On Monday, March 23, 2020, the Board of Governors of the Federal Reserve System (the “Fed”) announced a suite of measures to address the economic disruption caused by the COVID-19 pandemic. Among those measures are six programs designed to support the debt markets and general corporate lending. One of these programs is fast developing and is expected to extend the Fed’s reach to small to medium-sized enterprise (“SME”) lending, either directly or more likely through a bank or intermediary.
The Fed has acted more quickly, and in broader markets, than it did in 2008 to address financial market weakening. These programs are informed by the experience of that prior time, building on the successes of some earlier programs. Each program appears to complement, but not overlap with, programs currently in consideration by Congress.
The Markets and Programs in Short:
- Term Loan Asset-Backed Securities Facility (TALF 2.01) for securitizations, loans to asset purchasers for asset-backed securities (“ABS”) facilities for securitizations including those that are funded by consumer debt (providing increased liquidity and indirect sources for funding smaller extensions of credit including consumer debt).
- Main Street Business Lending Program for SMEs (providing for direct credit lines to businesses, complementing SBA loans and guaranties). Unlike the other programs below for which the Fed has provided some details, this program is still percolating through finalization of structure and administration. However, it bears the hallmarks of a program akin to those administered by the Small Business Administration (“SBA”), and therefore may contemplate a program centered on banks and other direct lenders as vehicles for getting financing to borrowers.
- Primary Market Corporate Credit Facility for large employers, purchasing new investment grade bonds and making new loans (providing enhanced credit capacity).
- Secondary Market Corporate Credit Facility for large employers, purchasing investment grade bonds in secondary markets (providing increased liquidity).
- Money Market Mutual Fund Liquidity Facility for money markets, asset and liquidity support to support money market mutual funds (providing credit support for money market mutual funds).
- Commercial Paper Funding Facility for highly rated commercial paper (providing liquidity for short-term funding for enterprises).
Other than the Main Street Business Lending Program which the Fed continues to design, all of these programs will use the existing capabilities and relationships of one of two of the Federal Reserve Banks (New York and Boston), and the institutional relationships of dealers that have accounts with the relevant Reserve Bank, as well as existing banking channels.
There are limitations based on credit quality, amounts, and U.S. vs non-U.S. entities.
Please contact any member of our team listed below or your Baker Botts lawyer to determine how you might benefit from any of these programs or if you need assistance navigating the funding process.
Background and Context:
The Fed programs were designed to support the credit markets and the availability of credit to businesses and individuals impacted by the crisis. Each forms a part of the larger emerging landscape of federal support for financial stability through the U.S. Treasury, bank regulators, and securities regulators.
The Fed’s action is one of the first pieces of the federal government’s effort to blunt the financial impacts of the COVID-19 pandemic to be implemented. It precedes expected legislative actions, being debated in Congress this week, to create a broad-scope stimulus bill. The availability of assistance to companies under the Fed programs is designed to coordinate, but not overlap, with Congressionally approved funding measures. In addition, the banking regulators (including the regulatory arm of the Fed) have published their guidance for greater latitude in providing and managing commercial banking and lending, and the Securities and Exchange Commission announced that it would temporarily provide registered investment companies with additional flexibility in terms of borrowing and lending arrangements so that funds can manage their portfolios as investors react to the current market conditions.
The Fed programs reflect and build on the experience that the Federal Reserve System gained during the collapse and recession of 2008-09. The TALF 2.0 facility (bearing the same name, but not the same scope, as one of the programs operating during the 2008-09 recession), has a familiar structure, as do the Money Market Fund Liquidity Facility and the Commercial Paper Funding Facility. The Primary and Secondary Market Corporate Credit facilities are newly developed tools that expand upon previous monetary policy tools. The Main Street Business Lending Program, however, depending on how it is structured, could be unprecedented.
