Ahead of the June 2020 FOMC (Federal Open Market Committee) meeting, the Fed announced further steps designed to help small and midsize businesses in the United States. It updated the Main Street Lending Program by lowering the minimum loan amount, raising the maximum loan limit, and even extended the term to five years so many companies can take advantage of it.
The announced measures will come as no surprise, and market participants could expect more in the days to come.
Here’s the Fed’s “bazooka” in response to the coronavirus pandemic. On top of cutting the federal funds rate to zero, its facilities are designed to stimulate economic activity on an unprecedented scale.
However, only about $100 billion out of the total of $4 trillion available has been used so far, suggesting either the conditions are too strict, or there is no need for capital. Judging by the impact of the coronavirus pandemic on the global economy and the United States economy too, there is clearly a need for capital.
This leaves us with the answer as to why did the Fed have eased the conditions on its main street lending program.
What Does It Mean for Businesses?
The Fed is willing to buy a wider range of loan sizes and is extending the term of eligible loans to the program. Businesses now have an extra year to repay the loans – five instead of four.
Second, the Fed is willing to buy up to 95% of the total loans made to eligible companies. The eligibility criteria refer to the company’s debt level – it should not exceed six times the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
Third, the size of the minimum amount to borrow was cut in half, while the maximum amount increased. This way, the Fed wants to make sure it gives access to all sizes of businesses to the funds, from the very small ones to midsize ones.
What is interesting is that the Fed’s announcement comes two days ahead of the June 2020 press conference. Also, since the Fed announced the eight emergency programs seen in the earlier picture, the S&P500 is up 45%, while the funds available were barely used.
In other words, it was enough for the Fed to only “flex” the muscles a bit and the markets to believe it has the firepower to support the economy. Carrying a big gun is all you need.