Main Street Lending Program
Small and medium-sized businesses are finally getting some much-needed help from the Federal Reserve. The main street facility is the latest of the Fed’s measures to support the economy through this crisis. Some investors believe that the monetary and fiscal backstop will help the economy recover enough to keep the stock market going.
- Unlike the Paycheck Protection Program, these loans are not forgivable and don’t have requirements such as rehiring employees. Instead, the Fed expects borrowers to make “commercially reasonable efforts to retain employees” given the economic environment.
- Businesses that have already laid off workers will still be able to apply for the Fed’s main street loans.
- Companies have to apply for the loans with their banks, which can now register as main street lenders, the Federal Reserve Bank of Boston announced Monday. Banks are encouraged to make the new loans immediately, the Boston Fed said.
- The Fed decreased the minimum size of loans to make them more accessible to smaller businesses.
- The central bank will purchase 95% of each loan extended under the facility, including those made before June 10 if they were originated under the same terms. By doing that, the Fed takes risk off banks’ balance sheets and allows them to make more loans.
How this helps you:
- Targeted to companies that may be too large for the government’s small business loan program, and too small for the government’s bond buying program.
- The loans will range from $250,000 to $300 million, structured as five-year loans with floating rates.
- Payments will be deferred at first, with no principal due for two years and no interest for one year.
- Loans eligible for businesses with up to 15,000 employees, or up to $5 billion in annual revenue.
Corporate Bond-Buying Program
The Federal Reserve announced Monday it will begin buying individual corporate bonds.
- The program will purchase existing bonds on the open market, as opposed to newly-issued debt.
- The central bank will seek to build a “broad and diversified” portfolio that will mimic a bond-market index. The bonds will have to be from highly-rated, investment-grade companies, or firms that fit that description before the viral outbreak struck.
- The program, also known as the Secondary Market Corporate Credit Facility, will take in up to $250 billion in corporate bonds from eligible issuers. The Fed can also tap $25 billion in funding assistance from the Treasury Department as set aside by the CARES Act.
- Participating issuers need to have been rated investment-grade as of March 22 to participate in the Fed’s individual bond purchases, according to a term sheet.
- Bonds bought on the secondary market must also have remaining maturities of five years or less.
How this helps you:
- The Fed’s purchases should hold down corporate bond yields, making it cheaper for companies to borrow
- By lowering the return from investing in those bonds, the Fed’s actions will likely encourage investors to shift money from corporate bonds to stocks in hopes of achieving a higher return. Today’s market performance already shows the positive response to the announcement.
- Increased confidence that the Federal Reserve will take steps to provide market support and help to increase market functioning