The most noteworthy example of how the Fed’s new programs will borrow from memory of 2008 is the TALF 2.0 program, the architecture of which is expected to resemble the 2008 program. In that event, and based on our experience with the 2008 TALF 2.0 program, the program is likely to function as follows: Proposed borrowers who own collateral will work through a dealer in government securities that has an account with the New York Fed (an Agent) to apply for a loan. The Agent will have a large role in reviewing the proposed collateral, managing contact with the New York Fed, and arranging for the grant of security interests. The relationship between the Agent and the borrower will likely be governed by a standard-form agreement provided by the Agent. The Agent’s review of the borrower’s proposed collateral will be a detailed exercise, but one likely to be expedited on account of market conditions. Funding will occur through the Agent and will be subject to minimum amounts and limits defined by collateral and by program size. Similarly, payments are expected to be made through the Agent. Although $200 billion was authorized for the 2008 TALF program (twice the amount authorized for TALF 2.0), only approximately $70 billion was ultimately lent. Accordingly, the application materials and process will be new to many Agents and borrowers alike, in particular for borrowers seeking early access the program.
The Main Street Business Lending Program is a new program for the Fed and details have yet to be released. However, we also expect that lessons can be gleaned on how the program will be structured, and how borrowers may be able to access capital. While a direct lending program cannot be ruled out at this point, the Fed may not be able to develop the infrastructure to support a massive lending program to SMEs in short order. In that event, the Fed could decide to piggy-back on the established SBA application process. The Fed has provided no guidance at this point on the ultimate structure for the program. Only if the Fed elects to mirror the structure of the SBA loan process, the program could function as follows (with the Fed in place of the SBA): The SBA does not lend funds directly to a borrower but rather facilitates funding through a lending partner (the “Lender”), the proceeds of which is guaranteed by the SBA. The Lender follows the SBA’s lender guidelines, which helps to reduce risk and enables easier access to capital. To be eligible for an SBA-guaranteed loan, the borrower must: (1) be a for-profit business duly registered and legally operating; (2) do business in the U.S. or its territories; (3) have invested equity in the business; and (4) have exhausted other financing options. Additionally, while SBA-guaranteed loans range from $500 to $5.5 million, the Fed has not released any details on the potential range of available credit per loan.
Each of the Fed programs has its own structure and provides its own eligibility requirements and types of credit support. Details available from the Fed on each program are summarized below.
Summary of Fed Programs:
Term Asset-Backed Securities Loan Facility (TALF 2.0)
Purpose: The Fed established this facility to encourage investment in ABS that facilitate lending to consumers and small businesses and support the ABS market more generally. The program aims to reduce risk for liquidity and market risk to banks and other ABS issuers in providing lending to individuals and businesses.
Mechanism: An SPV, using financing provided on a recourse basis by the New York Fed, 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.
Eligible Borrowers: All U.S. companies that own eligible collateral and maintain an account relationship with a primary dealer are eligible to borrow under the TALF.
Eligible Collateral: Eligible collateral includes ABS issued on or after March 23, 2020 with a nationally recognized statistical rating organization ("NRSRO") AAA rating. 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; (5) floorplan loans; (6) insurance premium finance loans; (7) certain small business loans that are guaranteed by the SBA; or (8) eligible servicing advance receivables.
Pricing: The interest rates will be determined by the type of collateral securing the loan, and the quality of the underlying assets and other credit support. The SPV will assess an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral.
Program Termination: No new credit extensions will be made after September 30, 2020, unless the TALF is extended by the Fed Board of Governors.
- Term Sheet (as of March 23, 2020)
- 2008 TALF Frequently Asked Questions (FAQs) (July 21, 2010) (for reference only)
The Main Street Business Lending Program
The details about this program have not yet been released, but the Fed has stated that it will support loans to small and medium-sized businesses, complementing programs with the SBA. See additional details above, including our analysis regarding this program.
Primary Market Corporate Credit Facility (PMCCF)
Purpose: This facility, along with the Secondary Market Corporate Credit Facility (“SMCCF”), support credit to large employers through purchases of new bonds and loan issuances. The PMCCF will allow companies access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic. The PMCCF is structured to be a direct lender to (or direct purchaser of bonds from) these companies.
