On March 23, 2020, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced a series of actions intended to support the United States economy during the unprecedented financial crisis caused by the outbreak of the coronavirus (COVID-19) pandemic. The Federal Reserve’s announcement describes aggressive new measures by the central bank to address the economic slowdown caused by COVID-19 and the accompanying business closures and stay-at-home advisories, and to facilitate the flow of credit to employers, households, businesses, non-profits, municipalities and other U.S. institutions. Below are brief summaries of the measures announced by the Federal Reserve.
Primary Market Corporate Credit Facility (PMCCF)
The PMCCF is intended to provide bridge financing to large employers with investment grade ratings through new bond and loan issuances. The PMCCF will provide financing for up to four years, and borrowers may defer interest and principal payments during the first six months of the term of the applicable instrument, extendable at the Federal Reserve’s discretion. Under the program, the Federal Reserve will make loans from the PMCCF to a special purpose vehicle (SPV), which will then extend financing to the corporate borrower. The Federal Reserve loans will be secured by all the assets of the SPV.
Eligible borrowers or bond issuers are companies headquartered in the United States and with material operations in the United States, and that are rated at least BBB-/Baa3 by a credit rating agency that is a major nationally-recognized statistical rating organization (NRSRO). If rated by multiple major NRSROs, the company must be rated at least BBB-/Baa3 by two or more NRSROs. Companies that are expected to receive direct financial assistance under new federal legislation related to COVID-19 are not eligible for borrowing or bond issuance under this program.
The maximum amount of loans or bonds under the PMCCF is determined based on a combination of the borrower's or issuer’s credit rating, and the highest amount of its bonds and loans on any given day between March 22, 2019 and March 22, 2020, as set out in the table below:
Maximum percentage of outstanding bonds and loans
For example, a company with an AA/Aa rating and a peak loan/bond amount of $200,000,000 in June 2019 could be eligible to borrow not more than $260,000,000 under the PMCCF.
Interest rates will be based on market conditions and may be payable in kind for six months, so long as no dividends or stock buybacks take place during the PIK period. All loans will carry a 100bps commitment fee, but are prepayable at par at any time, without premium or penalty.
The PMCCF will cease purchasing eligible corporate bonds or extending loans on September 30, 2020, unless it is extended by the Federal Reserve.
More information regarding the PMCCF program can be found here.
Secondary Market Corporate Credit Facility (SMCCF)
The SMCCF is intended to facilitate credit to businesses by providing liquidity to the corporate bond market. Under the SMCCF, the Federal Reserve will lend, on a recourse basis, to a SPV that will purchase in the secondary market corporate debt issued by eligible issuers. The SPV will purchase eligible individual corporate bonds and bond portfolios in the form of exchange traded funds (ETFs) in the secondary market. The Federal Reserve will be secured by all of the assets of the SPV.
Eligible bonds must be issued by companies headquartered in the United States and with material operations in the United States. Bonds issued by Companies that are expected to receive direct financial assistance under new federal legislation related to COVID-19 are not eligible for purchase under this program. Similar ratings standards as those under the PMCCF apply, and bonds must be rated at least BBB-/Baa3 by a major NRSRO, and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs. In addition, bonds must have a remaining maturity of no greater than five years.
Eligible ETFs must be US-listed, with an investment objective of providing broad exposure to the market for U.S. investment-grade corporate bonds.
Limitations apply with respect to the maximum amount of bonds or ETFs the SMCFF will purchase from any eligible issuer, and the program will not purchase more than 10% of the issuer’s maximum bonds outstanding on any day between March 22, 2019 and March 22, 2020, or 20% of the assets of any particular ETF as of March 22, 2020.
Pricing will be determined based on fair market value in the secondary market for bonds. The Facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.
The SMCCF will cease purchasing eligible corporate bonds and eligible ETFs no later than September 30, 2020, unless it is extended by the Board of Governors of the Federal Reserve.
More information regarding the SMCCF program can be found here.
Term Asset-Backed Securities Loan Facility (TALF)
The Federal Reserve established the TALF to support the flow of credit to consumers and businesses. A version of the TALF program was first created by the Federal Reserve during the financial crisis of 2007-08, and the Federal Reserve resurrected the program to encourage private investment in financial instrument securitizations backed by loans to small businesses and consumers.
Qualified borrowers under the TALF program include U.S. companies owning eligible collateral and maintaining an account relationship with a primary dealer. Eligible collateral includes U.S. dollar-denominated cash asset-backed securities (ABS) with a credit rating in the highest long-term or short-term investment grade ratings categories from at least two eligible NRSROs and no credit rating below the highest investment-grade rating category from an eligible NRSRO. Eligible ABS must have been issued on or after March 23, 2020 and underlying credit exposure for eligible ABS must have been originated by a U.S. company and be backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets. Loans under the TALF program will have a term of three years, equal to the market value of eligible ABS less a haircut, and be secured at all times by eligible ABS.
