Fed, Treasury may create lending facility for firms 'falling in the gaps'

Written by Jasir Jawaid

The Federal Reserve and the U.S. Treasury Department may set up an asset-based lending facility for companies that do not meet the Main Street Lending Program's eligibility criteria and are too large to qualify for loans under the Paycheck Protection Program, according to a report by the Congressional Oversight Commission.

The Congressional Oversight Commission was created by the CARES Act to assess how Treasury and the Fed have used the funds allotted to them under the law. It issued its third report July 20.

Currently, a business's eligibility for the Main Street Lending Program is based, in part, on its adjusted 2019 earnings before interest, taxes, depreciation, and amortization. Some businesses, such as real estate companies, retail businesses with lots of inventory, and new and growing businesses, may not meet the MSLP's EBITDA standards and are too large to qualify for PPP loans. Nonetheless, those firms may have substantial assets and be deemed creditworthy. Such businesses may have low or weak cash flow but possess favorable loan-to-value or loan-to-cost ratios.

The report said Treasury Secretary Steven Mnuchin indicated to the commission that the regulators were looking at options to potentially address this situation, and the commission recommended they weigh the merits of the MSLP offering second-lien lending to "creditworthy businesses with reasonable cash flow and valued collateral."

Regarding the Secondary Market Corporate Credit Facility, the report noted that the secondary market for corporate bonds is functioning well, and continued Fed intervention could have "distortionary effects" in both the short term and the long term. Fed Chairman Jerome Powell has said that even though the corporate bond market is functioning well, the Fed purchased individual corporate bonds through the SMCCF in order to, in part, maintain its credibility with market participants by following through on its previously announced plan to buy such bonds.

As of July 15, the Municipal Liquidity Facility has made a single purchase of $1.2 billion in notes from Illinois, but New Jersey and Hawaii are also reportedly planning to use the facility, according to the report. The commission noted that there was less evidence that the actions of the Treasury and the Federal Reserve have been as beneficial for state and local governments as they have been for larger companies that can access the capital markets.

Some commentators have attributed the current low utilization of the MLF to the fact that it often charges interest rates above rates currently available in the municipal bond market, and it does not purchase notes with maturities greater than three years. The report cited an analysis of the potential value of the MLF to New Jersey, which found that if its repayment term was longer than three years, "the facility could provide the state with significantly more capacity to borrow and spend."

This article was published by S&P Global Market Intelligence on the S&P Capital IQ Pro platform.