WASHINGTON – La Colombe, a Philadelphia-based provider of chic coffee and canned lattes, saw a sharp decline in business in 2020 as the coronavirus pandemic closed its cafes and closed upscale restaurants that serve the brew. But the company has fallen through the cracks when it comes to government aid.
La Colombe did not believe that due to its size and canned coffee business, it had qualified for the government-sponsored small business loan program. It is too small to access the debt markets that large corporations use to raise money – markets that chug with Federal Reserve backstops.
Business leaders believed that another Fed program designed to help medium-sized businesses by providing credit would be the best way to get help. When the central bank released the details in early April, it was clear that La Colombe would not qualify. The company has too much debt in relation to profit to meet the Fed’s leverage limits.
“It just doesn’t make sense for companies like La Colombe because we are growing so fast,” said Aren Platt, who heads special projects for the company.
The Fed’s Main Street Loan Program for medium-sized companies should be challenging. The central bank has never tried to lend to medium-sized companies before, and it is difficult to help a very diverse group of companies without jeopardizing taxpayers’ money. The Fed, the Treasury, and members of Congress have sometimes commented on various pages about what the program is designed to achieve.
The central bank and the Treasury, which provide money to cover any loans, have spent months drafting the program, negotiating credit risk and reviewing conditions. Many Fed officials wanted to create a program that companies would actually use, but some in the Treasury rather saw the program as an absolute setback for companies that had no options. Steven Mnuchin, the finance minister, has resisted taking too much riskand said at one point that he didn’t want to lose money on the programs as a base case.
What happened after three months, two overhauls and more than 2,000 Remarks A program has been submitted to the Fed that does not appear to be able to please many of anyone.
The Main Street program, first announced on March 23, finally allowed banks to register as lenders in mid-June. So far, however, only about 450 of the country’s thousands of eligible banks have registered. Banks have reported that many customers are not interested in using the program, Fed chairman Jerome H. Powell admitted to the legislators concerned when he testified in late June.
Small town bankers say that some customers were startled by the considerable paperwork involved in using the program. Large companies often have more attractive options elsewhere in the market. Some, like La Colombe, have too much debt to apply for. This problem is repeated all over the world Comment letters from companies that enlarged their footprint before the pandemic.
It will be difficult to declare the program a complete failure, even if only a few companies use it, because the Fed and the Treasury have set limited – and often vague – goals. Officials say that they want to give healthy companies an option to access credit when market conditions worsen but want to be responsible with the credit they grant.
“Success would be that we have broad national coverage,” said Eric Rosengren, president of the Federal Reserve Bank of Boston, which oversees the effort. “This is for companies that have a good business model, who have been disrupted by the pandemic, and can recover from it so that they can repay the loan.”
The program is designed to help a narrow group of companies, especially given its tough conditions, experts said.
The Fed takes on 95 percent of the risk, but banks must keep 5 percent of all loans they subscribe to under the Main Street program. This provision is intended to prevent them from throwing bad debts on the Fed. Since they have to have skin in the game, they are likely to avoid taking out loans when the economy is in a crisis and it looks like a large part of the borrowers could fail.
The program also includes reporting obligations and others Restrictions – including restrictions on executive compensation and capital distributions such as dividends that Congress has set out in the relief laws. If the economy gets mixed up and loans are basically available, some companies will find borrowing through the Main Street program unattractive due to the conditions involved.
It’s a goldilocks design: companies don’t use it when credit conditions are healthy, and banks don’t use it when they’re too unhealthy. It could help companies get access to credit when the situation is right – for example, when credit conditions worsen with a second wave of viruses in the fall, but banks and borrowers expect the economy to recover soon.
“There are some difficult conditions associated with taking this money,” said Bruce Winfield Van Saun, general manager of Citizens Financial Group, at an investor conference on May 27th. “I think a lot of companies will use other funds from banks or wealth-based lenders if they can do that.” He added: “If the situation remains difficult or worsening, more companies are likely to take up lending on Main Street.”
The program opened fully on Monday, and Rosengren said the banks had already offered loans to companies that were badly affected, such as B. Cinemas. He declined to say how many and said he expected demand to increase over time. The information from the Boston Fed shows this hardly any of the largest banks other than Bank of America are ready to publicly say that they are lending to new customers through the program.
An analysis by Goldman Sachs’ economists showed that there are potential borrowers for whom the program conditions would be attractive given the current funding conditions and could lend money to banks – mostly smaller and riskier companies. However, due to the program conditions, they expect little use. Larger risky companies may also find the facility attractive, but the program limits would likely rule them out.
Another incentive to the program – removing credit from bank balance sheets to make room for more credit – also doesn’t seem to be a priority, wrote an economist from J.P. Morgan, Michael Feroli, in a research note. He pointed out that a separate Fed program that takes small business loans from bank balance sheets is used only to a limited extent, suggesting that banks are not generally concerned about clearing the balance sheet area.
Legislators have repeatedly urged policy makers to make the program more inclusive and widely available. However, Mr. Mnuchin was relatively cautious about taking credit risk and occasionally described the Main Street program as a backup option that could be successful without ever being used by giving the market confidence that credit would still be available.
“In the perfect world, we’ve announced all of these facilities, the markets are working and we don’t have to use them,” he said said on CNBC in May. “But they are there and they will be ready and serve as backstops.”
The Fed and the Treasury have revised criticism of the program terms several times to make it more attractive to borrowers and lenders.
Banks can now grant smaller loans of just $ 250,000, and borrowers can have up to five years to repay the loan.
Even so, Powell told lawmakers on June 30 that banks “don’t get much interest from borrowers” and added that they expect demand to increase. “We’re still open to playing with the formula and making adjustments.”
Mr. Powell signaled thaThe minimum loan size could continue to decrease, and Mr. Mnuchin said the Treasury and the Fed are dealing with asset-based loans that could allow more indebted companies to take out loans by using their businesses and factories to secure the loans. La Colombe is pushing for this, sometimes through local lawmakers.
It is unclear how much marginal optimizations will help, even if the economy deteriorates and credit availability dries up. The Fed can only offer loans, not grants, so companies using the program get out of service with more debt.
“There are limits to how good the program can be because it is a loan,” said Nellie Liang, a former Fed official who is now with the Brookings Institution. Still, she said, policymakers should “be on the generosity side, especially for smaller companies,” and add, “If the program is too modest, the economy may deteriorate, more companies fail, and more support would be needed. ” . ”