On April 9, 2020, the Federal Reserve issued a term sheet for each of the Primary Market Corporate Credit Facility (“PMCCF”) and the Secondary Market Corporate Credit Facility (the “SMCCF”).  Under the PMCCF and the SMCCF, the Federal Reserve Bank of New York (“Reserve Bank”) will commit to lend to a special purpose vehicle (“SPV”) on a recourse basis.  Under the PMCCF, the SPV will (i) purchase qualifying bonds as the sole investor in a bond issuance; and (ii) purchase portions of syndicated loans or bonds at issuance.  Under the SMCCF, the SPV will purchase in the secondary market eligible individual corporate bonds as well as eligible corporate bond portfolios in the form of exchange-traded funds (“ETFs”).  The Reserve Bank will be secured by all the assets of the SPV.

The Department of the Treasury will make a $75 billion equity investment in the SPV to support both the PMCCF and SMCCF.  The initial allocation of the equity will be $50 billion toward the PMCCF and $25 billion toward the SMCCF.  The combined size of the PMCCF and the SMCCF will be up to $750 billion.  The PMCCF and SMCCF will cease purchasing eligible assets no later than September 30, 2020, unless such programs are extended by the Board of Governors of the Federal Reserve System and the Treasury Department. The Reserve Bank will continue to fund each Facility after such date until such Facility’s underlying assets either mature or are sold.

Highlights of PMCCF

Eligible Assets:  Eligible corporate or syndicate bonds must meet each of the following criteria at the time of bond purchase:  (i) issued by an eligible issuer; and (ii) have a maturity of 4 years or less.  The PMFCC may purchase no more than 25 percent of any loan syndication or bond issuance.

Eligible Issuer:  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 cannot be an insured depository institution or depository institution holding company, as such terms are defined in the Dodd-Frank Act.

Credit Rating:  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 PMFCC 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 PMFCC makes a purchase.

Double-Dipping Prohibition:  The issuer has not received specific support pursuant to the CARES Act or any subsequent federal legislation.

Conflict of Interest Requirement:  The issuer must satisfy the conflicts-of-interest requirements of Section 4019 of the CARES Act.

Pricing:  Pricing will be issuer-specific, informed by market conditions, plus a fee set at 100 basis points.

Limits per Issuer:

  • Issuers may approach the PMFCC to refinance outstanding debt, from the period of three months ahead of the maturity date of such outstanding debt. Issuers may additionally approach the PMFCC at any time to issue additional debt, provided their rating is reaffirmed in accordance with the requirements set forth above.
  • The maximum amount of outstanding bonds or loans of an eligible issuer that borrows from the PMFCC may not exceed 130% of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020.
  • 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.

Leverage:  The PMCCF will leverage the Treasury Department equity in varying levels based on the risk of the underlying corporate bonds or syndicated loans, as determined by the investment rating.  Investment grade bonds or syndicated loans will be leveraged at a 10-to-1 ratio. Everything else will be at a 7-to-1 ratio.

Click for the PMFCC Term Sheet

Highlights of SMCCF

Eligible Assets:  The SMCCF may purchase corporate bonds that, at the time of purchase: (i) were issued by an eligible issuer; (ii) have a remaining maturity of 5 years or less; and (iii) were sold to SMCCF by an eligible seller.  The SMCCF also may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds.  The majority 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 Issuer: 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 cannot be an insured depository institution or depository institution holding company, as such terms are defined in the Dodd-Frank Act.

Eligible Seller:  Each institution from which the SMCCF 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.

Credit Rating:  The eligible issuer was rated at least BBB-/Baa3 as of March 22, 2020, by a 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 SMCCF 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 SMCCF makes a purchase.

Double-Dipping Prohibition:  The eligible issuer has not received specific support pursuant to the CARES Act or any subsequent federal legislation.

Conflict of Interest Requirement:  The eligible issuer and eligible seller must satisfy the conflicts-of-interest requirements of Section 4019 of the CARES Act.

Pricing:  The SMCCF will purchase eligible corporate bonds at fair market value in the secondary market.  The SMCCF will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.

Limits per Issuer/ETF:

  • The maximum amount of instruments that the SMCCF and the PMCCF 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.
  • The maximum amount of bonds that the SMCCF will purchase from the secondary market of any eligible issuer is also capped at 10% of the issuer’s maximum bonds outstanding on any day between March 22, 2019 and March 22, 2020.
  • The SMCCF will not purchase shares of a particular ETF if after such purchase the SMCCF would hold more than 20% of that ETF’s outstanding shares.

Leverage:  The SMCCF will leverage the Treasury Department equity in varying levels based on the risk of the underlying bonds, as determined by the investment rating.  Investment grade bonds or ETFs whose primary investment objective is exposure to investment grade corporate bonds will be leveraged at a 10-to-1 ratio.  Everything else will be less, based on the risk.

Click for the SMCCF Term Sheet

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As you are aware, things are changing quickly and there is no clear-cut authority or bright line rules.  This is not an unequivocal statement of the law, but instead represents our best interpretation of where things currently stand.  This article does not address the potential impacts of the numerous other local, state and federal orders that have been issued in response to the Covid-19 pandemic, including, without limitation, potential liability should an employee become ill, requirements regarding family leave, sick pay and other issues.

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*This alert is provided for information purposes only and does not constitute legal advice and is not intended to form an attorney client relationship.  Please contact your Sheppard Mullin attorney contact for additional information.*