Fed’s Pandemic Main Street Relief Program Is Now a Burden on Businesses – BNN Bloomberg

(Bloomberg) — The Federal Reserve’s pandemic relief program aimed at supporting midsize businesses is now having the opposite effect on some of them, burying them under high interest rates and bloated payouts and leading to layoffs at companies struggling to stay afloat.

The central bank created the Main Street Lending Program to help businesses that were typically too large to apply for forgivable loans through the Paycheck Protection Program and too small to access U.S. capital markets. The program, the Fed’s first attempt to systematically support American businesses in this way since the Great Depression, ultimately provided 1,830 adjustable-rate loans ranging in size from $100,000 to $300 million.

While most of the $17.5 billion in loans have been repaid, $1.23 billion in interest and principal payments were outstanding as of Oct. 31. a massive 70% lump sum payable next year and a large interest bill.

“It was a double whammy,” said Justin Paget, an attorney and partner at Hunton Andrews Kurth LLP, which represented lenders and borrowers on about 10% of the program’s loans.

Policymakers made lending rates adjustable, a feature that became devastating for borrowers when the Fed began rapidly raising rates two years later to quell inflation.

“Many businesses felt they would get better cash flow and profitability thanks to Covid,” he said. “For many of them, those predictions simply did not materialize.”

Main Street was one of many programs launched in 2020, bolstered by $2.2 trillion in CARES Act funds and approved by the U.S. Treasury. Lawmakers rushed to bolster the economy with the largest stimulus package in U.S. history, but were unable to anticipate the ultimate path of the pandemic or the subsequent spike in inflation. The challenges of implementing an entirely new program and the burden it has placed on many of its borrowers raise questions about whether it will remain in the Fed’s crisis-relief toolkit.

“I would be very surprised if they did this type of program again,” said Eric Rosengren, former president of the Federal Reserve Bank of Boston, which runs Main Street.

Main Street is the only central bank emergency lending program that has suffered actual credit losses—losses that could have been much larger had the program reached its $600 billion lending limit. However, the Fed still expects it to be fully restored over the life of the program, with interest payments covering some losses and up to $75 billion in fiscal support covering the rest.

“The Main Street Lending Program worked with banks to provide much-needed loans to small and medium-sized businesses and nonprofits that were in good financial health before the pandemic but suffered from a sudden decline in economic activity through no fault of their own. ” said a Fed spokesman. “The program, along with other efforts, has helped keep jobs and businesses afloat during a very difficult and uncertain time.”

Harsh conditions

Banks guaranteed the loans, but the Fed took on most of the risk since lenders were only required to maintain 5% of the balance in their accounts. The program was intended to target companies that needed financing but were considered too risky to qualify for a traditional loan.

“A lot of people in Congress have heard from mid-market businesses that a lot of jobs will be lost if we end up closing,” Rosengren said. “There was a risk that many of these firms, which employ significantly more people than smaller firms, may not make it to the other side.”

Although lending conditions were onerous, Main Street offered some companies the only option for survival.

The payment schedule, which required no interest or principal payments in the first year, is now snowballing. Interest rates have risen to levels unimaginable four years ago, after a decade of low inflation and low borrowing costs. These extra-large interest payments, Paget said, made it impossible for businesses to invest in their own firms.

Tejun Kang’s marketing company, Atypen Digital, faithfully paid interest on a $3.5 million loan, even though it rose from $11,000 a month to $25,000. But he couldn’t keep up with his first payment due last year. Although Kang was able to secure a six-month extension, the combined monthly bill of $65,000 in interest and principal was still too high.

“It feels like I took money from the devil? What did I sign up for? – said Kang. “It’s a tough situation.”

The Fed has allowed some businesses to extend their loans, but no later than 2026. Atypical Digital, which works with companies such as Adobe Inc. and Toyota Motor Corp., across everything from web optimization to software customization, has seen major contracts go away during the pandemic. The company turned to smaller companies to fill the gap, but the contracts brought in less money. To help with payments, Kang laid off about 60% of his staff.

Although the Main Street loans did not have a specific employment mandate, unlike the PPP, the Fed advised companies to make “commercially reasonable” efforts to retain employees while the loans remained outstanding.

Main Street Lending Program Basics

The program made a lot of sense for businesses that have been particularly hard hit by the pandemic, such as service businesses, which account for the majority of the loans. Borrowers included small cruise lines, gyms and entertainment venues. Despite this, popularity was low. In total, the $17.5 billion in loans represents just 3% of the program’s $600 billion limit.

Low utilization rates along with onerous loan terms have led critics to argue that Main Street should have been a direct assistance program, more like a PPP, rather than loans that must be repaid. However, at the time there was little appetite for adding additions to the pandemic bill.

Bharat Ramamurthy, who headed the congressional panel responsible for overseeing the Fed’s pandemic relief programs, said some defaults in such a program are inevitable.

“If they weren’t there, I would say it would mean the institution wasn’t doing its job properly because it was too restrictive in terms of what types of companies were supported,” he added.

But Brian Miller, special inspector general for pandemic recovery, expects more companies to default next year.

“Defaults are through the roof and will continue to rise,” he said.

Those defaults include borrowers who never intended to use the money for their businesses, Miller said. As a result, defaults can also be used as a warning signal for law enforcement so they can detect and punish the fraud that has permeated several pandemic-era programs. More than 70% of Miller and his staff’s investigations into Main Street loans involve default, according to a SIGPR spokesman.

That’s what happened in an investigation into a $424,168 Main Street loan taken out by an Oklahoma woman allegedly to cover payroll and expenses for a children’s clothing company, according to a government watchdog. Instead, she used the proceeds to build a house and buy a luxury car before defaulting on the loan. She pleaded guilty to bank fraud and money laundering and was sentenced in November 2023 to 20 months in federal prison.

Post-pandemic world

For some Main Street borrowers, the realities of the post-pandemic economy—unforeseen in 2020—make debt repayment impossible. World of Beer, a chain of restaurants and bars specializing in craft beer, used part of its $8 million Main Street loan to open a new location in the lobby of an office building in Arlington, Virginia. He counted on a steady stream of after-work customers that never materialized amid the sluggish return to the office.

World of Beer filed for Chapter 11 bankruptcy, following other casual dining restaurants this year, and closed all three locations it opened with Main Street money, said Steven Berman, an attorney and partner at the Shumaker law firm. , Loop & Kendrick. , LLP representing World of Beer in its bankruptcy case.

“People have misjudged how much Covid will impact the way people move around the city, the way people do business, where they go, how they spend their money,” Berman said. “And then add to that inflation, rising interest rates and the rising cost of goods needed to run a food and beverage company, and you have sort of a perfect storm of economic negativity that is affecting a lot of businesses in the country.”

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