The Federal Reserve Bank of New York ("NY Fed") published additional guidance for the Primary Market Corporate Credit Facility ("PMCCF") and the Secondary Market Corporate Credit Facility ("SMCCF", and, jointly, the "Facilities"). The term sheets for the Facilities were originally published by the Federal Reserve Board on April 9, 2020, and can be found at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm.
The PMCCF will provide a funding backstop for corporate debt to eligible issuers so that they are better able to maintain business operations and capacity during the period of dislocation related to COVID-19 by purchasing from eligible issuers corporate bonds with maturity dates of four years or less. The PMCCF will provide companies access to credit by (i) purchasing qualifying bonds as the sole investor in a bond issuance, or (ii) purchasing portions of syndicated loans or bonds at issuance.
The SMCCF will support market liquidity for corporate debt by purchasing individual corporate bonds of eligible issuers and exchange-traded funds (ETFs) in the secondary market. The SMCCF may purchase in the secondary market (i) corporate bonds issued by investment-grade US companies, (ii) corporate bonds issued by companies that were investment-grade rated as of March 22, 2020, and that remain rated at least BB-/Ba3 at the time of purchase, (iii) US-listed ETFs whose investment objective is to provide broad exposure to the market for US investment-grade corporate bonds, and (iv) US-listed ETFs whose primary investment objective is exposure to US high-yield corporate bonds.
The SMCCF is expected to begin purchasing eligible ETFs in early May of 2020 and the SMCCF is expected to begin purchasing eligible corporate bonds soon thereafter. The Facilities will cease purchasing eligible corporate bonds, eligible syndicated loans, and eligible ETFs no later than September 30, 2020, unless the Faciltiies are extended by the Fed and the Department of the Treasury.
The FAQs published by the Fed include guidance on the following notable points:
Eligibility Criteria under the PMCCF and SMCCF
The Fed clarified that to qualify as an eligible issuer, the issuer:
- must be a business that is created or organized in the US or under the laws of the United States with significant operations in and a majority of its employees based in the US;
- must have been 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 have been rated at least BBB-/Baa3 by two or more NRSROs as of March 22, 2020. 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 PMCCF or SMCCF 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 PMCCF or SMCCF makes a purchase;
- must not be an insured depository institution or depository institution holding company, as such terms are defined in the Dodd-Frank Act;
- must not have received specific support pursuant to the CARES Act or any subsequent federal legislation; and
- must satisfy the conflicts-of-interest requirements of section 4019 of the CARES Act.
The NY Fed noted that if a non-profit organization meets the eligibility criteria, it will be considered an eligible issuer under the Facilities. In addition, an issuer may utilize tax credits or tax relief in the CARES Act and still participate in the Facilities, but it may not borrow under both the PMCCF and a Main Street Facility.
Eligible issuers under the Facilities will be required to certify compliance with the eligibility criteria. In addition, while no certifications by eligible issuers are required under section 13(3) for purposes of the SMCCF, under the PMCCF, each issuer will be required to provide a written certification (and evidence) that it is unable to secure adequate credit accommodations from other banking institutions and the capital markets and that it is not insolvent. In making the certification, issuers may consider economic or market conditions in the market intended to be addressed by the PMCCF as compared to normal conditions, including the availability and price of credit. The NY Fed indicated that lack of adequate credit does not mean that no credit is available, and that if credit is available, but at prices or on conditions that are inconsistent with a normal, well-functioning market a prospective issuer could still be an eligible issuer under the PMCCF.
The NY Fed indicated that the requirements and processes for certification are under development and will be provided in the near future.
If an issuer is not a subsidiary whose sole purpose is to issue debt, then, in evaluating its eligibility, any parent company or sister affiliate of the issuer will not be considered. If an issuer's sole purpose is to issue debt, then any of its corporate affiliates to which 95 percent or more of the proceeds from the syndicated loan or corporate bond purchase are transferred for use in its operations (the "primary corporate beneficiary") must have significant operations in and a majority of its employees based in the US on a consolidated basis. If an issuer does not have a primary corporate beneficiary, then all corporate affiliates that have significant operations in and a majority of their employees based in the US on a consolidated basis must receive, in the aggregate, 95 percent or more of the proceeds from the syndicated loan or corporate bond purchase.
An eligible issuer may be a subsidiary of a foreign company, provided that (i) the issuer itself is created or organized in the US or under its laws, and (ii) on a consolidated basis, the issuer has significant operations in and a majority of its employees based in the US. An eligible issuer in the PMCCF that is a subsidiary of a foreign company must use the proceeds derived from participation in the PMCCF only for the benefit of its US business, and not for the benefit of its foreign affiliates.
The PMCCF may purchase eligible corporate bonds as the sole investor in a bond issuance. Eligible corporate bonds must, at the time of purchase, be issued by an eligible issuer and have a maturity of 4 years or less. The PMCCF also may purchase portions of syndicated loans or bonds of eligible issuers at issuance, which, at the time of purchase, must be issued by an eligible issuer and have a maturity of 4 years or less. The PMCCF may purchase no more than 25 percent of any syndicated loan or bond issuance.
The SMCCF may purchase corporate bonds that are issued by an eligible issuer which have a remaining maturity of 5 years or less. The SMCCF also may purchase US-listed ETFs whose investment objective is to provide broad exposure to the market for US corporate bonds.
Eligible issuers may approach the PMCCF to refinance existing bonds and issue new bonds, subject to conditions and limitations. An issuer may refinance outstanding debt up to three months ahead of the maturity date of such outstanding debt. Eligible issuers also may approach the PMCCF at any time to issue additional debt, provided that the issuer's rating is reaffirmed at the required level or above.
An issuer may not borrow from the PMCCF in excess of 130 percent of its maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020.
The Federal Reserve will publicly disclose information regarding the Facilities during the operation of the facilities, including information regarding participants, transaction amounts, costs, revenues and other fees.
The NY Fed noted that additional information on the Facilities is forthcoming, including specific start dates of the facilities, issuer certification requirements and more detailed instructions, among other operational details.
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