NEW YORK (LPC) – Restrictions within the US government’s coronavirus aid program Main Street Lending Program (MSLP) bypass borrowers and lenders even as new lending activity begins to expand in the market intermediate.

So far, only US $ 252 million out of 32 loans have been committed or settled under the program, with an additional $ 604 million in 55 loans under review, according to figures released Aug. 12 by the Federal Reserve Bank of Boston, the organization that manages the program. .

This is only a fraction of the US $ 600 billion in available funds, which has raised questions from lawmakers about the viability of a program designed to provide immediate help to businesses hit by the economic shutdown.

According to some bank lenders, the loan ownership restrictions built into the program are the main obstacles for lenders. The banks guarantee the transactions and the US government owns 95% of the individual loans made under the plan. Loans are either priority or pari passu with a company’s existing debt, and benefit from government protection.

Yet even though banks are taking far less risk than taking out the entire loan themselves, many in the market see shared collateral as a deterrent.

By introducing new secured debt at the top of the capital structure, the existing lender then becomes subordinate in collateral claims in bankruptcy. A lender who had an existing first lien facility will no longer be on the front line for payments if the collateral is liquidated.

“Banks assume 5% of the increase, but it’s 100% of the administrative burden. Debt collection is done at the bank, ”said Samuel Pizzichillo, head of financial services audit at the accounting firm Mazars USA.

The program offers the possibility of accessing middle market borrowers, a relatively new customer base for some of these banks. The requirement for a loan at a maximum price of 300bp against Libor also gives financial institutions a competitive advantage over private debt funds, which have gained market share in the mid-market over the past year. decade and demand higher returns for their risk.

According to sources, a typical senior loan from a private debt firm is between 500 and 700 bps against Libor.

“It’s an opportunity to gain more market share, but you have to branch off the guarantee with the government,” said one banker.

LIMITATIONS OF THE BORROWER

The MSLP, which lives under the shadow of the government’s Payment Protection Program (PPP), has its own limits for borrowers.

The PPP and MSLP followed the passage of the CARES Coronavirus Aid, Relief and Economic Security Act, designed to provide liquidity to small and medium-sized businesses to withstand the impact of the coronavirus.

Under the PPP, more than five million loans have been made for a total amount of $ 525 billion, according to figures released by the US Treasury when the program closed on August 8. The MSLP, meanwhile, will remain open until the end of the year.

PPP finance was attractive to borrowers because loans could be canceled under certain conditions.

PPP also gives businesses greater freedom than MSLP, which limits dividend payments 12 months after loan repayment. The maximum amount a business can borrow under the PPP was $ 10 million, while the MSLP offers borrowers up to $ 35 million in loans.

The heightened uncertainty caused by the novel coronavirus has dried up financing for middle market companies, which were readily available from some banks and private credit funds before the start of the pandemic.

Although the slow reopening of the US economy has made these lenders more comfortable with the space, they are more inclined to support stronger credit, leaving weaker companies to seek out PPP funds because they are not in the market. the level of risk that a bank is willing to take.

“It’s a bit of a catch-22. Weaker or more indebted borrowers face eligibility issues, while stronger borrowers may find the terms too onerous for the credit they can get outside of the program, ”said Andrew Bettwy, partner of the program. Proskauer law firm.

Lenders are also more likely to fund businesses in their existing portfolio where due diligence has already been performed than to seek new business. Due diligence processes have proven more difficult to undertake as travel restrictions have prevailed in recent months.

“Purchasing a new issuer can be a slow process. A bank’s existing relationship will likely already have an internal rating and there is a natural attraction to existing customers, ”Bettwy said.