PTSD From PPP Controversy Derails Promising Program For Struggling Businesses

Billions of dollars set aside by the government through the Main Street Lending Program to help distressed companies remain untouched as firms wrestle with the program's complexity and fears over potential regulatory blowback.

Congress allocated $600B to the Federal Reserve as part of the Main Street Lending Program, approved under the CARES Act rescue package in March. Lawmakers and regulators designed the initiative to funnel money to banks so they could, in turn, issue loans to struggling businesses impacted by the coronavirus pandemic's outbreak. 

The program provides liquidity to banks for lending purposes, with the promise that the Fed will buy back 95% of the debt issued, allowing the lender to move forward with only 5% of a loan's balance on its books. Businesses can apply for loans of up to $50M as long as they have less than $5B in revenue and fewer than 15,000 employees — with the exception of speculative-type businesses such as private equity, hedge funds and financial companies, which are excluded from the program.

Despite a starting point of $600B in liquidity, only 400 loans with a value of $3.7B have been written through the program. 

The Main Street Lending Program is a solid relief offering that has the potential to rescue struggling restaurants and movie theater chains, among other businesses, that need to keep their leases paid and cash flow going during pandemic-induced traffic declines, Hunton Andrews Kurth partner James "J.R." England said. 

England said most of the loans issued thus far have been for much less than the $50M max allowable.

The loans allow firms that were profitable prior to the pandemic to obtain enough debt to carry them through the pandemic. The program also offers flexibility by writing the debt as a five-year loan with Libor plus 3% interest. But the real benefit comes during the first year of the loan, since no principal or interest payments are due as the pandemic rages, England said. 

In the second and third year of the loan, the borrower only has to pay interest, and then faces a balloon payment of 15% of the principal interest due, England said. Year four is interest-only again, and borrowers face another 15% balloon payment at the end of the year. That repeats in year five, though with a 70% balloon payment at the end of the year.

"I think it is a significant untapped resource for a lot of companies that are out there, and even more so if they are able to get these loans in a significant way to pay off their existing debts and to keep those restaurant leases ... current to ride this out," England said.

So what's keeping businesses and banks from fully utilizing the program? A combination of future regulatory fears, the complex nature of the initiative and simply not qualifying, lawyers working with borrowers and lenders say. 

"Honestly, it is just really complicated," England said in an interview with Bisnow. "There are a lot of restrictions for banks in determining whether they are eligible, and there are a lot of restrictions for the borrower."

Banks have become a bit more comfortable over time with the question of whether they are eligible to lend under the program, England said, but financial institutions still fear the aftermath of the CARES Act's Paycheck Protection Program, which put banks originating forgivable loans after the pandemic and borrowers in a hot spot when negative publicity caused Congress to abruptly change requirements for the program. 

"I think what scares them off is a lot of them got burned by the PPP program that came out earlier in the year, and the sloppy roll-out of that program resulted in 30 or 40 amendments to the rules that the banks were trying to keep up with," England said. "A lot of the biggest banks out there simply said, 'I'm not interested in another government program. I am not going to deal with the same heartache or headache that I had the last time, so thanks but no thanks.'"

Realizing how few small-to-midsized businesses are using the program, the Federal Reserve amended some of the terms of the Main Street Lending program last week by reducing the minimum loan size offered from $250K to $100K and adjusting fees in an effort to make the loans more palatable to smaller borrowers.

But is it enough to instill confidence?

It helps, but it may fall short of what banks are looking for when it comes to obtaining confidence in the program, said Asnardo Garro, a partner with Miami-based law firm ARHMF. Many still fear regulators will hold them accountable later on if some of the loans do not perform as well as expected, particularly with the loans written as businesses are struggling.

"The biggest thing that I have seen in dealing with our community bank clients is concern about the underwriting," Garro said.

Two years from now, regulatory authorities looking at the loan made through the Main Street Lending Program may not be as forgiving if the loans fail even though lenders are being encouraged to originate debt even though underwriting is complicated. 

"So [the banks] are struggling with how do we make these loans that we don't usually make and what implications will this have two years down the road if it all goes sideways? [T]here is a regulatory concern on their part," Garro added. 

Garro notes that some type of safe harbor for lenders or assurances they will not be held accountable by financial regulators later on for Main Street loans that fail would go a long way in boosting confidence in the program. 

"I think what else is being missed here is some regulatory guidance from all of the regulators because the Federal Reserve may not be a [bank's] ultimate regulator," Garro said.

"It may be the OCC, the FDIC or the state ... and when an examiner comes in two years [from now] and they're looking at this loan, if it has gone bad, you may get criticized for the decisions you are making today. I think a lot of banks, especially a lot of small-to-midsized community banks, are having issues with that."