PPP Maxed Out
The Payment Protection Loan Program will run out of money at some point today as over $324 billion of the allocated $349 billion as of last night. Yesterday, Treasury Secretary Mnuchin and SBA Administrator Carranza issued the following statement:
“The SBA has processed more than 14 years’ worth of loans in less than 14 days. The Paycheck Protection Program is saving millions of jobs and helping America’s small businesses make it through this challenging time. The EIDL program is also providing much-needed relief to people and businesses. By law, the SBA will not be able to issue new loan approvals once the programs experience a lapse in appropriations.”
In a period of a few weeks, a single new loan program became the obsession of every bank and banker we have spoken to. There were problems with the program, particularly its broadness as a good portion of the money went to businesses that didn’t need it, but it was an overwhelming success. The program didn’t exist until March 27 and the SBA had to open the program to a whole new universe of lenders without 7(a) lending experience.
The talks between Mnuchin and Schumer will continue into Thursday when the Senate is scheduled to meet in the afternoon for a pro forma session.
Senators could at that time pass an agreement to provide an extra $250 billion for the popular Paycheck Protection Program (PPP) and $250 billion for hospitals and state and local governments, which Democrats are demanding — but it would require all 100 of them to agree.
Meanwhile, the Federal Reserve announced that its Liquidity Facility, in which depository institutions can borrow at 35 basis points to fund these loans, is now fully operational. All the relevant forms and documents are posted and available. Non-banks have not yet been given access, but they are in the process of opening this up to them, although it is unclear which parties will be approved.
Essentially, this program was a race between banks to provide as much of these dollars to their customers. Some banks were slow to figure it out, while others became experts. One bank told me that nearly every single employee was working on these loans and their senior management team spent all weekend inputting the applications into E-Tran to make sure their clients got the money, providing a disproportionate share of money than their larger competitors. These loans are expected to be funded within ten days.
Main Street Lending Program
The Federal Reserve rolled out a new $1.2 trillion program to provide loans to midsize businesses. The intent appears to fill the gap between the PPP program and the larger corporate rescue packages. Its technically two programs (Main Street New Loan Facility and Main Street Expanded Loan Facility), each for $600 billion. One facility is for new loans, while the other is for loan increases to existing loans. Here is what we know so far, which is entirely from the term sheets of both programs.
- Eligible lenders are US depository institutions while eligible borrowers can have up to 10K employees and $2.5 billion in 2019 revenue. Eligible borrowers must be US domiciled companies with the majority of their employees based in the US.
- Eligible Loans must have the following characteristics: a 4-year maturity with 1-year deferment of P&I; Adjustable rate of SOFR + 250-400 basis points; minimum loan size of $1 million; and no Prepayment Penalty
- Maximum loan amounts are the lesser of either $25 million or 4X 2019 EBITDA in the New Loan Facility, and the lesser of either $150 million, 30% of the borrower’s existing and committed but undrawn bank debt, or 6x 2019 EBITDA for the Expanded Loan Facility
- An SPV funded by the Fed will then purchase a 95% participation in these loans at par value with the originator retaining 5%. SPV gets the 1% origination fee, while the originator receives 25 basis points for servicing the sold portion.
- Borrower agrees to limits on compensation, stock repurchases, and capital distributions
- Meanwhile, the originating lender cannot use the monies to refinance their existing loans or cancel or reduce any existing lines of credit.
- Expires on September 30, 2020.
The Main Street Lending Program is perhaps the most unprecedented step the Federal Reserve has taken so far. To our knowledge, the Federal Reserve does not generally take true credit risk. They take liquidity and pricing risk, but they generally purchase, guarantee, or lend against relatively safe assets. This represents a radical departure as the program appears to be geared towards struggling companies.
To wit, the Eligible Borrower must “attest that it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 (“COVID-19”) pandemic.” And the programs require these loans to be new money. Companies struggling with COVID-19 that need new money are likely using the money for defensive purposes (i.e. working capital). Not too many of these companies are buying new equipment, buildings, or making acquisitions.
The American Bankers Association and the New York Bankers Association both said they too are trying to get their arms around the Fed’s announcements.
Joseph Lynyak III, a partner at the law firm Dorsey & Whitney, said in a statement that the Fed has begun to “look down the road” with the announcement of these programs to jump-start these businesses.
“The intention is twofold: First, the facilities will provide necessary liquidity to banks to extend the credit,” Lynyak said. “More importantly, however, the facilities will effectively function as working capital loans for businesses as the nation emerges from the COVID-19 emergency.”
There are also some other considerations that need to be addressed. Banks that make these loans are tying their hands on using their rights to terminate their existing lines of credit, so these loans should be made to bank’s most important customers. And, borrowers will want to know whether the Fed will take any adverse actions if they end up laying off employees, as they are required to make a good faith effort to retain them.
Without a doubt, the Federal Reserve and Treasury are trying everything they can do to inject life into the economy. Time will tell if they have done too much, but few could argue they have done too little.
Who’s Paying?
The National Multifamily Housing Council (NMHC) found that 84 percent of apartment households made a full or partial rent payment by April 12 in its second survey of 11.5 million units of professionally managed apartment units across the country, up 15 percentage points from April 5.
NMHC’s Rent Payment Tracker numbers also examined historical numbers and found that 90 percent of renters made full or partial payments from April 1-12, 2019, and 91 percent of renters in March 1-12, 2020. The latest tracker numbers reflect a payment rate of 93 percent compared to the same time last month. These data encompass a wide variety of market-rate rental properties, which can vary by size, type and average rental price.
