Tuesday, May 19, 2020

Can The Federal Reserve's Main Street Lending Program Be Manna From Heaven for Community Banks?

"How much more abuse can small businesses take from big banks?"
~ Community Bank CEO

PPP is winding down. Community banks not only took care of their small to medium sized businesses (SMEs), but also helped big bank customers when their calls went unanswered.

Why? Because the big banks prioritized. It was a first come, first served program. And the race to the gate was intense. Ask any banker and SME CEO worried that the program would pass them by. So when they didn't hear back from their big bank, they started calling the local banks. 

Opportunity to win new customers? I think so. And bankers ought to be strategizing on how to turn those borrowers into core customers. 

Main Street Lending Program

But there's more! Now I sound like I'm selling you two Shamwow's for the price of one. Could the more be the yet to be launched Fed's Main Street Lending program? Set to launch May 29th and end on September 30th.

There are three lending facilities: Main Street New Loan Facility (MSNLF), Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF). In this post, I want to focus on the MSPLF, because it looks to be uniquely set up so community banks can win those local customers that have stubbornly remained with your large bank competitor.

Fine Print

Let me copy/paste a unique Eligible Borrower certification/ covenant of the MSPLF:

"The Eligible Borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due. However, the Eligible Borrower may, at the time of origination of the Eligible Loan, refinance existing debt owed by the Eligible Borrower to a lender that is not the Eligible Lender." (emphasis mine)

So, as I read it, if the Eligible Borrower has a loan outstanding at a big bank, it can saunter into your office, apply for an MSPLF, and repay a loan at the big bank. And the MSPLF loan is LIBOR +3%, which is currently 3.42%. And the loan is unsecured and the amount is based on the Eligible Borrower's 2019 EBITDA. Six times their EBITDA. Oh, and no payments for the first year. Years 2-3 amortization is 15% of outstanding balance, and year 4 is a 70% balloon. And your bank need only maintain 15% of the balance and the Fed will participate the other 85% through a special purpose vehicle.

I doubt the big bank will be calling their smaller customers that are current on their loans and have a good chance of making it through the pandemic.

So why is that stopping you?


~ Jeff

Update: This from the ABA's Daily Newsbytes on the MSLP:

The Fed announced that it would hold a drop-in session on May 22 at 2 p.m. EDT and an informational webinar on May 28 at 2 p.m. EDT for potential lenders in the MSLP. The drop in session will provide an opportunity for lenders to ask questions about the program, while the webinar will give lenders a chance to learn more about the infrastructure and operations of the MSLP.
Registration for these live sessions will be limited to two representatives per institution, and recordings will be available after each program. Register now. Questions may be submitted in advance to questions@askthefed.org.

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