On March 23, the Federal Reserve announced that it is establishing and expanding a number of facilities to provide powerful support for the flow of credit to large U.S. employers and other businesses and families in the midst of the coronavirus pandemic.
The Fed’s facilities and related actions are rooted in its authority related to financial markets under Section 13(3) of the Federal Reserve Act, but creatively expand the reach of the assistance the Fed may provide relative to the financial-crisis era legislation last addressed by the Dodd-Frank Act, including by using special purpose vehicles (SPVs) backed by the U.S. Treasury to purchase assets, which now include corporate bonds. In the COVID-19 crisis, we see the Fed’s use of Section 13(3) not targeted principally at systemically important financial institutions, but rather at the broader economy, including financial and nonfinancial businesses, large and small. Eligibility under these programs involves factors in Section 13(3) itself, as amended by the Dodd Frank Act, the Fed’s respective term sheets, and the economic stimulus legislation pending in Congress.
The three new or expanded facilities initially making available up to an aggregate $300 billion of new financing, and expansions to recently announced facilities, each further described in term sheets released by the Fed, include the following:
- A newly-established facility, the Term Asset-Backed Securities Loan Facility (TALF), specifically authorized by Section 13(3) and similar to a 2008 financial crisis-era program, initially will provide up to $100 billion intended to support the flow of credit to consumers and businesses by enabling the issuance of asset-backed securities (ABS) on or after March 23. The ABS will be backed by auto loans and leases, floorplan loans, eligible servicing advance receivables, student loans, credit card receivables (both consumer and corporate), loans guaranteed by the Small Business Administration (SBA), equipment loans and insurance premium finance loans.
- To be TALF-eligible collateral, “all or substantially all of the underlying credit exposures must be newly issued” and originated by a U.S. company. All U.S. companies that own eligible collateral and maintain an account relationship with a primary dealer are eligible to borrow under the TALF.
- For purposes of the TALF, a U.S. company is defined as a U.S. business entity organized under U.S. federal or state law (including such an entity that has a non-U.S. parent company), or a U.S. branch or agency of a foreign bank.
- TALF loans will have a term of three years and will be nonrecourse to the borrower, but fully secured by the eligible ABS. The ABS must meet certain ratings criteria and are subject to certain exclusions. The pledged eligible collateral will be valued and assigned a haircut according to a schedule based on its sector, the weighted average life, and historical volatility of the ABS, with the schedule to be roughly in line with the haircut schedule used for the TALF facility established in 2008. The Fed term sheet for the TALF provides additional details on pricing and fees, and notes that more detailed terms and conditions are to come.
- Two newly-established facilities each initially providing up to $100 billion for “eligible issuers” with investment-grade credit. While the Fed notes that the definition of an eligible issuer may be expanded in the future, as of the time of the announcement, to be eligible a company must be headquartered in the U.S., with material operations in the U.S. and, at the time of purchase or lending by the Fed facility, rated at least BBB-/Baa3 by a major nationally recognized statistical rating organization (NRSRO), and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs.
- The Primary Market Corporate Credit Facility (PMCCF) will purchase eligible corporate bonds with a maturity of four years or less directly from investment grade issuers and provide bridge financing of four years. Borrowers may elect to defer all or a portion of principal and interest (payable in kind, added to principal) during the first six months of the loan, extendable at the Federal Reserve’s discretion, in order to have additional cash on hand that can be used to pay employees and suppliers, provided, however, that a borrower making such election may not pay dividends or buy back stock during the period that it is not paying interest. The facility will purchase bonds and make loans “that have interest rates informed by market conditions” with a 100 basis point commitment fee.
- The Secondary Market Corporate Credit Facility (SMCCF) is designed to promote liquidity for outstanding corporate bonds by making secondary market purchases of corporate bonds issued by eligible issuers, with the bonds also meeting the NRSRO rating criteria for eligible issuers and with remaining maturities of five years or less. The SMCCF also may purchase U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds. The facility will make purchases of eligible corporate bonds “at fair market value in the secondary market.”
- An expanded Money Market Mutual Fund Liquidity Facility (MMLF), now to include a wider range of securities, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit. All U.S. depository institutions, U.S. bank holding companies (parent companies incorporated in the U.S. or their U.S. broker-dealer subsidiaries), or U.S. branches and agencies of foreign banks are eligible to borrow under the MMLF. A Fund must identify itself as a Prime, Single State, or Other Tax Exempt money market fund under item A.10 of Securities and Exchange Commission Form N-MFP to qualify.
- An expanded Commercial Paper Funding Facility (CPFF), now to include high-quality, tax-exempt commercial paper as eligible securities. The pricing of the facility has been reduced relative to the pricing the Fed previously announced.
The Fed also indicated that it “expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.”
If you have any questions regarding the Fed’s new facilities or other related issues, please contact an Orrick attorney with whom you have worked in the past.