Introduction
On April 9, 2020, the Federal Reserve Board of Governors (the “Fed”) released an updated term sheet1 for the Primary Market Corporate Credit Facility (“PMCCF”) program, providing additional detail and further clarification of its March 23, 2020 announcement2 establishing the PMCCF program. Unlike the Term Asset-Backed Securities Loan Facility (“TALF”) program that was used in 2008 and is being reestablished now, the PMCCF program is a new program that was included as part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) to address the liquidity and financing needs of businesses facing uncertainties as a result of the COVID-19 pandemic by encouraging new corporate bond and loan issuance.
How Will it Work?
Under the PMCCF, the Department of the Treasury will make an equity investment of up to US$75 billion3 from its Exchange Stabilization Fund in a special purpose vehicle (“SPV”) for the PMCCF and the Secondary Market Corporate Credit Facility (the “SMCCF”), with the initial allocation to the PMCCF expected to be US$50 billion. The Federal Reserve Bank of New York (the “NY Fed”) will commit to lend to the SPV on a recourse basis. The SPV will engage with businesses by either purchasing their qualifying bonds as the sole investor in a bond issuance, or by purchasing portions of their syndicated loans or bonds at issuance. The PMCCF and SMCCF will leverage their equity investments at 10 to 1 when acquiring corporate bonds or syndicated loans from issuers that are investment grade at the time of purchase for a total facility size of up to US$750 billion.
Who Can Participate?
There are no size restrictions on businesses seeking to participate in the PMCCF. The Fed has told Congress that it intends to facilitate the provision of credit to a wide range of U.S. companies.4 To qualify as an eligible issuer, the issuer must satisfy the following conditions.5
- The issuer is a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
- The issuer was rated at least BBB-/Baa3 as of March 22, 2020, by a major nationally recognized statistical rating organization (“NRSRO”). If rated by multiple major NRSROs, the issuer must be rated at least BBB-/Baa3 by two or more NRSROs as of March 22, 2020.6
- The issuer is not an insured depository institution or depository institution holding company, as defined in the Dodd-Frank Act.
- The issuer has not received specific support pursuant to the CARES Act or any subsequent federal legislation.
- The issuer must satisfy the conflict-of-interest requirements of section 4019 of the CARES Act, which relate to companies owned by senior government officials or their immediate family members.
What Type of Issuance Qualifies for Purchase by the PMCCF?
The PMCCF will purchase corporate bonds or syndicated loans issued by an eligible issuer, in either case with a maturity of four (4) years or less at the time of purchase by the PMCCF. The PMCCF will either purchase 100% of any corporate bond issuance as the sole investor or less than 25% of any corporate bond issuance as a member of a syndicate, and will purchase less than 25% of any syndicated loan.
Issuers may approach the PMCCF to refinance outstanding debt, from the period of three months ahead of the maturity date of such outstanding date. In addition, issuers may approach the PMCCF at any time to issue additional debt, provided that their rating is reaffirmed at BB-/Ba3 or above by each NRSRO with a rating of the issuer when considering such additional debt.
The updated term sheet simplifies the calculation of the maximum amount of outstanding debt an eligible issuer may issue to the PMCCF at once. Unlike the stepped approach based on the borrower’s rating that was included in the initial PMCCF announcement, under the updated term sheet, the amount of debt issued to the PMCCF may not exceed 130% of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020. In addition to the limitation on the amount of PMCCF indebtedness that may be issued by any borrower, the PMCCF, together with the SMCCF, also imposes a concentration limit on the amount of indebtedness that could be held by the PMCCF and the SMCCF with respect to any one borrower. The maximum amount of instruments that the PMCCF and the SMCCF combined will purchase with respect to any eligible issuer is capped at 1.5% of the combined potential size of the PMCCF and the SMCCF, which would currently mean a cap of US$11.25 billion.
How Will Issuances be Priced?
For eligible corporate bonds that are 100% purchased by the PMCCF as the sole investor, pricing will be issuer-specific, informed by market conditions, plus a 100 bps facility fee. For eligible syndicated loans and bonds, the PMCCF will receive the same pricing as other syndicate members, plus a 100 bps facility fee on the PMCCF’s share of the syndication.
How Long Will the PMCCF Run?
The PMCCF is currently expected to complete its purchases of eligible debt by September 30, 2020, but the program could be extended by the Fed and the Treasury Department. It is important to note that the allocated funds may run out prior to the expected end date, at which point the PMCCF would cease purchases of eligible debt unless additional money is allocated by Congress. The NY Fed will continue to fund the PMCCF after such date until the PMCCF’s holdings either mature or are sold.
How Can Businesses Take Advantage of the PMCCF?
A formal start date for the PMCCF has not yet been announced, and no application or procedure guide has yet been published.
There have been no announced restrictions on the use of proceeds from the PMCCF, and we expect that eligible issuers will be permitted to use proceeds to maintain their business operations and capacity during the pandemic. Additionally, borrowers may elect to defer interest and principal payments during the first six months of the bond or loan, extendable at the Fed’s discretion, in order to have cash on hand to pay employees and suppliers. Any deferred amounts would be capitalized into the debt. If a borrower elects to defer payments of principal and interest on its debt, it will be restricted from paying dividends or making stock buybacks during the deferral period. As drafted, there is not an exception to the restriction on paying dividends for REITs.
We would note that the TALF program may provide a further avenue of liquidity for those portions of PMCCF eligible leveraged loans that are not financed using proceeds from the PMCCF. One of the requirements under the TALF program with respect to eligible securitizations (other than commercial mortgage backed securitizations) is that the underlying collateral be comprised of newly issued assets. At the moment what is considered “new issue” under TALF has not been defined, however, the non-PMCCF funded portion of a leverage loan may be considered eligible new issue collateral for collateralized loan obligation (“CLO”) transactions that are in turn eligible issuers under the TALF program. Practically speaking, the economics will dictate whether or not CLOs can utilize PMCCF related leverage loans as collateral (particularly in regards to the TALF program) but, on the surface, it is possible that the PMCCF and TALF programs can be utilized by the market to provide broader liquidity than anticipated to certain segments of the leverage loan market.
The bonds and loans issued under the PMCCF will be callable by the eligible issuer at any time at par.
What’s Next?
While the updated term sheet has provided some additional specifics regarding the PMCCF, there is still much that is not known about the program. We anticipate that additional details of the PMCCF will continue to be announced by the Fed and the Treasury in the coming weeks. Dechert can assist you in evaluating whether the program is right for your business and with requesting PMCCF financing for eligible corporate bonds or syndicated loans. Dechert will continue to monitor all developments relating to the Fed’s announcements closely.
Footnotes
1) Primary Market Corporate Credit Facility Updated Term Sheet, published April 9, 2020 by the Fed.
2) Primary Market Corporate Credit Facility Term Sheet, published March 23, 2020 by the Fed.
3) This is up from US$30 billion when the programs were announced on March 23, 2020.
4) Report to Congress Pursuant to Section 13(3) of the Federal Reserve Act: Primary Market Corporate Credit Facility, March 30, 2020 by the Fed.
5) Primary Market Corporate Credit Facility Updated Term Sheet, published April 9, 2020 by the Fed.
6) Issuers that met this criteria but were subsequently downgraded will still be eligible if they are rated BB-/Ba3 at the time the PMCCF makes a purchase. In every case, issuer ratings are subject to review by the Federal Reserve. These ratings were selected in furtherance of the Fed’s policy objective that the PMCCF will not result in losses in excess of the Treasury’s equity investment, thereby avoiding any losses to the Fed or the taxpayers. Leverage for downgraded issuers will be at 7 to 1.
