A significant wave of defaults is looming for companies that borrowed under the Federal Reserve's Main Street Lending Program (MSLP), as substantial balloon payments come due throughout 2025. Several major companies have already filed for bankruptcy with unpaid MSLP loans, and many more businesses are struggling with dramatically increased interest payments and approaching principal obligations.
Key Takeaways
- Credit losses from MSLP loans have reached $1.36 billion as of December 2024, with an additional $624 million in estimated losses anticipated.
- Of 1,830 loans made under the program, only about 30 have received any form of modification, with just one receiving a maturity date extension.
- Major bankruptcies include Wendy's franchisee Starboard Group ($49.8 million owed), Coach USA ($37.9 million), and Corsa Coal ($16.3 million).
- Monthly interest payments have risen dramatically, from roughly $17,000 in 2021 to $80,000 for some borrowers.
- Many operationally profitable businesses cannot make the required 70% balloon payment due in year five.
The MSLP was established during the COVID-19 pandemic as a $600 billion initiative to support small and mid-sized businesses that were too large for the Paycheck Protection Program but too small to readily access capital markets. Under the program, companies took out five-year loans from banks, with the Federal Reserve purchasing 95% of each loan. The Treasury Department provided loss protection using taxpayer funds.
The program's structure has created particular challenges for borrowers. Loans required no interest payments for the first year and no principal payments for two years. However, 15% of principal was due in years three and four, with a 70% balloon payment due in year five. The program's expiration at the end of 2026 further constrains restructuring possibilities.
Some borrowers have found bankruptcy to be a clearer path forward than attempting out-of-court workouts. The Federal Reserve Bank of Boston, which oversees the program, has not provided formal guidance on handling defaults, leaving stakeholders to navigate uncertain territory. One potential solution that has emerged is the sale of MSLP notes to third parties, which the Fed has agreed to allow, though without providing detailed instructions on the process.
Companies with MSLP loans should assess their ability to make balloon payments well in advance and explore all available options, including refinancing or potential note sales. Lenders should review their MSLP loan portfolios for default risks and prepare for potential bankruptcy filings. Other creditors and stakeholders should monitor MSLP borrowers for signs of distress and evaluate the potential impact of defaults on their overall exposure.
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