The Federal Reserve System (the “Fed”) has recently announced programs intended to help businesses not covered by the loan provisions under the purview of the Small Business Administration, specifically PPP and EIDL loans available under the CARES Act.
In order to facilitate lending to larger corporations, the Fed instituted the Primary Market Corporate Credit Facility (“PMCCF”) and the Secondary Market Corporate Credit Facility (“SMCCF”). Under these programs, the Fed can now be a direct purchaser of corporate debt, either in a primary issuance or in the secondary market.
The programs are only available to those companies with investment-grade credit and are not available if the business is expected to receive direct financial assistance under any other program related to the CARES Act. There are no size or revenue restrictions for businesses seeking relief under these programs. There are also no limitations on the use of proceeds in the PMCCF or the SMCCF.
Please note, under a previous PMCCF term sheet, the PMCCF would have been able to make direct loans to eligible businesses who would therefore be subject to the compensation, stock repurchase and capital distribution restrictions found in section 4003(c)(3)(A)(ii) of the CARES Act. However, now that the PMCCF does not include any form of direct loans, it may be the case that corporations that receive assistance through this program will not be subject to any restrictions outside of falling under the definition of “eligible issuer” below.
The following is an outline of the two facilities, with links to their term sheets.
Primary Market Corporate Credit Facility (https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a5.pdf)
- The Fed facility will (i) purchase qualifying bonds directly from eligible issuers as the sole investor in a bond issuance and (ii) purchase portions of syndicated loans or bonds at issuance.
- Eligible Corporate Bonds as Sole Investor
- Eligible corporate bonds must meet each of the following criteria at the time of bond purchase by the facility: (i) issued by an eligible issuer; and (ii) have a maturity of 4 years or less.
- Eligible Syndicated Loans and Bonds Purchased at Issuance
- Eligible syndicated loans and bonds must meet each of the following criteria at the time of purchase by the facility: (i) issued by an eligible issuer; and (ii) have a maturity of 4 years or less.
- The facility may purchase no more than 25 percent of any loan syndication or bond issuance.
- Eligible Issuers
- 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.
- Issuers that were rated at least BBB-/Baa3 as of March 22, 2020, but are subsequently downgraded, must be rated at least BB-/Ba3 at the time the facility makes a purchase. If rated by multiple major NRSROs, such issuers must be rated at least BB-/Ba3 by two or more NRSROs at the time the facility makes a purchase.
- The issuer is not an insured depository institution or depository institution holding company, as such terms are 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 conflicts-of-interest requirements (related to minority stakes of members of the Executive Department and Congress) of section 4019 of the CARES Act.
- Issuers may approach the facility to refinance outstanding debt, from the period of three months ahead of the maturity date of such outstanding debt.
- Issuers may additionally approach the facility at any time to issue additional debt.
- All pricing will be issuer-specific informed by market conditions, plus a 100 bps facility fee.
- The PMCCF will cease purchasing eligible corporate bonds or extending loans on September 30, 2020.
Secondary Market Corporate Credit Facility (https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a2.pdf)
- The Fed will purchase eligible individual corporate bonds as well as eligible corporate bond portfolios in the form of exchange traded funds (“ETFs”) in the secondary market with certain limits per issuer or ETF.
- Eligible Individual Corporate Bonds
- The facility may purchase corporate bonds that, at the time of purchase by the facility: (i) were issued by an eligible issuer; (ii) have a remaining maturity of 5 years or less; and (iii) were sold to the facility by an eligible seller.
- Eligible ETFs
- The facility also may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds.
- The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.
- Eligible Issuers are the same as under the PMCCF.
- Eligible Seller
- Each institution from which the facility purchases securities must be a business that is created or organized in the United States or under the laws of the United States with significant U.S. operations and a majority of U.S.-based employees.
- The maximum amount of bonds that the facility will purchase from the secondary market of any eligible issuer is also capped at 10 percent of the issuer’s maximum bonds outstanding on any day between March 22, 2019 and March 22, 2020.
- The facility will not purchase shares of a particular ETF if after such purchase the facility would hold more than 20 percent of that ETF’s outstanding shares.
- The SMCCF will cease purchasing eligible corporate bonds or extending loans on September 30, 2020.
Additionally, the Fed enacted the Commercial Paper Funding Facility, which provides credit to issuers of certain commercial paper.
Commercial Paper Funding Facility (https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200323b5.pdf)
- The Fed will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers
- The Fed will purchase from eligible issuers three-month U.S. dollar-denominated commercial paper.
- Eligible issuers are U.S. issuers of commercial paper, including municipal issuers and U.S. issuers with a foreign parent company.
- The Fed will not purchase asset-backed commercial paper from issuers that were inactive prior to the creation of the CPFF. An issuer will be deemed inactive if it did not issue asset-backed commercial paper to institutions other than the sponsoring institution for any consecutive period of three-months or longer between March 16, 2019 and March 16, 2020.