On May 4, 2020, the Federal Reserve published an updated set of Frequently Asked Questions (“FAQs”) concerning the Primary Market Corporate Credit Facility (the “PMCCF”) and Secondary Market Corporate Credit Facility (the “SMCCF”, and together with the PMCCF, the “CCFs”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The FAQs update previous FAQs issued on April 17, 2020 and clarify various terms of the program, including issuer eligibility, certification requirements and certain operational details. The SMCCF is expected to begin purchasing eligible ETFs in early May. The PMCCF is expected to launch and the SMCCF is expected to begin purchasing eligible corporate bonds soon thereafter, although the Federal Reserve has not announced specific start dates.
This alert discusses only the Federal Reserve’s FAQs. For more information on the CCFs generally, see our client alert here.
Issuer and Seller Eligibility
Significant Operations in the United States. To qualify for the CCFs, Eligible Issuers under the PMCCF and SMCCF and Eligible Sellers under the SMCCF (together “Eligible Entities”) must be organized in the United States or under the laws of the United States with significant operations in and a majority of their employees based in the United States. The FAQs provide much needed clarity on this requirement. While the requirement applies to all of the CARES Act financial assistance programs, the FAQs for the first time provide guidance on what constitutes “significant operations in the United States.”
For purposes of the CCFs, the FAQs provide a non-exclusive list of examples of what would constitute “significant operations” of a prospective issuer or seller:
- greater than 50% of its consolidated assets located in the U.S.;
- greater than 50% of its annual consolidated net income generated in the U.S.;
- greater than 50% of its annual consolidated net operating revenues generated in the U.S.; or
- greater than 50% of its annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service), each as reflected in its most recent audited financial statements, generated in the U.S.
Measuring Operations and Employees. The FAQs address the question of whether operations and employees of parent entities and affiliates should be counted for purposes of establishing issuer and seller eligibility. If the Eligible Entity is not a subsidiary whose sole purpose is to issue debt, operations and employees are measured at the Eligible Entity level without consideration of any parent companies or affiliated entities. However, if the Eligible Entity is a subsidiary whose sole purpose is to issue debt, and 95% or more of the proceeds of the syndicated loan or corporate bond issuance are transferred to a corporate affiliate of such subsidiary, that corporate affiliate must also have significant operations in and a majority of its employees based in the United States.
Eligible Entities. The Federal Reserve also expanded the list of eligible issuers and sellers based on location and place of operation, stating that the following entities are eligible to participate in one or both of the CCFs, subject to satisfaction of the other eligibility requirements:
- a U.S. company that is a subsidiary of a foreign company may be an Eligible Issuer under either program if created or organized in the U.S., with significant operations in and a majority of its employees based in the U.S. Specifically with respect to the PMCCF, such an entity must not use proceeds derived from participation in the program for the benefit of its foreign affiliates;
- a U.S. subsidiary or U.S. branch of a foreign bank may be an Eligible Seller under the SMCCF if created or organized in the U.S. or under U.S. law;
- a newly-formed entity may be an Eligible Issuer to the PMCCF, relying on the ratings history of a U.S. affiliate that is guaranteeing the issuance; and
- a non-profit organization may be an Eligible Issuer under either program.
Specific Support Condition. The PMCCF and SMCCF term sheets specify that an Eligible Issuer must not have received specific support pursuant to the CARES Act. The FAQs clarify that “specific support” refers only to a loan, loan guarantee, or other investment from the Treasury Department under section 4003(b)(1)-(3) of the CARES Act. The FAQs further clarify that an issuer may not participate in both the PMCCF and the Main Street Lending Facilities. However, Eligible Issuers may utilize tax credits or tax relief in the CARES Act and still participate in the CCFs.
Seller Eligibility. The FAQs specify that the SMCCF will begin by transacting with Primary Dealers that meet the Eligible Seller criteria. However, the SMCCF will consider expanding the pool of Eligible Sellers to include minority, women- and veteran-owned business entities (“MWVs”). Additionally, MWV-owned businesses may participate in the future as underwriters with respect to the PMCCF and in other various roles supporting the CCFs. Further details will be provided at a later date.
Compliance and Certifications
While the FAQs provided some additional details, the compliance and certification requirements for entities interested in participating in the CCFs remain nebulous. Eligible Issuers will not be required to provide certifications under Section 13(3) of the Federal Reserve Act for purposes of the SMCCF. PMCCF issuers, by contrast, must certify that they are both solvent and unable to secure adequate alternative credit accommodations, consistent with section 13(3). Notably, the FAQs clarify that a lack of “adequate credit” does not mean that no credit is available. Available credit at prices or on conditions that are not consistent with a “normal” market could support the required certification. The Federal Reserve will require evidence of such inability, but it has not yet specified the type or manner of such evidence.
The FAQs do clarify that, before participation in the CCFs, issuers and sellers will be required to certify to certain CARES Act eligibility requirements where applicable. On May 5, 2020, the Federal Reserve posted a seller certification packet for the SMCCF on its website, which includes form seller certifications as to solvency, the U.S. business requirement and the conflicts of interest requirements under section 4019. The packet also includes a verification pursuant to which the seller will agree to maintain records containing the bases for such certifications, to be provided to the Federal Reserve upon request. The seller certification packet is available here. Further information on the issuer certification requirements will be published prior to launch of the CCFs.
The Federal Reserve also clarified certain asset eligibility requirements in the updated FAQs:
- the CCFs will not purchase non-U.S. denominated corporate bond issues;
- where the PMCCF is the sole participant in an offering, it will only purchase fixed-rate bonds. In the event that the PMCCF is approached to participate in a syndication of floating-rate debt, it will expect any debt priced by reference to LIBOR to include adequate fallback language. The SMCCF will purchase a range of bonds, including floating-rate debt that is priced off LIBOR;
- ETFs purchased by the SMCCF may include underlying bonds with maturities of greater than five years, or that would otherwise be ineligible for purchase by the SMCCF. The SMCCF will generally not purchase ETFs that are trading at a premium above the lower of the following, relative to the prior end-of-day net asset value (NAV): (i) 1% or (ii) the 1-standard deviation level of the ETF’s premium to end-of-day NAV over the prior 52 weeks, on a rolling basis; and
- the CCFs may purchase privately placed corporate bonds issued pursuant to Rule 144A.
Other Terms and Clarifications
The Federal Reserve will disclose information regarding the CCFs during the duration of the programs, including participants, transaction sizes, costs, revenues and other fees.
Initially, BlackRock Financial Markets Advisory will serve as the investment manager for the CCFs, acting at the sole direction of the Federal Reserve on behalf of the facilities pursuant to investment guidelines provided by the Federal Reserve. Once the urgent need to commence the programs has passed, the role of investment manager will be subject to a competitive process.
Issuers may participate in both the PMCCF and the SMCCF at the same time, assuming per-issuer limits are satisfied without exceeding the total debt allowed under the facilities. If the SMCCF purchases a particular issuer’s corporate bonds prior to the issuer issuing to the PMCCF, it will reduce the issuer’s capacity available under the PMCCF.
The Federal Reserve also clarified that there is no minimum issuance amount when the PMCCF purchases eligible corporate bonds as the sole investor. Further, while there is no specific minimum, eligible issuers are not expected to use the PMCCF to borrow small amounts or percentages of the total deal where multiple investors are involved.
As noted in the FAQs, we expect the Federal Reserve to issue further guidance on the CCFs prior to their launch. We will continue to monitor the Federal Reserve and Treasury Department announcements for additional information and guidance.
You can view the full FAQs here.