In an effort to support the ongoing mitigation efforts of Congress to reduce the impact of the COVID-19 pandemic on the economy, the Federal Reserve took actions on Thursday morning to improve the flow of credit and effectiveness of existing relief programs under the CARES Act. The $2.3 trillion loan package includes several provisions to assist community banks in their efforts to support Main Street during this crisis.
Paycheck Protection Plan Lending Facility (PPPLF)
To improve the effectiveness of the Paycheck Protection Program
(PPP), the Fed is offering term financing to participating institutions backed by the PPP loans that they have issued to small businesses, taking these loans as collateral at face value. All depository institutions originating PPP loans are eligible to participate. The facility term sheet can be found here
The credit facility will carry a rate of 35 basis points. The maturity date on the extension of credit will match the maturity date of the underlying PPP loans pledged as collateral, including an acceleration provision that matches the extent of any loan’s forgiveness portions. The maturity will also be accelerated if the PPP loan goes into default and the depository institution sells the PPP loan to the SBA to realize the guarantee. The PPPLF loans are non-recourse loans to the depository institution.
How do lenders deal with PPP loan forgiveness?
We recently talked through best practices for lenders, outstanding questions surrounding PPP loan funding and forgiveness and a potential model to help maximize forgiveness.
In addition, the Federal Reserve Board, OCC and FDIC issued Financial Institution Letter (FIL-37-2020) “Changes to the Regulatory Capital Rule to Accommodate the Paycheck Protection Program,” which allows banking organizations to exclude loans pledged as collateral to the PPPLF from the institution’s total leverage exposures, average total consolidated assets, advanced approaches total risk-weighted assets, as applicable. This interim final rule effectively neutralizes the impact of a depository institution’s participation in the PPP program.
Eligible depository institutions should strongly consider utilizing the PPPLF given these favorable terms. Utilizing the credit facility allows them to perfectly match the balance sheet impact of the PPP loans, locks in a 65-bps spread in addition to the origination fee, and neutralizes the impact of these loans for leverage ratio purposes. Banks should weigh the benefits of this credit facility to their existing source of funds and their current liquidity positions prior to participating in the PPPLF.
Main Street New Loan Facility (MSNLF)
There’s much to consider when it comes to the impact of COVID-19 on financial institutions.
In addition to the PPPLF, the Fed will facilitate loans through a special purpose vehicle (SPV) to facilitate lending to small and medium-sized businesses through eligible lenders. Eligible lenders are U.S. insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies. The facility term sheet can be found here
This loan program expands the access to credit to mid-size companies, making U.S. businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues eligible, as long as the majority of operations and employees are based in the United States. The eligible business must have also been in good financial standing prior to the COVID-19 pandemic
. The SPV will purchase a 95% participation in eligible loans at par value, with the lender retaining a 5% interest in the loan. Risk will be shared on a pari passu basis.
Eligible loans are unsecured, with a four-year maturity and variable rate of Secured Overnight Financing Rate (SOFR) plus 250-400 bps. The minimum loan size is $1 million with a maximum loan request up to $25 million. The amortization of principal and interest will be deferred for one year. The eligible lender also receives a 25 bps servicing fee and can charge an origination fee up to 100 bps. The SPV will charge a 100 bps facility fee for the amount purchased by the SPV. The eligible lender can require the borrower to pay this fee.
The Impact of Relief Provisions to Banks
Many businesses and organizations are eager to apply for and receive relief funding. But there is a burden on financial institutions who are designated lenders of this relief. The guidance issued by the Federal Reserve is designed to help financial institutions as they navigate this new normal.
Have questions about how this will apply to your financial institution?