Even as the president signs the largest economic assistance package in U.S. history into law, industry groups are saying more needs to be done.
Before the House cleared the $2.3 trillion bill Friday, the American Hotel & Lodging Association urged Congress to expand its forgivable loan provisions, saying the funds wouldn’t be enough to keep empty hotels alive during the widespread shutdown caused by the coronavirus.
While Speaker of the House Nancy Pelosi has already laid out her priorities for a “Phase IV” contagion response bill, some Republicans, like House Financial Services ranking member Patrick T. McHenry, R-N.C., say they want to see how the measure works before returning to the drafting table.
The law gives the Small Business Administration $377 billion, earmarking $349 billion of that sum for emergency loans to small businesses — 500 employees or fewer per location — to cover payroll, rent, utilities and debt service payments. If companies use the loans for those fixed costs, then they don’t have to pay them back. To the extent firms cut staff or their pay, the amount of forgivable debt decreases.
The loans are capped at 2.5 times a company’s monthly payroll. The AHLA says that’s not enough.
“This limit will not allow a business owner to meet both payroll and debt service obligations beyond an estimated 4 to 8 weeks,” AHLA President Chip Rogers said in a statement. “Consequently, it will result in furloughing the very workers the bill seeks to protect. Since the measure reduces debt forgiveness with any reduction in payroll, hoteliers would be forced to use the entire loan amount on payroll, at the expense of debt service.”
More broadly, $349 billion may not be enough. Some economists have estimated that Congress would need to double the forgivable loan program’s funds to cover small business payrolls for 75 days.
The stimulus package also gives the Treasury Department $454 billion to set up credit facilities with the Federal Reserve, which will leverage the funds into more than $4 trillion in low-interest loans. Those loans are meant to help larger businesses stay afloat while the coronavirus tourniquets cut off cash flows, as well as smaller firms that may need more than what the SBA and private lenders can provide.
On Friday, the AHLA and the Asian American Hotel Owners Association wrote Treasury Secretary Steven Mnuchin, Fed Chairman Jerome Powell and Securities and Exchange Commission Chairman Jay Clayton saying they needed one of those facilities to save the commercial mortgage bond market.
With COVID-19 countermeasures largely shutting down travel, hotel revenues have declined 70 percent, the letter said. If that forces hotels to skip paying their commercial mortgages, they could face foreclosure. And if the $300 billion in commercial mortgage backed securities backed by hotels go into default, the problems could spread, virus-like, into the banking industry.
The letter argues that because their mortgages are securitized, hotels “have a limited ability to work directly with holders and servicers of CMBS debt to achieve meaningful relief during this crisis.”
While the Fed has already taken steps to ensure that private lenders can meet credit demand during the crisis, Randy Meyer, CFO of the Hotel Group, argued that that might not be enough.
"The credit unions, state, and federally chartered banks are doing a good job of working with the borrowers," he said in an email. "However, there are over 2800 hotels that are currently financed with CMBS debt. That debt amounts to roughly $56 [billion]. In the absence of relief from the federal government, there is a risk that those borrowers will default."
The Fed has already created six emergency credit facilities to help other secondary markets, including student loans, auto loans and credit cards.
The central bank has also agreed to buy any residential mortgage-backed securities off of a bank’s balance sheet during the COVID-19 crisis, and established credit facilities to help the secondary corporate bond market and money market mutual funds.
Other industries will likely join the hoteliers in asking the Fed for credit programs tailored to their needs in the coming days.
While the stimulus bill directed Mnuchin to “endeavor” to work with the Fed in creating a direct lending program for medium-sized businesses — 5,000 to 10,000 employees — with significant restrictions on how those borrowers operate, it didn't say how much of the $454 billion must go to that facility or otherwise put restrictions on the number or kinds of facilities the Fed and Treasury create.