Please note that this session was held at a particular point in time (Wednesday May 13,2020, 4pm-5pm EDT), and in light of the rapidly evolving Covid-19 situation, it is possible these discussions are no longer accurate after that date.

WEBINAR: COVID-19 FINANCIAL POLICY RESPONSESInternational and U.S. relief programs, with a deep dive on the Main Street Lending Program (MSLP) and the Paycheck Protection Program (PPP)May 13th, 2020

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OLIVER WYMAN FINANCIAL SERVICES AMERICAS COVID-19 WEBINAR SCHEDULE

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M A R C H

A P R I L

M A Y

March 11 COVID-19 and Risk Managers

March 25 Impact on the US Financial System: Epidemiology, Cyber, Liquidity, Policy Responses and CECL

April 8 Impact on the US Financial System: Epidemiology, Interest Rates, Cares Act, Resilience

April 22 Impact on the US Financial System: Pandemic Modelling and Consumer Credit

April 29 Impact on Consumer Credit

May 6 Impact on the US Financial System: Cyber and Return to Workplace

May 13 [Today] COVID-19 Financial Policy Responses

Completed Today

Materials and recordings for completed webinars and registration for upcoming webinars can be found here: https://www.oliverwyman.com/our-expertise/events.html

WEBINAR AGENDA

1 Global Policy Response 15 min

2 U.S. Policy Themes 10 min

3 Main Street Lending Program (MSLP) 10 min

4 Implementing PPP: Forgive But Don’t Forget 10 min

5 Additional Q&A Remaining time

OUR PANELISTSTil SchuermannPartner & Co-Head – Risk & Public PolicyNew York

Elizabeth St-OngePartner, Financial ServicesNew York

Douglas ElliottPartner, Risk & Public PolicyNew York

Oliver WuenschSenior Advisor, Public PolicyZurich

Vivian MerkerPartner, Digital & Retail and Business Banking New York

Tammi LingPartner, Finance, Risk & Public Policy, and Co-Head of the New York Office New York

GLOBAL POLICY RESPONSEPanelist: Oliver Wuensch

1

EUROAREA COUNTRIES HAVE TAKEN MEASURES OF 19 PERCENT OF GDP, DRIVEN BY DEBT CAPACITY AND CRISIS IMPACT

140

60

20

120

0

180

10

50

30

40

100

0

160

20

40

60

80

200

220

Den-mark

Nether-lands

5

Greece

Mea

sure

s/G

DP %

Italy

26

Publ

ic D

ebt/

GDP

%

UKBelgium

12

France Germany Portugal Spain

19

USA

1512

52

Euro Area

4

19 21

14

44

Fiscal spending Deferrals Guarantees (below the line) Debt/GDP

Source: Oliver Wyman analysis, IMF, OECD, Eurostat, Bruegel

Outright fiscal spending: Provides direct fiscal stimulus, but permanently impacts the budget

Deferrals:Provide temporarily liquidity relief with temporary fiscal impact to be offset later

Guarantee schemes:Provide breathing space for businesses,with fiscal impact being deferred

• Healthcare expenses: Financing measures to address public health issues created by the crisis, including expanding healthcare capacity, purchase of equipment and infrastructure, protective measures

• Short-term worker benefits: Subsidy of wages for temporarily underemployed workers to prevent layoffs, provide relief for businesses and allow for swift restart once economic activity resumes

• Unemployment benefits: Social benefits for the unemployed, including financial injections into unemployment insurance funds

• Cancellation of taxes and social security contributions for a limited time period

• Suspension of tax and social security paymentsto provide liquidity relief

• Credit lines for businesses– Provided through the banking system (facilitated

by development banks) with and without risk sharing with banks

– Direct credit extension by existing and newly created state funds

– Increases leverage and weakens financial position of supported companies, can therefore negatively impact growth

• Equity injection by the state in private enterprises to support solvency and broader economic policy

EUROZONE RESPONSES HAVE PREDOMINANTLY BEEN TAKEN AT NATIONAL (MEMBER STATE) LEVEL, BUT SHARE COMMON THEMES

Actions were taken at member-state level as industrial and social policy is member-state, not EU-level responsibility! Size of measures varies greatly across member states

ALTHOUGH UNPRECEDENTED STEPS HAVE BEEN TAKEN AT EU-LEVEL TO FACILITATE MEMBER STATE ACTIONS, IT MIGHT NOT BE ENOUGH

The EU has substantially relaxed existing rulebook• Limits of the “Stability and Growth Pact” have been suspended (max 60 percent Debt/GDP, max 3

percent primary deficit)• State aid rules have been relaxed to allow for member-state support measures targeting businesses

