansion of the TALF will broaden the range of assets that are considered to be eligible collateral for purposes of the TALF, including AAA-rated tranches of both outstanding commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility, however, will remain US$100 billion.
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