By Howard Schneider and Lindsay Dunsmuir
WASHINGTON (Reuters) – The U.S. Federal Reserve on Thursday widened a key program to nurse the “Main Street” economy through the coronavirus pandemic, agreeing to lend to even larger firms, taking on more risk in participation with banks, and hinting at some form of dedicated help for non-profits.
The central bank said it would expand its “Main Street Lending Facility” into three separate programs to support businesses with up to 15,000 employees and $5 billion in revenue compared to an initial program limited to 10,000 workers and $2 billion when it was announced on April 9.
Some 2,200 business, individuals and non-profits had written in with suggestions about how to tailor the Fed’s unprecedented efforts to meet the needs of the “real economy.”
The result is a program that will now be open to more firms, and allow more risk-taking. The initial program required banks to hold 5% of any loan they made, with the rest coming from the Fed. For companies with more leverage, and thus more risk, the Fed will allow them to participate if banks agree to take on 15%.
In addition, the Fed said firms now had to offer assurances they could pay their bills for at least 90 days and would not go bankrupt in that period – a measure of protection that the lending will have an impact.
Firms also have to promise they will make “commercially reasonable efforts” to maintain employees – a change from just the “reasonable efforts” demanded previously.
The Fed said the aim was to encourage participation, not set too many restrictions, and not set terms that might weaken firms that were already struggling.
The size of the program will remain the same for now with $600 billion in loans available on the basis of $75 billion in capital from the U.S. Treasury at risk for any losses – an amount set by the Fed to insulate it from any loans that go bad.
It marks the latest expansion by the Fed of a safety net it has built along with the Treasury to try to keep the economy stable as health officials battle a global pandemic (for a graphic of those programs: https://reut.rs/35izs4l)
In a matter of weeks the U.S. economy has gone from historically low unemployment to seeing more than 30 million people file for unemployment benefits and the sharpest plunge in activity since the 2007-2009 Great Recession, as authorities across the country shut down large swaths of industry and commerce to slow the spread of the novel coronavirus.
The Fed has already slashed interest rates to zero, and it reiterated on Wednesday at the end of a two-day policy meeting that they will stay there until the economy is clearly back on track. It has also rolled out around $2 trillion in lending commitments.
In its policy statement on Wednesday, the Fed reiterated it was ready to expand its programs as needed.
In this case, a main goal, the Fed said, was to provide “Main Street” loans for even fairly large companies still too small to raise money on public capital or bond markets.
The mix of additional firms now allowed into the program is broad, the Fed said, and is not meant to extend help to particular industries like the oil and gas sector that have lobbied for help.
(Reporting by Lindsay Dunsmuir and Howard Schneider; Editing by Chizu Nomiyama and Paul Simao)