… it is again on the ECB to do “whatever it takes”• Establishment of a Pandemic Emergency Purchasing Program to put up a firewall to protect weak

sovereigns and avert funding stress in corporate debt markets (overall volume EUR 750bn, can be expanded)

Still, member states’ headroom depend on their fiscal firepower• Prohibition of fiscal transfers is a key pillar of the European Monetary Union• Mobilization of European Stability Mechanism (2 percent EZ GDP)• Safety nets developed during the Euro crisis (European Stability Mechanism) address liquidity issues

onlyIn absence of a EU-level fiscal capacity …• Pre-crisis attempts to establish a small Eurozone fiscal capacity have so far failed due to lack

of agreement on fiscal governance (target: 2 percent of EZ GDP vs 22 percent in US)• Agreement on debt mutualization (“Corona bonds”) failed, but Corona-specific transfers enjoy

political consensus

… but it is to be seen whether ECB can continue to substitute lack of political action ...… also in light of the recent decision of Germany’s Constitutional Court!

MARKETS WATCH POLITICAL DISCUSSIONS CLOSELY, WITH SPECIFIC EMPHASIS ON ITALYSpread Italian BTP / German Bunds (10yr)

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05/13/202004/15/202003/17/202002/18/202001/21/2020

Spre

ad B

TP/B

und

(10y

r)

Announcement ECB PEPP

Political discussion re: EU-level support

LATIN AMERICAN COUNTRIES ENTERED THE CRISIS IN A VULNERABLE FISCAL POSITION

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-3

-2

-4

-1-2

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5451

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60

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Prim

ary

fisca

l bal

ance

/ %

GDP

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93

Debt

/ %

GDP

Brazil Mexico

28

Chile Argentina Peru Colombia

Fiscal balance / GDP % Debt / GDP %

Data as per end-2019; Source: Oliver Wyman analysis, IMF, Worldbank, Bloomberg

… BUT STILL HAVE TAKEN SUBSTANTIAL MEASURES FOCUSING ON PROVIDING IMMEDIATE SUPPORT TO HOUSEHOLDS AND BUSINESSES

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39

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51

84

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0

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3

Mea

sure

s / %

GDP

Chile Euro Area

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1

Debt

/ %

GDP

Brazil Mexico Colombia

2 1

Peru

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USAArgentina

810

7

19

1413

Debt / GDP %Fiscal spending Deferrals Guarantees

Source: Oliver Wyman analysis, IMF, IADB, Bloomberg

… WHILE BEING CONFRONTED WITH CAPITAL OUTFLOWS AND FUNDING STRESS, WHICH WILL IMPEDE ECONOMIC RECOVERY IN ABSENCE OF EXTERNAL SUPPORT.

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pr 2

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pr 2

020

29 A

pr 2

020

06 M

ay 2

020

USD

/BRL

USD

/MXN

USD/MXN USD/BRL

Source: Oliver Wyman analysis, Thomson Reuters

U.S. POLICY THEMESPanelist: Douglas Elliott

2

POLITICIANS AND THE FED HAVE RESPONDED WITH MASSIVE SUPPORT FOR THE ECONOMY

Huge fiscal stimulus Largest emergency government credit programs in U.S. history

Massive monetary stimulus Modest regulatory shifts to encourage lending

Pervasive support for credit markets

WE ARE LIKELY TO SEE SUBSTANTIALLY MORE STIMULUS

I believe officials are still underestimating the probable

economic impacts of the pandemic, in part due to the

likelihood of further lockdowns

• There is already considerable pressure for further stimulus– More aid for states– Infrastructure programs

• In an election year, politicians are likely to outbid each other on stimulus

• The Fed will step up its actions as well if the worst case economic reality occurs

• There do not appear to be any big short-term constraints to block fiscal or monetary stimulus, especially as inflation is not a short-term threat

THERE ARE STILL AREAS WHERE LIQUIDITY IS A MAJOR ISSUE…

Small businesses with proportionally smaller

employee bases (sometimes single proprietorships)

Commercial real estate Mortgage servicers

… and others

…BUT THE POLICY FOCUS NEEDS TO SHIFT FROM LIQUIDITY TO SOLVENCY• There was too much financial leverage in the corporate sector to start with

• Credit was the only fast way to respond to pandemic-related liquidity issues

• But, many businesses now have very fragile balance sheets and are at risk of bankruptcy

• Any new credit programs should be more discriminating, so we don’t encourage “zombie” companies that drag down our economy

• The government should encourage equity infusions

• We need to optimize our response to the necessary wave of balance sheet restructurings that could swamp our bankruptcy courts