Only 20 percent of the Related Group’s commercial tenants paid their rent in April, executive Jon Paul Pérez said during The Real Deal’s webinar on Friday.
“If you get 20 percent you’re sort of happy and jumping up and down,” he said. About 90 percent of Related’s multifamily tenants paid rent, which Pérez said is much higher than the 50 percent the company originally expected.
Mr. Perez’s comments were as of April 10, so the collection rate should improve, but commercial tenants are invoking force majeure to get out of their rent payments. On the loan side, banks are seeing stress from both their consumer and commercial buyers. On the commercial side, banks should have concerns about their commercial credit lines.
A total of $231.2 billion was drawn from revolving credit lines across the industry since March 5, the research team at Goldman Sachs said in a note to clients issued earlier this week. The rush caused a spike in first-quarter loan growth at banks.
A big reason for initial stability was the decision to quickly approve deferments for mortgages, credit cards and auto loans, Moynihan said. Federal stimulus programs could help curb delinquencies in the second quarter.
BofA has received hardship requests tied to about 3% of its credit card accounts and 5% of its mortgages. In comparison, 16% of its small business accounts submitted requests for leniency.
While its early, a few themes are emerging. Consumers are doing a better job of paying their bills, including rent and loan payments, while commercial tenants and likely their landlords are struggling to keep their obligations current, although some may be strategically defaulting. Unfortunately, no one appears to be worried about moral hazard.
RIP Fracking?
In reality, the dream was always an illusion, and its collapse was already underway. That’s because oil fracking has never been financially viable. America’s energy independence was built on an industry that is the very definition of dependent — dependent on investors to keeping pouring billions upon billions in capital into money-losing companies to fund their drilling. Investors were willing to do this only as long as oil prices, which are not under America’s control, were high — and when they believed that one day, profits would materialize.
The promised profits haven’t materialized. In the first half of 2019, when oil was around $55 a barrel, only a few top-tier companies were profitable. “By now, it should be abundantly clear that the current shale oil business model does not work — even for the very best companies in the industry,” the investment firm SailingStone Capital Partners explained in a recent note.
All that’s left to tally is the environmental and financial damage. In the five years ending in April, there were 215 bankruptcies for oil and gas companies, involving $130 billion in debt, according to the law firm Haynes and Boone. Moody’s, the rating agency, said that in the third quarter of 2019, 91 percent of defaulted U.S. corporate debt was due to oil and gas companies. And North American oil and gas drillers have almost $100 billion of debt that is set to mature in the next four years.
This is a provocative and thought-provoking piece. However, the desire for US energy independence is high and Bloomberg reports that the Energy Department may pay US oil producers to leave oil in the ground, in order to reduce the supply of oil and raise energy prices.
Born to Run
A white 2019 Audi A8 L sedan with extra fuel tanks in the trunk pulled away from a Midtown Manhattan parking garage late last Saturday night. A driver on a high-speed mission aimed the car west and hit the accelerator.
Averaging more than 100 miles per hour over nearly 3,000 miles of the nation’s epically uncrowded highway system, the car arrived at an oceanside hotel in Redondo Beach, Calif., less than 27 hours later.
The car and its three-person crew, none of whom have yet revealed themselves publicly, easily broke the record for driving from New York to Los Angeles, a sprint known as the Cannonball Run. Past record-holders expect the mark to fall again in the coming weeks, and maybe again and again — one more impact of the coronavirus-induced quarantine that the nation is under.
With traffic levels down more than 90% in some cases, insurance companies are rebating car owners and municipalities are seeing far less revenue from speeding violations and parking tickets.
Introducing CSC Specialty Asset Management
As you may already know, our firm specializes in loan sales for banks and private equity firms. During the 2008 financial crisis, we launched a specialty business, to help with workouts during unique times. Unfortunately, this pandemic has brought on a lot of uncertainty, and we have decided to provide this service again.
Many financial institutions need resources to manage the surge of loan workout unleashed by the COVID-19 pandemic. Clark Street Capital’s Specialty Asset Management (“SAM”) provides a contract workout solution for lenders to prudently manage elevated problem assets. Our team of experienced professionals act as a seamless and integrated outsourced workout solution.
- Highly trained professionals with comprehensive loan workout experience
- Broad knowledge of multiple loan types, ranging from traditional CRE, hospitality, senior housing, churches, SBA, and C&I
- Our professionals join your team under your platform and your supervision
Our Team:
James McCartney, Managing Director CSC SAM
A subsidiary of Clark Street Capital, CSC Specialty Asset Management is led by James McCartney, who brings decades of management of complex portfolios.
Analytical and results-driven, Jim has a demonstrated track record of achievement in loan workouts real estate debt, commercial and industrial (C&I) financing for both banks and finance companies.
Before joining Clark Street, Jim served in a variety of senior roles with Urban Partnership Bank in Chicago, a community development financial institution capitalized by a variety of Wall Street an regional institutions to acquire the assets of ShoreBank, subject to an FDIC loss share agreement on a highly distressed and complex $1.4 billion portfolio.
Jon Winick, CEO Clark Street Capital
Jon Winick is the CEO of Clark Street Capital. In 2008, at the height of the financial crisis, Jon saw the opportunity to establish a leading bank advisory and loan sale firm, sensing a void in the marke of firms with real-world banking, loan and real estate experience.
