A Critical Look at the Main Street Lending Program

by Troy Keller

Yesterday, the Federal Reserve announced new terms for its Main Street Lending Program that expand the eligibility criteria to cover more potential borrowers and increase the scope of eligible loans under the program. The revised Main Street Lending Program will now include three categories of loans, depending on whether the loan is a new loan or an expansion of an existing facility, the maximum amount of the loan and the percentage of the loan retained by the lender.

Many of our nation’s key employers are too large to participate in the PPP but not large enough to benefit from some of the earlier Wall Street-focused initiatives. These are the mid-sized companies that provide millions of skilled and professional jobs in America, and the Main Street Lending Program is meant to be the solution for those in this category who need support in order to maintain operations and their employee base.

While in concept intriguing, the Main Street Program as it is currently structured is not overly attractive. The interest rates offered are, depending on credit profiles, similar to prevailing market rates, and availability is based on relatively conservative debt-to-ebitda [earnings before interest, taxes, depreciation and amortization] ratios. The loans are also accompanied by meaningful operating restrictions on things like executive pay, shareholder dividends, debt paydowns and stock buybacks. Further, borrowers in most cases will need to incur costly waivers and consents from existing lenders in order to incur the additional debt.

As such, most companies have no real incentive to participate unless they are desperate for capital in order to survive — and in that case, they in all likelihood won’t be candidates for the program. Given this reality, if the goal of the Main Street Program is to help (and encourage) companies to maintain their employee base, the program needs to offer more. Not much would be needed to tip the scales. A little more flexibility and acceptance of risk for lower credit profiles would help this program be available to the companies who actually need it and to encourage companies who are facing the prospect of downsizing to wait out the crisis, to give them an incentive to keep people employed.

It is unfortunate that the goal seems to be prioritizing credit-worthiness and protection of federal funds over saving of jobs. Federal funds of course need to be carefully managed, but it’s odd that more flexibility wasn’t provided (as it was with the PPP in spades) to incentivize employers to take the money and maintain operations rather than doing layoffs and going into hibernation model.

Troy Keller is an attorney at the international law firm Dorsey & Whitney who advises companies on corporate law matters and government relations strategies, and has been advising companies about the Main Street Lending Program. 

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