SPECIAL REPORT: What Do the New Federal Reserve Programs Mean for You
On April 9, 2020, the Federal Reserve announced new programs and facilities providing up to $2.3 trillion in new and additional loans to assist households, employers, and state and local governments. The intent of the funding is to assist households and employers, regardless of size, and state and local governments during the COVID-19 crisis. The Federal Reserve undertook the following actions pursuant to its mandate from Congress to stabilization the economy, financial system, and employment.
Below are some of the salient features of the Federal Reserve’s actions:
Main Street Lending Program
Main Street Lending Program was initially announced on March 23, 2020. Under this program, the Federal Reserve will purchase of up to $600 billion in loans to assist small and mid-sized companies that were in good financial standing before the COVID-19 crisis. Eligible borrowers are companies with up to 10,000 employees or revenues of less than $2.5 billion, and must be created or organized in the United States or under the laws of the United States with a significant operations in and a majority of its employees based in the United States.
The Main Street Lending Program will offer 4-year loans to eligible companies with principal and interest payments deferred for one year. The minimum loan size is $1 million and maximum loan size that is the lesser of (i) $150 million, (ii) 30% of the Eligible Borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”). There are no prepayment penalties.
Eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses. Banks will retain a 5% interest of the loan, and will sell the remaining 95% to the Main Street facility. The Main Street facility will purchase up to $600 billion of loans.
Companies seeking a Main Street loan must commit to use reasonable efforts to maintain payroll and retain its employees. The compensation, stock repurchase, and dividend restrictions under the CARES Act apply to Main Street loan. Companies are eligible to participate in both PPP and Main Street loan programs.
The Federal Reserve and Department of Treasury will work with lenders, borrowers, and other stakeholders in finalizing the procedures for Main Street loans. Feedback will be accepted through April 16, 2020.
Paycheck Protection Program Liquidity Facility (PPPLF)
The Federal Reserve established the PPPLF to reinforce the SBA’s Paycheck Protection Program (PPP), which we detailed in a previous Special Report. The PPP provides loans to small businesses to maintain payroll and other expenses during the COVID-19 crisis. The PPPLF extends credit to eligible financial institutions that originate PPP loans by taking the loans as collateral at face value.
Term Asset-Backed Securities Loan Facility (TALF)
The Federal Reserve also announced the expansion of the TALF. The TALF is a credit facility authorized under section 13(3) of the Federal Reserve Act intended to help meet the credit needs of consumers and businesses by facilitating the issuance of asset-backed securities (“ABS”). The TALF will be a funding backstop to facilitate the issuance of eligible ABS on or after March 23, 2020. No new credit extensions will be made after September 30, 2020, unless the TALF is extended.
Under the TALF, the Federal Reserve Bank of New York will commit to lend to a special purpose vehicle (“SPV”) on a recourse basis. The Department of the Treasury will make an equity investment of $10 billion in the SPV. The TALF SPV initially will make up to $100 billion of loans available. The loans will have a term of three years; will be nonrecourse to the borrower; and will be fully secured by eligible ABS. There will be no prepayment penalties. However, substitution of collateral during the term of the loan generally will not be allowed.
Eligible borrowers are all U.S. companies that own eligible collateral and maintain an account relationship with a primary dealer. Just like Main Street loan borrowers, companies must be created or organized in the United States or under the laws of the United States and that has significant operations in and a majority of its employees based in the United States.
With the exception of commercial mortgage-backed securities (CMBS), eligible ABS must be issued on or after March 23, 2020. CMBS issued on or after March 23, 2020, will not be eligible. For CMBS, the underlying credit exposures must be to real property located in the United States or one of its territories.
Eligible collateral must be ABS where the underlying credit exposures are one of the following: 1) Auto loans and leases; 2) Student loans; 3) Credit card receivables (both consumer and corporate); 4) Equipment loans and leases; 5) Floorplan loans; 6) Insurance premium finance loans; 7) Certain small business loans that are guaranteed by the Small Business Administration; 8) Leveraged loans; or 9) Commercial mortgages.
Except for legacy CMBS, all or substantially all of the underlying credit exposures must be newly issued to be eligible collateral. The Federal Reserve will consider the feasibility of adding other asset classes or expanding the scope of existing asset in the future.
Municipal Liquidity Facility
The Municipal Liquidity Facility has been authorized under Section 13(3) of the Federal Reserve Act, and will support lending to U.S. states and the District of Columbia, U.S. cities with a population exceeding one million residents, and U.S. counties with a population exceeding two million residents to help manage cash flow pressures in order to continue to serve households and businesses in their communities.
The Municipal Liquidity Facility will offer up to $500 billion in lending to states, cities, and counties. The Treasury will provide $35 billion of credit protection to the Federal Reserve for the Municipal Liquidity Facility using funds appropriated by the CARES Act.
Primary Market Corporate Credit Facility (PMCCF)
The PMCCF will commit to lend to a special purpose vehicle (“SPV”) on a recourse basis. The PMCCF may purchase eligible corporate bonds as the sole investor in a bond issuance. Eligible corporate bonds must meet each of the following criteria at the time of bond purchase by the PMCCF: (i) issued by an eligible issuer; and (ii) have a maturity of 4 years or less. The PMCCF may also purchase portions of syndicated loans or bonds of eligible issuers at issuance. Eligible syndicated loans and bonds must meet each of the following criteria at the time of purchase by the PMCCF: (i) issued by an eligible issuer; and (ii) have a maturity of 4 years or less. The PMCCF may not purchase more than 25% of any loan syndication or bond issuance.
To qualify as an eligible issuer, the issuer must meet the following conditions:
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.
o 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.
o In every case, issuer ratings are subject to review by the Federal Reserve.
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 of section 4019 of the CARES Act.
Secondary Market Corporate Credit Facility (SMCCF)
The SMCCF will lend, on a recourse basis, to a special purpose vehicle (“SPV”) that will purchase in the secondary market corporate debt issued by eligible issuers. The SMCCF may purchase corporate bonds that, at the time of purchase by the SMCCF: (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. 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 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.
To qualify as an eligible issuer, the issuer must meet the following conditions:
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.
o An issuer that was rated at least BBB-/Baa3 as of March 22, 2020, but was subsequently downgraded, must be rated at least BB-/Ba3 as of the date on which the Facility makes a purchase. If rated by multiple major NRSROs, such an issuer 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 of section 4019 of the CARES Act.
Conclusion
The Federal Reserve’s new lending programs are collectively intended to support the economy to combat the COVID-19 crisis. The Main Street Lending Program will provide small businesses with an additional loan product, and offer mid-size businesses that did not qualify for PPP to obtain loans to help maintain its employees and payroll. The TALF is intended to help lenders meet credit needs of households and businesses. The PMCCF and SMCCF are intended to help corporations by purchasing corporate debts in the primary and secondary markets. Finally, the Municipal Liquidity Facility will offer loans to states and municipalities to help households and local businesses. Only time will tell how successful these programs are in propping up the U.S. economy or if additional measures are necessary.
CONTACT:
Andrew J. Annes, Esquire
aannes@satclaw.com
mobile: (312) 246-3110
John W. Campbell, Jr., Esquire
jcampbell@satclaw.com
mobile: (312) 391-3126