The Main Street Lending Program (MSLP), launched in 2020 by the Federal Reserve and U.S. Treasury under Section 13(3) of the Federal Reserve Act, provided over $17.5 billion in liquidity to 1,830 small and mid-sized U.S. businesses. The Program was intended to serve as a critical bridge during the Covid-19 pandemic. Five years later, roughly half of these loans made under the Program are outstanding and approaching maturity. Beginning in July 2025 and continuing through year-end, the MSLP borrowers will be required to make 70% balloon loan repayments to satisfy their obligations in full. Many Program participants will be unable to refinance their loans. This article discusses the structure of the MSLP loans, the growing wave of expected defaults, available borrower remedies and emerging opportunities for distressed debt investors.
Loan Structure And Anticipated Defaults
Through a loan participation, each MSLP loan is 95% owned by a special purpose vehicle managed by the Federal Reserve Bank of Boston (the "Fed SPV") with 5% retained by the originating bank, which also services the loan.
The MSLP loans mature five years from origination, most by late 2025, and were structured with favorable early terms to provide businesses with relief: no payments in the first year, interest-only payments in the second, followed by 15% principal repayments in years three and four, and a balloon payment of 70% of principal in year five. The loans were issued at a floating interest rate (originally LIBOR + 300 bps, now often replaced by the Secured Overnight Financing Rate ("SOFR"). The loans are secured by blanket liens on all borrower assets, and in some cases, supported by personal guarantees.
With MSLP borrowers required to make balloon payments of 70% of the principal loan amounts in 2025, a wave of defaults is now anticipated. As of May 31, 2025, the Federal Reserve has already recognized over $1.42 billion in MSLP-related losses, and only a fraction of MSLP borrowers have been able to obtain modifications.
Modification Constraints, Borrower Challenges And Loan Sales
MSLP loan modifications are possible, but what can be accomplished is quite limiting. The Fed SPV will consider restructuring requests only when there is an imminent or likely payment default, declared or anticipated bankruptcy, clear going concern risks, insufficient projected cash flows, or no access to alternative funding at market terms. But even then, the Fed SPV has categorically refused to extend maturity dates beyond 2026 or reduce interest rates, and principal forgiveness is not permitted under the program's terms. To date, only a narrow set of modifications—such as deferral of interest or principal payments—has been granted.
While out-of-court restructuring options for MSLP loans are limited, there may be an alternative out-of-court path: a sale of the MSLP loan. Working with its servicing bank, a borrower may be able to identify third parties interested in acquiring its loan as a potential path to greater flexibility in terms of loan modifications. The servicing bank and borrower will need to demonstrate to the Fed SPV that: (i) a sale of the loan is better than a liquidation of the borrower and (ii) fair value is being paid, which may require that the loan be subject to an auction process in the secondary market. Under such a scenario, there is a risk to the borrower that its preferred proposed buyer may not submit the best offer and a party unknown to the borrower ends up buying the loan.
Loan Sale Risks For Borrowers
MSLP loan documents do not give borrowers the right to consent to or block loan sales. The incoming lender may adopt a more aggressive enforcement posture or resist accommodating modifications. Negotiating a loan modification in this environment may be possible, but it will require proactive outreach and transparent financial reporting, and borrowers should be prepared to undertake operational reforms like reducing overhead, among others.
The Bankruptcy Option
In some cases, bankruptcy may provide the most viable path forward. MSLP loans are treated as ordinary secured claims in Chapter 11 and do not receive a preferential treatment other than that available to other secured creditors. It is important to note that because the Fed SPV is no longer making loans, a borrower will have to look elsewhere for debtor-in-possession financing.
Opportunities For Distressed Investors
Investors seeking to acquire MSLP loans may find significant opportunities in the current environment. The Fed SPV has allowed sales of its loan interests to qualified buyers, opening a secondary market in which distressed debt can be purchased, often at a discount. Buyers may benefit by restructuring loans, converting debt to equity, or acquiring assets through bankruptcy sales under Section 363.
Conclusion
Borrowers must act swiftly to evaluate their restructuring, refinancing or sale strategies. Lenders and investors should be aware of the risky nature of owning MSLP loans, including heightened defaults, but, at the same time, recognize that there are market openings for strategic acquisitions.
Originally published by Financial Advisor Magazine.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
