Recipients of loans through COVID-era Fed program saw significant improvements relative to peers
Study of Main Street Lending Program also finds firms with brighter prospects likelier to get loans
Main Street Lending Program loans succeeded in stabilizing midsize businesses that had shown strong potential in the year leading up to the pandemic but had suffered severe disruptions once COVID-19 struck, according to the latest analysis of the MSLP by Federal Reserve Bank of Boston senior economist and policy advisor J. Christina Wang. The loans enabled these businesses – generally of 250 to 500 employees – to survive the crisis, and it put them in better position to grow as the economy returns to normal.
In her working paper titled “The Main Street Lending Program: Who Borrowed and How Have They Benefited?”, Wang finds evidence that the program “achieved the objective of shoring up the liquidity position of firms that had promising prospects but were hit hard by the pandemic.”
More specifically, companies that borrowed from the MSLP saw their delinquency risk drop an average of nearly 18% one year after they received their loan, according to Wang’s analysis using the Dun & Bradstreet database, the paper’s primary data source.
The MSLP was designed to aid businesses that were too small to access the corporate bond market, which the Federal Reserve propped up early in the pandemic with an unprecedented program authorized to purchase corporate bonds. Some of these businesses were also too large to borrow under the Paycheck Protection Program, which the U.S. Congress had authorized in response to the COVID-19 crisis to provide liquidity to small businesses through low-cost loans that mostly became grants.
D&B data enabled comparison of private companies’ traits and performance
Publicly available data about the businesses eligible for MSLP loans are limited because virtually all are privately owned – they’re too small to be public companies. However, Dun & Bradstreet has information on the financial health and commercial viability of nearly 25 million private U.S. businesses, including ones that have only a few employees. As Wang explains, D&B is regarded as a credit bureau for businesses. It assigns credit scores to predict, for example, whether a business will make timely payments on its bills and debt.
Wang uses the D&B data to examine the characteristics of businesses that borrowed from the MSLP. She then looks at how they performed after receiving a loan relative to businesses of the same size, in the same industry and geographic location, and mostly in the same credit-rating range that were eligible to borrow from the program but did not.
“(The analysis) can help evaluate whether the program reached the subset of businesses it was designed to target,” Wang writes. “Perhaps more importantly, it can provide useful clues about which program parameters might be altered to make it more suitable should a similar program be called for in the future.”
Results show MSLP reached the businesses for which it was designed
Wang’s analysis of the D&B data produced the following results:
- Among eligible businesses, those with roughly 250 to 500 employees were the most likely to borrow from the MSLP.
- Businesses that saw a large improvement in their D&B risk score over the year before the pandemic but a large decline after the onset were more likely to borrow from the MSLP.
- Businesses that, according to D&B, represented a moderately low risk to lenders just before the COVID-19 outbreak were more likely to borrow compared with riskier firms. The safest firms were the least likely to borrow.
- The financial health of recipient firms improved progressively and significantly over the year following their receipt of an MSLP loan.
“The general pattern that emerges from the findings is that Main Street borrowers were, on average, more commercially active and viable before COVID-19 hit, but they were more adversely affected by the pandemic and thus suffered a worse short-term liquidity shortage,” Wang writes.
She explains that this combination of characteristics made these businesses suitable MSLP loan recipients. “Their promising long-term prospects made the lending relationship valuable to their banks,” Wang writes. “The onset of the pandemic, however, rendered the firms riskier, at least temporarily. Therefore, the banks turned to the MSLP to fund the loans, as the program likely enabled them to offer lower rates or lend larger amounts, or both, than they would have had they used solely their own capital.”
The Boston Fed operated the MSLP from its inception on July 6, 2020, until it closed on Jan. 8, 2021. Businesses with as many as 15,000 employees or as much as $5 billion in annual revenue were eligible to apply for a loan. The program approved 1,830 loans totaling $17.5 billion, which was only a small portion of its capacity of $600 billion. The MSLP could purchase 95% of a loan from the lending bank, with the bank retaining the remaining 5% of the balance. The loan amounts available ranged from $100,000 to $300 million, depending on, among other factors, the type of loan and the financial condition of the business.
MSLP loans didn’t immediately improve employment at recipient businesses
Wang’s analysis shows that while the MSLP funding provided liquidity to businesses with promising prospects, in the year following receipt of the loans, it did not lead to significantly improved employment numbers among borrowers. “Full recovery may require more time, especially considering the labor market tightness in general,” Wang writes.
She also finds that being an early recipient of a 2020 Paycheck Protection Program loan increased a business’ likelihood of borrowing from the MSLP. She interprets this finding as indicating the importance of preexisting banking relationships for borrowers. It also suggests the borrowers needed more funding than was available through the PPP. “For the firms that were eligible for the PPP but required more funding, Main Street helped make up for the shortfall,” she writes.
In “What Do 25 Million Records of Small Businesses Say about the Effects of the PPP?” a study of the PPP that also uses D&B data, Wang and coauthor Gustavo Joaquim find that, as with the MSLP, businesses that represented less of a risk to lenders were more likely to receive PPP loans. Among other results, their study also shows that businesses’ financial health and commercial viability before the pandemic affected the efficacy of the loans. Notably, the lower a company’s creditworthiness before the pandemic, the greater the boost from the PPP loan.
Previous studies: MSLP was best option for borrowers; loans were timely, well targeted
Wang’s paper is the latest in a series of Boston Fed studies of the MSLP. As in the most recent paper, in “How Did the MSLP Borrowers Fare Before and During COVID-19?” she and her coauthors, using D&B data, find that businesses were able to borrow from the MSLP because their high likelihood of surviving the pandemic made banks willing to lend to them. The authors also find that MSLP borrowers tended to have rising credit risk following the onset of the crisis. That made the MSLP attractive, because they could pay a lower price for credit or obtain more credit through the program than they would have otherwise.
In “A Helping Hand to Main Street Where and When It Was Needed,” authors Wang, senior economist and policy advisor Falk Bräuning, senior economist and policy advisor José L. Fillat, and research assistant Frankie Lin conclude that more MSLP loans went to businesses located in states hit hardest by the pandemic, and more credit was issued when the infection rate in a state rose.
In “Uptake of the Main Street Lending Program,” Bräuning and Board of Governors principal economist Teodora Paligorova find that 99% of the MSLP borrowers were smaller businesses with less than $50 million in annual revenue, and more than 70% were in the industries hurt most by the pandemic. They also find that the amount of credit extended by the MSLP equated to about 60% of the volume of loans made by large banks to borrowers of comparable size and leverage.