Pricing under the TALF program, assuming the underlying credit exposures are not government guaranteed, will be at 100 bps over 2-year LIBOR swap rate for securities with a weighted average life of less than two years or 100 bps over the 3-year LIBOR swap rate for securities with a weighted average life of two years or greater. A 10 bps fee will be assessed at closing.
The financial incentives offered by the Federal Reserve under the TALF program are intended to encourage investors to invest in the ABS market for small business and consumer loans, improving the market conditions for ABS investments and facilitating loans to consumers and businesses that need them.
More information regarding the TALF program can be found here.
Money Market Mutual Fund Liquidity Facility (MMLF)
The MMLF provides liquidity to “prime”, “single state” and “other tax exempt” money market mutual funds that may otherwise begin to experience demand stress if investors seek to redeem their investments more quickly than the money market mutual funds can sell assets to support those redemptions. The program was established by the Federal Reserve Bank of Boston and the Department of the Treasury is providing $10 billion of credit protection to the Federal Reserve. Under the program, U.S. depository institutions, U.S. bank holding companies (including U.S. broker-dealer subsidiaries) and U.S. branches and agencies of non-U.S. banks may borrow funds and use the proceeds to purchase certain assets from money market mutual funds. The purchased assets will be pledged to the Federal Reserve as collateral for the loans, and the loans will be non-recourse to the borrowers, meaning the borrowers will not face credit or market risks by participating in the program. The program will terminate on September 30, 2020.
Eligible collateral under the program includes:
- treasury securities and fully guaranteed agency securities;
- securities issued by US government-sponsored entities;
- asset-backed commercial paper, unsecured commercial paper or negotiable certificates of deposit that are issued by a U.S. issuer and are rated in the top rating category by at least two NRSROs (or, if rated by only one NRSRO, it must be rated in the top rating category by that NRSRO);
- U.S. municipal short-term debt that has a maturity that does not exceed 12 months and, if rated in the short-term rating category, is rated in the top of that category by at least two NRSROs (or, if rated by only one NRSRO, is rated within the top rating category by that NRSRO), or, if not rated in the short-term rating category, is rated in one of the top two long-term rating categories by at least two NRSROs (or, if rated by only one NRSRO, is rated within the top two rating categories by that NRSRO); and
- variable rate demand notes that have a demand feature that allows holders to tender the notes at their option within 12 months and are rated in the top short-term rating category by at least two NRSROs (or, if rated by only one NRSRO, is rated within the top rating category by that NRSRO), or, if not rated in a short-term rating category, is rated in one of the top two long-term rating categories by at least two NRSROs (or, if rated by only one NRSRO, is rated within the top two rating categories by that NRSRO).
Depending on the collateral, loans under the program will be made at the Federal Reserve prime credit rate, the prime credit rate plus 25 basis points or the prime credit rate plus 100 basis points. All loans will mature within 12 months from the time of advance. More information regarding the MMLF program can be found here.
Commercial Paper Funding Facility (CPFF)
The CPFF provides a liquidity backstop to eligible issuers of highly-rated commercial paper. The CPFF is structured as a SPV to which the Federal Reserve Bank of New York will make loans, and the loans will be secured by all the assets of the SPV. In addition, the Department of the Treasury is providing a $10 billion equity investment in the SPV. The SPV will use its funding to purchase three-month U.S. dollar-denominated commercial paper that is rated at least A1/P1/F1 by at least two NRSROs (or, if rated by only one NRSRO, it must be rated at least A1/P1/F1 by that NRSRO). In addition, eligible issuers may make one-time sales of commercial paper to the SPV if rated at least A1/P1/F1 on March 17, 2020 but that later was subsequently downgraded to at least A2/P2/F2. The largest amount of any issuer’s commercial paper that the SPV can hold is the maximum amount that such issuer had outstanding on any day between March 16, 2019 and March 16, 2020.
Pricing for commercial paper rated at least A1/P1/F1 will be based on the then-current three-month overnight index swap rate plus 110 basis points. For commercial paper rated at least A/2/P2/F2, pricing will be based on the then-current three-month overnight index swap rate plus 200 basis points. The SPV will cease purchasing eligible commercial paper on March 17, 2021 unless the program is extended.
More information regarding the CPFF program can be found here.
Main Street Business Lending Program (MSBLP)
In addition to the above measures, the Federal Reserve suggested that it would soon announce the details of a new program to support direct loans to small- and medium-sized businesses, complementing programs offered by the Small Business Administration (SBA). The specifics of the MSBLP have yet to be announced, but the Federal Reserve intends for this program to offer more direct help to businesses suffering financial distress due to COVID-19.
More information regarding the terms and conditions of the above programs, the process for participating in such programs and the timelines for processing is expected to be published by the Federal Reserve in the days and weeks following its initial announcement. As COVID-19 evolves, the Federal Reserve’s policy may also change to respond to developments in the economy and to related federal legislation, including the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).