On March 23, 2020, the Federal Reserve announced several new measures aimed at confronting the economic fallout from the COVID-19 pandemic and keeping credit markets functioning. One of these measures is the establishment of a Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuances with the goal of providing liquidity to large employers. On April 9, 2020, the Federal Reserve announced the expansion of the size and scope of the PMCCF and issued a new PMCCF term sheet.
The PMCCF will be open to domestic investment-grade companies and will provide bridge financing of up to four years. Under the PMCCF, the New York Federal Reserve, through a special-purpose vehicle (SPV), will buy corporate bonds directly from eligible issuers as the sole investor and purchase portions of syndicated loans or bonds of eligible issuers at issuance.
The term sheet also sets forth basic terms of the PMCCF, such as a maximum loan or bond maturity of up to four years and a facility fee of 100 bps. Interest rates for eligible corporate bonds will be issuer-specific and will be set based on market conditions. With respect to eligible syndicated loans and bonds, the PMCCF will receive the same pricing as the other syndicate members. Issuers may approach the PMCCF (i) to refinance outstanding debt, from the period of three months ahead of the maturity date of such outstanding debt, or (ii) any time to issue additional debt, provided their rating is reaffirmed at BB-/Ba3 or above with the additional debt by each major nationally recognized statistical rating organization (NRSRO) with a rating of the issuer.
The PMCCF will cease purchasing eligible assets no later than September 30, 2020, unless extended by the Federal Reserve and the Treasury Department. The PMCCF will continue to be funded after such date until the PMCCF’s holdings either are sold or mature.
The New York Federal Reserve has appointed BlackRock Financial Markets Advisory as investment advisor for the PMCCF.
We note that the revised term sheet eliminated several features of the program as set forth in the original March 23 term sheet. In particular, the new term sheet eliminated an issuer’s ability to elect to make interest payments in kind during the first six months, which triggered a prohibition on paying dividends or buying back stock during such period. Also eliminated was the ability to prepay bonds or loans at any time without penalty. In calculating the maximum amount of bonds or loans a participating eligible issuer could have outstanding, the original term sheet had provided a sliding scale of 110 to 140 percent based upon the issuer’s credit rating and the new term sheet fixes that percentage at 130 percent.
Pursuant to the CARES Act, which provides Treasury funding to support the PMCCF, a borrower of a “direct loan” is required to comply with prohibitions on the payment of dividends and share buybacks, as well as restrictions on executive compensation, until 12 months after a loan is repaid. Based on the current term sheet it appears that the PMCCF SPV will only buy bonds and syndicated loans, which are not direct loans pursuant to the CARES Act. Therefore, these prohibitions will not apply to borrowers and issuers under the PMCCF, unless the Federal Reserve decides to also make direct loans.
The PMCCF may be further modified as the Federal Reserve, the Treasury and their advisers finalize procedures for implementing this program and other programs, and there may also be additional impact from future legislative efforts.
Key Considerations for Interested Companies
While the Federal Reserve has not yet provided procedures or a timeline for accessing the PMCCF, there are certain steps interested companies can take now in order to prepare for access to the PMCCF.
- Determine Eligible Issuer Status. In order to be eligible, an issuer must:
- Be a business that is created or organized in the U.S. or under the laws of the U.S., have significant U.S. operations and have a majority of its employees based in the U.S.
- Be rated at least BBB-/Baa3 as of March 22, 2020, by a major NRSRO (or by two or more NRSROs if rated by multiple major NRSROs).
- Not be an insured depository institution or depository institution holding company, as such terms are defined in the Dodd-Frank Act.
- Not have received direct financial assistance under the CARES Act or any subsequent federal legislation.
- Satisfy the conflicts-of-interest requirements of section 4019 of the CARES Act.
If the issuer was rated at least BBB-/Baa3 as of March 22, 2020, but was subsequently downgraded, it must be rated at least BB-/Ba3 at the time the PMCCF makes a purchase.
- Determine Amount of Outstanding Debt. The PMCCF limits the amount of bonds or loans that may be outstanding for an eligible issuer participating in the PMCCF to 130 percent of the eligible issuer’s maximum outstanding bonds and loans on any day between March 22, 2019, and March 22, 2020. For example, an issuer whose maximum outstanding bonds and loans during the specified period was $1 billion could issue up to an additional $300 million of bonds or loans to the SPV under the PMCCF.
- Determine Additional Debt Capacity. Eligible issuers should review their existing debt instruments, organizational documents, applicable regulations and credit rating limitations in order to assess additional debt capacity. In addition, issuers with multiple eligible subsidiaries should consider which entity is most suitable to issue additional debt.
- Obtain Necessary Approvals. Interested companies should review their organizational documents, existing debt instruments and applicable regulatory requirements to determine any necessary approvals to issue bonds or borrow under the PMCCF, such as board, shareholder, lender or regulatory approval.
- Monitor Announcements By Federal Reserve and Contact Your Bankers. Interested companies should monitor announcements by the Federal Reserve regarding timing, logistics and other additional or further modified requirements related to the PMCCF. In addition, we expect that member banks will be invaluable in helping corporate issuers interface with the New York Federal Reserve as the program rolls out, so interested companies should reach out to their key bankers to stay ahead of the curve. We will be providing regular updates as more information becomes available from the Federal Reserve.