Initial Read on New Fed Main Street Liquidity Facilities: MSNLF, MSELF

Sometimes life comes at you fast.  Apologies for the second post today, but I’ve received enough questions that I thought it made sense to bother you again:

  •  The Senate met and failed to upsize PPP.  Democrats wanted to add an additional $250B for hospitals and local governments.  Stay tuned.
  • The Fed announced $2.3 trillion of new liquidity and provided term sheets for the new PPP Lending facility that will lend against PPP at par, expanded PMCFF, SMCFF and TALF programs and created a municipal liquidity facility (MLF) to lend to state and local governments.
  • Combined size will be up to $600B.
    • Fed SPV to purchase 95% participations in eligible loans.
    • Originating lenders (limited to banks and S&Ls) would retain 5%.
    • Eligible Borrowers are businesses with up to 10k employees or $2.5B in 2019 revenues.
    • Terms:
      • 4 year maturity;
      • Amortization of principal and interest deferred for one year;
      • Adjustable rate of SOFR + 250-400 basis points;
      • Minimum loan size of $1 million;
      • Maximum loan size that is the lesser of (i) $25 million or (ii) up to 4x 2019 EBITDA leverage, taking into account existing drawn and committed debt facilities (QUICK READ:  This could greatly limit availability to PE sponsored companies);
      • Prepayable without penalty.
  • Loans cannot be used to refi existing debt (which makes the 4x leverage especially challenging).
  • Borrower attest that it:
    • It requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and
    • using the proceeds of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.
  • The Fed is imposing the comp, dividend and buyback limits from the CARES Act.  (Will follow up with more detail on that.  There had been hope that these would NOT apply to main street.)
  • Yesterday, the SEC announced yesterday that it will allow increased flexibility for BDCs to raise capital (but is not waiving dividend requirements as some had hoped).

DC Updates – Watching for New Government Funding

The main updates this morning are a bit speculative.  Fed Chairman Powell is expected to announce more details around the “main street” liquidity facility in a speech today and the Senate may act by unanimous consent today on the attached proposal for the PPP upsize.  It’s short and sweet.  Below is an analysis from our Policy team in DC.  We will, of course, provide an update once we know more.  Out of respect for your inboxes, I won’t send that before tonight or tomorrow morning, but if you’d like a more real time update, please let me know.

On the SBA front, the only material updates were applications forms for new bank (etc.)  and non-bank lenders and an updated FAQ that didn’t do much:

  • reiterated that lenders are to use their own form of note; and
  • clarified that loans are to be disbursed within 10 days of approval and the 8-week clock starts on the date of disbursement.

Anticipating your question, nothing in here seems to help with the PE/VC affiliation analysis. 

As for the size of the stimulus and our original comment that “We’re gonna need a bigger boat,” we looked at the Census bureau data for 2017 (the most recent I could find) which shows that:

  • Employers with less than 500 employees (excluding employers with only one employee) had total payroll of $2.7 trillion.
  • That’s a monthly average of ~$225B.
  • Multiplied by 2.5x, that would yield a hypothetical total PPP borrowing capacity of $564B if every such employer (all 6 million of them) applied for the maximum amount. 

The census payroll measure and the PPP “payroll costs” don’t match up for several reasons, but some of those differences would at least directionally cancel each other out.  For instance the census includes all comp above $100k, but also excludes some benefits that are includable under the PPP, and we know that many employers with more than 500 employees can obtain a PPP, but that’s still probably at least a directional estimate.  Well, it is until you factor in the single-employee employers, which the census shows as having a 2017 payroll of $6.7 trillion, which would alone have borrowing demand of $1.2 TRILLION, but there is a lot of noise in those numbers so that number needs to be taken with a large grain of salt.

From Senate Majority Leader McConnell’s office:

Paycheck Protection Program Funding

The Majority Leader seeks a unanimous consent agreement that would allow the Senate to break in to the Pro Forma session scheduled for Thursday, April 9th, to introduce, call up and pass, by voice vote, a bill that would provide an additional $250 billion for the paycheck protection program.

  • Tomorrow morning, I’ll ask unanimous consent to pass standalone emergency funding for the hugely popular Paycheck Protection Program that is saving small-business jobs as we speak. As the rest of the CARES Act continues to come online, this key part is already low on funds.
  • Nobody thinks tomorrow will be the Senate’s last word on COVID-19. Other crucial parts of the CARES Act, like its historic funds for hospitals and healthcare providers, are still coming online and have not yet been exhausted. The PPP is where the lights are already flashing red.
  • If we want to act fast, Congress has to focus. There is no realistic chance that another sprawling bill which allocates half a trillion dollars to a number of priorities, even important ones, will be able to pass the Senate or the House by unanimous consent this week.
  • Ten million Americans were laid off in just the last two weeks. Tomorrow morning will likely bring another historic unemployment figure. This is urgent. If Senators delay this urgent paycheck support to insist on a broader bill, more Americans will lose their jobs unnecessarily.
  • I hope none of my colleagues object to my request for these urgently-needed funds. There is no reason why this bipartisan job-saving program should be held hostage for other priorities. Let’s re-fund the only program that’s already running dry and keep moving forward together.

While there is bipartisan consensus that more funds are needed for PPP due to popular demand, Democrats want accountability about how the funds are being used and will be used.  In response, Speaker Pelosi and Leader Schumer released a joint statement calling for the following conditions on the new package:

·      $250 billion in assistance to small businesses, with $125 billion channeled through community-based financial institutions that serve farmers, family, women, minority and veteran-owned small businesses and nonprofits in rural, tribal, suburban and urban communities across our country, and improvements to ensure all eligible small businesses can access this critical funding and are not turned away by banks;

·     $100 billion for hospitals, community health centers and health systems, providing desperately needed resources to the frontlines of this crisis, including production and distribution of national rapid testing and Personal Protective Equipment (PPE);

·    $150 billion for state and local governments to manage this crisis and mitigate lost revenue, doubling down on the investment secured in the CARES Act;

·    Strong additional support for families with a 15 percent increase to the maximum SNAP benefit to help put food on the table.

While it appears very likely that more assistance will be authorized and appropriated, the timing is less clear.  Even if the Senate were to work out a compromise in terms, we can’t forget the House.  The House also doesn’t want to have to physically return to DC, and getting 435 Members to agree to unanimous consent is never an easy lift.  There could be snags both on policy and procedures.  You will recall that for Stimulus 3, there was one House Member who effectively forced as many Members as practicable to return to DC for a vote.  It’s very possible the chambers will be seeing some weekend work. 

Note that this is not Stimulus 4, but rather Stimulus 3.5.  Pelosi and Schumer said they view this package as “interim emergency legislation,” and added that Congress “will move to pass a CARES 2 Act that will extend and expand the bipartisan CARES Act to meet the needs of the American people”.