MAIN STREET LENDING PROGRAMPanelist: Elizabeth St-Onge

3

MAIN STREET LENDING PROGRAM – OVERVIEWAS OF APRIL 30, 2020

SPV purchases

85–95%of eligible loans

$525 BN Recourse loan

EXPANDED Loan facility (95%)Increases existing term loans; min. of $10 MN; max. lesser of $200 MN or 35% of existing debt or Debt-to-EBITDA < 6

$75 BN Equity investment

NEW Loan facility (95%)New term loan; min. of $500 K; max. lesser of $25 MN or Debt-to-EBITDA < 4

PRIORITY Loan facility (85%)New term loan; min. of $500 K; max. lesser of $25 MN or Debt-to-EBITDA < 6

LOAN TERMS

• 4 year maturity• 1 year deferred amortization• Floating rate of LIBOR + 300 bps• 75–100 bps origination fee

SPV TERMS

• Lender pays 75–100 bps facility fee on amount purchased by SPV

• SPV pays 25 bps per annum servicing fee

BORROWERS TERMS

• Must have less than 15,000 employees or $5 BN in 2019 revenue

• Should not use loan to pay other debt except under Priority facility

• Should follow compensation, stock repurchase, and capital restrictions of CARES act

• Should have significant operations in the U.S.

SPV

$600 BN

Lenders fund remaining 5–15%

• What is the objective of the program overall?

• What are our objectives as an institution?

• Which Clients / borrowers should we target?

• Should we be proactive or reactive?

• Will there be demand?

• What are the risks? • What underwriting

guidelines should we use?

• What non-financial risks should we consider?

• What are the benefits?

• Are the economics viable?

• How do we streamline our processes for speed and scale?

• What are the on-going monitoring and operational requirements?

KEY CONSIDERATIONS & IMPLICATIONS FOR LENDERS

Objectives Clients (Borrowers) Risks Benefits Operations

1 2 3 4 5

IMMEDIATE ACTIONS FOR LENDERS

Understand the economic impact

Shore up operations and processes

Proactively manage client communications

Build a dynamic credit decisioning framework

Mobilize a “credit war room”

MSLP-specific

Relevant to broad COVID response and MSLP

FORGIVE BUT DON’T FORGETHow to Mitigate Risk and Promote Fairness while Implementing the Paycheck Protection Program (PPP)Panelists: Vivian Merker, Tammi Ling

4

Small businesses account for a significant fraction of the workforce

The PPP created forgivable loans to prop up small business employment

• 2-year, 1% interest loans• Fully forgivable if used for allowable

expenses in the first 8 weeks• Fully guaranteed by the Small

Business Administration

Controversy and operational issues plagued the rapid rollout

Borrower eligibility and fraud$669 BNTotal funding

$342 BNFirst tranche

$191 BNSecond tranche

Lender risks and challenges

CARES Act interpretation and implementation

164 MMTotal US labor force

60 MMin 6 MM companies with < 500 paid employees 26 MM

single proprietorships

Main focus of the Paycheck Protection Program

Source: Approximate data, sourcing include IRS, Statistics of US Businesses, Bureau of Labor Statistics, and SBA

PAYCHECK PROTECTION PROGRAM OVERVIEWThis key component of the CARES Act is intended to help small businesses with their payroll and other key expenses

• Customer attrition and loss of trust • Reputational risk, especially from critical media coverage• Operational errors, particularly due to high volume and compressed timelines• Loss of loan guarantees• Scrutiny and investigations from regulatory and lawmakers• Fines and other enforcement actions

Origination

Forgiveness (approximate)

Regular servicing

Delinquent servicing and guarantee redemption

2020 2021Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecApr May Jun Jul Aug Sep Oct Nov Dec

2022Jan Feb Mar Apr May Jun Jul

KEY SOURCES OF RISK THROUGHOUT THE LOAN LIFECYCLEWhile initial focus has been on the origination period, lenders should prepare for other challenges ahead

April 3, 2020Start of program

June 30, 2022End of term forlast loans

RECOMMENDATIONS TO SUCCESSFULLY IMPLEMENT THE PPP

Provide clear communication

Run well-defined and documented processes

Maintain existing (high) KYC/AML standards

Strengthen quality assurance and controls

Leverage technologyto promote operational

consistency

Establish a “control tower” response team

READ OUR LATEST INSIGHTS ABOUT COVID-19 AND ITS GLOBAL IMPACT ONLINEOliver Wyman and our parent company Marsh & McLennan (MMC) have been monitoring the latest events and are putting forth our perspectives to support our clients and the industries they serve around the world. Our dedicated COVID-19 digital destination will be updated daily as the situation evolves

Visit our dedicated COVID-19 website:https://www.oliverwyman.com/coronavirus

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