Federal Reserve Expands Size and Scope of Primary Market Corporate Credit Facilities (PMCCF) and the Secondary Market Corporate Credit Facilities (SMCCF)

The Treasury Department will use funding from the $454 billion appropriated under Title IV, Section 4003(b)(4) of the CARES Act to provide $75 billion in equity to the PMCCF and SMCCF utilizing a special purpose vehicle (SPV) operated by the Federal Reserve, initially allocating $50 billion toward the PMCCF and $25 billion toward the SMCCF. The combined size of the PMCCF and SMCCF will be up to $750 billion.

PMCCF

Under the PMCCF, the Federal Reserve Bank of New York (FRBNY) will lend to the SPV on a recourse basis. The SPV will:

• purchase qualifying bonds as the sole investor in a bond issuance; or
• purchase portions of syndicated loans or bonds at issuance, in each case for instruments issued by an eligible issuer and which have a maturity of four years or less. For syndicated loans or bonds, the PMCCF’s participation is capped at 25 percent.

To qualify as an eligible issuer, a company must:

• be a business created or organized in the United States, or with significant operations in or a majority of its employees in the United States;
• be rated at least BBB-/Baa3 by a major nationally recognized statistical rating organization (NRSRO) or, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs, in each case as of March 22, 2020, or if rated at least BBB-/Baa3 as of Mach 22, 2020, but subsequently downgraded, must be rated at least BB-/Ba3 by an NRSRO, or if rated by multiple major NRSROs, rated at least BB-/Ba3 by two or more NRSROs at the time the PMCCF makes a purchase;
• not receive specific direct financial assistance under the CARES Act; and
• not be an insured depository institution or depository holding company, each as defined in the Dodd-Frank Act.

Interest rates of bonds issued solely to the PMCCF will be determined by market conditions, plus a facility fee of 100 basis points. With respect to syndicated bonds and loans, the PMCCF will receive the same pricing terms as other syndicate members, plus a facility fee of 100 basis points on its share of the syndication.

The maximum amount of bonds or loans borrowed by an issuer from the PMCCF may not exceed 130% of such issuer’s maximum outstanding bonds and loans on any date between March 22, 2019, and March 22, 2020. Issuers may approach PMCCF (i) to refinance outstanding indebtedness beginning three months prior to its maturity date, and (ii) to issue additional debt at any time, provided the issuer’s rating is reaffirmed at BB-/Ba3 or above.

SMCCF

Under the SMCCF, the FRBNY will lend, on a recourse basis, to the SPV that will purchase corporate debt issued by eligible issuers in the secondary market. The SPV will purchase eligible corporate bonds as well as eligible corporate bond portfolios in the form of exchange traded funds (ETFs).

For corporate bonds, the instruments must have a remaining maturity of five years or less. For ETFs, the SMCCF may purchase U.S.-listed ETFs “whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds.” A majority of the SMCCF’s ETF investments will be in ETFs whose primary exposure is to investment-grade corporate bonds, with the minority in ETFs with primary exposure to high-yield corporate bonds.

To qualify as an eligible issuer, an issuer must meet the same criteria as described above for PMCCF eligible issuers.

Additionally, the institution from which the SMCCF purchases securities must be 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 SMCCF will purchase bonds in the secondary market at fair market value. It will avoid purchasing shares of ETFs that trade at prices that materially exceed the estimated net asset value of the underlying portfolio.

The SMCCF may purchase no more than 10% of an issuer’s maximum bonds outstanding on any date between March 22, 2019, and March 22, 2020, and will not purchase shares of a particular ETF if after such purchase it would hold more than 20% of such ETF’s outstanding shares.

In addition, the maximum amount of securities that the PMCCF and SMCCF may purchase on a combined basis with respect to any one issuer is 1.5% of the combined potential size of both facilities ($11.25 billion, based on the combined maximum facility size of up to $750 billion).

The PMCCF and SMCCF will cease purchasing bonds and loans on September 30, 2020, unless the programs are extended by the Federal Reserve and the Treasury Department.

The Federal Reserve and the Treasury Department have reserved the right to make any adjustments to the terms and conditions in the term sheets.

We continue to monitor the situation and will provide updates as they become available.

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