Federal relief: Too little too late?

Politics and red tape are keeping bailout funds from reaching the companies that need it most.

The US government has gone to extraordinary lengths to ensure that small and mid-market businesses, which power much of the nation’s economy and create roughly two-thirds of its new jobs, avoid falling victim to the financial calamity that was precipitated by the coronavirus pandemic and the official response to it.

Through the $659 billion Paycheck Protection Program and the $600 billion Main Street Lending Program, the US Treasury and Federal Reserve have endeavoured to throw a lifeline to companies whose businesses were upended by the virtual shutdown of the US economy.

But even as the Fed has moved expeditiously to prop up the public debt markets, going so far as to directly purchase junk bonds and exchange traded funds, some of their efforts to reach small and medium-sized businesses, many of which are privately held and financed or owned by alternative investors, have fallen short.

Indeed, a report in late August by the Congressional Oversight Commission, which oversees the responses to the pandemic by the Treasury and the Fed, found that just $496.8 million of loans – or less than 1 percent – of the money earmarked by the Main Street Lending programme had been disbursed to struggling businesses. Only 160 of the 522 lenders in the programme have publicised that they are accepting loan applications from new customers, and the oversight panel itself acknowledged that eligibility rules are complex and exclude some businesses that want to participate.

The commission recommended that the Fed and Treasury consider lowering the $250,000 minimum loan size, and that they adjust fees to encourage more lending to small businesses. It also outlined changes suggested by witnesses at an early August hearing, including extending the loan terms to seven years from five, and expanding the lending programme to include experienced non-bank lenders such as business development companies or other private lenders. But it is doubtful that any changes will be adopted soon.

By generally avoiding the high-yield and leveraged loan sector, the Fed and Treasury “are picking winners and losers,” said Art Penn, founder and managing partner of PennantPark Investment Advisers, a mid-market credit platform with two BDCs and a variety of private vehicles.

“It’s insanity,” added Tom Bohn, CEO of the Association for Corporate Growth, a trade group for mid-market M&A dealmakers and business leaders. “Frustration among middle-market companies is running rampant.”

Although Bohn thinks regulators are well intentioned, he believes the Main Street programme effectively is “punishing a group” because “certain factions have issues with private equity”. Moreover, Bohn thinks, there seems to be no impetus to get anything done before the elections in November. It’s a wait that many companies could do without.

Write to the author at robin.b@peimedia.com.