By James Politi in Washington
The US Department of the Treasury and the Federal Reserve are facing calls to clarify how businesses can access $ 454 billion in government funds set aside to help American businesses access capital during the coronavirus pandemic.
Almost a quarter of a $ 2 billion stimulus package signed by Donald Trump on Friday aims to provide businesses with loans, loan guarantees and debt purchases from government. But while Washington’s financial lifeline – which is to be jointly organized by the Fed and the Treasury – has already aroused huge interest from companies that urgently need to draw on the funds, the precise schedule, the mechanisms and conditions attached to government assistance are still unclear, leading to urgent requests for more information and details.
Mike Crapo, the Republican chairman of the Senate Banking Committee, wrote a letter to Steven Mnuchin, the United States Secretary of the Treasury, and Jay Powell, the chairman of the Federal Reserve, on Saturday evening asking them to “work quickly to issue guidelines “on the plan, highlighting the uncertainty as to its implementation.
Mr. Crapo said recipients must “understand what programs and facilities are available, the terms and conditions of those programs and facilities, and a contact point or information portal for them to discuss access and conditions applicable to these programs and installations “.
Key questions include whether companies receiving assistance from Washington would end up with large government holdings and restrictions on share buybacks and dividend payments, and the magnitude of the credit risk that the Fed will be willing to take during this period.
Interest in receiving government money has skyrocketed, according to Washington lobbyists. David Stewart, director of public policy practice at Squire Patton Boggs, said it was not only hotel and restaurant groups that were asking for ways to access federal aid, but a wider range companies in sectors ranging from energy to manufacturing.
“Everyone is looking for all the help available,” said Stewart. “Here is a situation where there has been a dramatic liquidity crisis in all sectors of the economy.”
“Businesses face a revenue cliff and they face unique challenges,” said Tom Quaadman, executive vice president of the US Chamber of Commerce’s Center for Capital Markets Competitiveness. “It’s about knowing how to keep your workforce paid, how to keep the business open and have the financial resources to weather the storm so you can start growing as quickly as possible afterwards,” a- he added.
But the success of the plan will depend on how quickly and efficiently the Treasury and the Fed can get the money to the companies that need it. The legislation passed Friday indicates that within 10 days of its promulgation, the Treasury Department must specify the procedures for requesting government assistance, which gives hope that it could soon be operational.
He also describes how the plan would be structured: the Treasury would provide money to the facilities put in place by the Fed which, in turn, would make direct loans to businesses, offer loan guarantees and buy corporate debt on the primary and secondary markets. This structure mirrors the existing emergency lending facilities already launched by the Fed and the Treasury last week to provide up to $ 300 billion in liquidity to the US economy through the banking system.
Trump administration officials say that once the Treasury’s $ 454 billion firepower is fully exploited, it could provide up to $ 4 billion in liquidity to the economy. “This is temporary support to the US economy which is very very, very critical,” Mnuchin told Fox News on Sunday, adding that he was in such close contact with Mr. Powell that they “speak several times a day regularly”. Both the Fed and the Treasury are expected to approve each investment.
Stimulus funds, however, have conditions attached to companies receiving aid, which can make it difficult for them to talk to the government. In the case of direct loans through a Fed mechanism, recipients will have to accept restrictions on share buybacks, dividend payments and executive compensation.
But Mr. Mnuchin will have the power to lift these restrictions if it is “necessary to protect the interests of the federal government” – and it is far from clear to what extent the Secretary of the Treasury intends to pursue these exemptions. Under the bill, some medium-sized businesses, with employees ranging from 500 to 10,000 people, may face other restrictions, including the requirement to be domiciled in the United States and to comply with collective agreements with unions.
The bill does not provide for companies participating in the Fed-Treasury regime to automatically accept a stake in government capital, as is the case for separate assistance of $ 50 billion to airlines and companies deemed essential to the national security in the stimulus bill, but that doesn’t rule it out either.
“I do not think it would be wise to assume that the Treasury would not seek some sort of participation,” said Stewart. Beyond the conditions likely to be set by the government on any bailout, another source of uncertainty is the role of the banks, because they can be called upon to act as an intermediary for government assistance if it comes in the form of loan guarantees through the Fed. establishment.
Finally, there remains a doubt as to the willingness of the Fed itself to grant assistance to the most distressed borrowers, especially given the rapid deterioration of the credit profiles of many companies. Even when it deployed its tools to fight the crisis, the American central bank has always looked for safe assets as collateral, a requirement of the Federal Reserve Act which established its existence.
The stimulus bill says that these rules on “loan guarantee, taxpayer protection and borrower creditworthiness” still apply, but if applied strictly, it could limit plan participation as well as the overall economic impact. “One thing a lot of people are asking is how much credit risk will the Fed take on,” said Alec Phillips, economic policy analyst at Goldman Sachs in Washington.