US loan program helping oil firms to launch in June

A US taxpayer-backed lending program that the US oil industry is hoping to tap for low-interest loans will begin operations by early next month.

The "Main Street" lending facilities administered by the Federal Reserve and backed by the Treasury Department should be ready no later than "a day or two into June" and "the funds should be flowing directly after that," Fed chairman Jay Powell told the Senate Banking Committee today.

The Fed in April made tweaks to several lending facilities that Congress has authorized to help businesses affected by an economic contraction as a result of the Covid-19 pandemic, allowing US oil and gas companies to obtain loans from financial institutions under a US Treasury guarantee. The Treasury is putting down $75bn to underwrite the program and expects that it will make up to $600bn of bank loans available to qualifying companies.

Companies that qualify under the revised "Main Street" lending facility will be able to borrow such that their total debt load can reach up to six times their adjusted earnings in 2019. Borrowers will not have to pay back any interest or principal for the first 12 months of the loan, and the interest rate will be the LIBOR interest benchmark rate plus 3pc.

"Our intention is that we expect to take some losses on these facilities. That is our base-case scenario," treasury secretary Steven Mnuchin told the Senate panel. "There are scenarios where the world gets better and we could actually make a small amount of money."

Unlike the bond purchasing program and a payroll protection program that injected cash quickly into US companies, the "Main Street" program will be more complex to access. The Fed is purchasing stakes of 85-95pc in new loans originated under that facility — a government guarantee that could result in a total loss for taxpayers, depending on the speed of economic recovery and the strength of the underlying business.

"These are small- and medium-sized companies. They live in a world of bank lending. That is a world of negotiated documents and we are trying to enter that world and make loans to qualifying buyers," Powell said.

President Donald Trump's administration hailed the Fed's willingness to make changes in its lending facility qualifications that allowed a larger group of oil companies to qualify for government support, even though the central bank says it did not aim to exclusively help the oil industry.

The program still faces criticism from congressional Democrats. "We wanted to make sure the Fed and the Treasury got this money directly into workers' pockets," Senate Banking Committee ranking member Sherrod Brown (D-Ohio) said. "We did not want to see it go to gas and oil companies whose activities, frankly, pose an existential threat to essential workers and our whole economy."

Powell and Mnuchin testified today as part of a quarterly reporting requirement on the nearly $3 trillion dollar economic recovery programs passed by Congress to address what is likely to be the deepest contraction in the US economy since the 1930s.

A congressional panel set to oversee the implementation of the program issued its first report as well, noting that the Treasury to date disbursed $37.5bn out of the $500bn in funds set to assist US corporations.

By Haik Gugarats