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CBA Comment Letter re Main Street Lending Program
Dear Chair Powell:
The Consumer Bankers Association (“CBA”) appreciates the opportunity to comment on the Federal Reserve’s Main Street Lending Program (“Main Street”). CBA applauds the Federal Reserve for swiftly acting to aid America’s small- and mid-sized businesses as we endure the uncertainties presented by the COVID-19 crisis. CBA has reviewed the details of the Main Street Lending Program (“the Program”) and has some suggestions the Federal Reserves should consider before finalizing the details of the Program.
Maximum Loan Size
To begin, both the Main Street New Loan Facility (“MSNLF”) and the Main Street Expanded Loan Facility (“MSELF”) base their maximum loan size on the 2019 EBITDA. The maximum loan for new loans under the MSNLF is the lesser of (a) $25 million, or (b) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times its 2019 EBITDA. Similarly, the maximum loan size for an upsized existing loan under the MSELF is the lesser of (a) $150 million, (b) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or (c) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA.
In regards to the MNSLF, CBA believes the requirement stating Eligible Borrowers may only have debt to EBITDA of four times and under should be changed. We recognize this requirement is intended to keep riskier borrowers out of the program, but we believe the terms as written will have the opposite effect. High leverage is not an indicator of borrower weakness. On the contrary, high leverage occurs because sophisticated lenders are prepared to put a great deal of money at risk on a non-recourse basis and with little in hard assets because they are confident borrowers, in normal circumstances, will be able to service and repay the debt. However, it is the more risky, cyclical borrowers who have debt levels below four times. We encourage the Federal Reserve to increase the maximum loan size for the MNSLF to a level which better considers the appropriate amount of leverage in the respective industry. If thousands of companies are unable to access these resources, the consequences could be catastrophic in terms of endless downsizings and a massive and permanent loss of investment capital.
Furthermore, the Federal Reserve may want to consider sector specific guidance, specifically for industries with higher leverage. For example, many businesses suffering from the COVID-19 pandemic also suffered in 2019 due to the trade war with China and felt the early supply chain disruptions in China. Some China exposed firms would presumably not qualify, unless EBIDTA allows legitimate defined adjustments. Another industry which seems to have been overlooked is the Commercial Real Estate Industry. Owner occupied or investor deals, including development, which would not be measured on an EBITDA basis, but ideally, they would be eligible for assistance if the firms have employees and/or an impaired rental income flow due to the pandemic.
Minimum Loan Size
CBA believes the Federal Reserve should lower its minimum loan amount to significantly less than $1 million. Based on the current terms, there is a potential for a “donut hole” with businesses potentially falling between the Small Business Administration’s (“SBA’s”) Paycheck Protection Program (“PPP”) and Main Street. Rather than focusing on excluding risk businesses, the Federal Reserve should identify the overlap where “large” small businesses and small “mid-size” businesses meet.
If the Federal Reserve plans to use loan size as a proxy for Main Street, then it should look at the SBA’s PPP loans as a metric for where to set the minimum loans amounts for the Main Street Lending Program. SBA released data on April 13, 2020 detailing the loans approved through ETRAN. 70% of the loans were less than $350k. While an imperfect comparison, this presents sound reasoning to reduce the minimum loan amount for the Main Street Lending program to roughly $350k. CBA believes a concentric circle of overlap between the programs would be ideal, while a gap would leave businesses without adequate support in the midst of an unprecedented crisis.
In addition, CBA performed a cursory analysis of its membership to help quantify the donut hole between the Main Street Lending Program and PPP. We identified the dominant cause of the gap is the interaction between the EBITDA and the $1 million minimum in the Main Street Lending Program. Analysis from our membership suggests thousands of mid-size companies could be too large for the SBA program yet fall below the $1 million loan minimum. One estimate indicates that 175,000 businesses, with an average annual revenue of $15 million, would be served by reducing the loan minimum to $500,000. Furthermore, we believe there should be flexibility in the length of the loans of the Main Street Lending Program. CBA would prefer to see loan terms range from four to six years.
Clarity in Terms
The Federal Reserve should clearly define terms for banks to operationalize the Main Street Loan Program. CBA encourages the Federal Reserve to define “debt.” EBITDA is not a defined term under GAAP. Also, based on the Federal Reserve’s current guidance about the Program, it seems if the definition of debt includes senior, mezzanine and subordinated debt, it may exclude many businesses in need. In addition, the Federal Reserve states the pricing on loans will be an adjustable rate of SOFR+250-400 bps, but there is no indication how SOFR is calculated, e.g. SOFR Compounded in Advance, SOFR Compounded in Arrears, or Daily Simple SOFR in Arrears.
CBA urges the Federal Reserve to issue guidance to eligible lenders and borrowers in a prompt and complete manner. CBA member banks are ready to do their part to help stabilize and restart the economy, but we will need timely and thorough guidance to help our banks lend and to help America’s businesses responsibly borrow. CBA also implores the Federal Reserve to continue to seek feedback once the facility is open to continue to ensure the Main Street Lending Program is working as intended. Please provide more clear guidance. CBA has included an appendix with a list of technical questions intended to generate clear and comprehensive guidance for financial institutions.
On a separate but related issue, CBA encourages the Federal Reserve to not change any existing regulatory tiers for financial institutions who choose to participate in this facility. During the duration of the Main Street Lending Program, banking organizations should retain their respective category in regards to the application of enhanced prudential standards. Asset sizes of banks will likely increase dramatically during the duration of the COVID-19 crisis as they participate in the Main Street Lending Program and other Federal Reserve and government-sponsored programs aimed at supporting the American economy during this time.
Again, CBA fully supports the Federal Reserves efforts to aid small- and mid- sized businesses during these unprecedented times. CBA sincerely wants to see the Federal Reserve’s Main Street Lending Program as effective as possible for the countless American businesses who stand in need.
If you have any additional questions or concerns, please do not hesitate to contact André Cotten at 202-552-6360 or at Acotten@consumerbankers.com.
André B. Cotten
Assistant Vice President, Regulator Counsel
Consumer Bankers Association
1225 New York Avenue
Washington, DC 20005