Mechanism: A special purpose vehicle (“SPV”), using financing provided on a recourse basis by the New York Fed, will (i) purchase qualifying bonds directly from eligible issuers and (ii) provide loans to eligible issuers.
Eligible Issuers and Limits: Eligible issuers are U.S. companies headquartered in the U.S. and with material operations in the U.S. but not companies that are expected to receive direct financial assistance under pending federal legislation. There are also limits to the bond and loan amounts per issuer based on the issuer’s rating by a NRSRO.
Eligible Assets: Eligible assets of the SPV are corporate bonds and loans, issued by an eligible issuer, where at the time of bond purchase or loan origination by the PMCCF the issuer has an NRSRO rating of least BBB-/Baa3 (and if rated by multiple major NRSROs, is rated at least BBB-/Baa3 by two or more major NRSROs) and the bonds or loans mature in four years or less.
Program Termination: The PMCCF will stop purchasing eligible bonds and making loans on September 30, 2020, unless extended by the Fed Board of Governors. Nevertheless, the New York Fed will continue to fund the PMCCF after the purchasing and lending stops, until the underlying assets mature.
Rate and Commitment Fee: Interest rates will be “informed by market conditions,” and there will be a commitment fee set at 100 bps.
See additional details above, including our analysis regarding this program.
Secondary Market Corporate Credit Facility (SMCCF)
Purpose: This facility meshes directly with the PMCCF to support credit to large employers through purchases of secondary market corporate debt. The SMCCF aims to provide liquidity for outstanding corporate bonds. The SMCCF is structured as a direct lender or purchaser to companies to undergird the market for corporate debt by acting as a purchaser in the debt markets.
Mechanism: An SPV, using financing provided on a recourse basis by the New York Fed, will purchase eligible individual corporate bonds as well as eligible corporate bond portfolios in the form of exchange traded funds (“ETFs”) in the secondary market.
Eligible ETFs and Limits: The facility may purchase up to 20% of the assets of a U.S.-listed ETF whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds.
Eligible Corporate Bonds and Limits: The facility may purchase up to 10% of the outstanding corporate bonds issued by an eligible issuer, where at the time of the bond purchase or loan origination by the PMCCF, the issuer has an NRSRO rating of least BBB-/Baa3 (and if rated by multiple major NRSROs, is rated at least BBB-/Baa3 by two or more major NRSROs) and the bonds or loans mature in five (5) years or less.
Eligible Issuers: Eligible issuers are U.S. companies headquartered in the U.S. and with material operations in the U.S. but not companies that are expected to receive direct financial assistance under pending federal legislation.
Pricing: The facility will purchase eligible corporate bonds at fair market value in the secondary market and will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio. The program does not yet quantify the amount of an ineligible purchase premium.
Program Termination: The SMCCF will stop purchasing bonds and ETF interests no later than September 30, 2020, unless extended by the Fed Board of Governors. Nevertheless, the New York Fed will continue to fund the SMCCF after the purchasing stops, until its holdings either mature or are sold.
Money Market Mutual Fund Liquidity Facility (MMLF)
Purpose: The Fed established this facility to provide liquidity to money market mutual funds and municipalities.
Mechanism: The Boston Fed will make non-recourse loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds. The collateral must be purchased by the borrowers from money market mutual funds, either: (i) concurrently with the borrowing or (ii) on or after March 18, 2020, but before the opening of the facility.
Borrower Eligibility: 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 facility.
Program Termination: The facility will open on March 23, 2020 and no new credit extensions will be made after September 30, 2020, unless the facility is extended by the Fed Board of Governors.
Rate: Three rates are provided depending on the quality of collateral: (1) the lowest rate is the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made; (2) the intermediate rate is this primary rate plus 25bps; and (3) the highest rate is this primary credit rate plus 100 bps.
- Frequently Asked Questions (FAQs) (as of March 21, 2020)
- MMLF Request Form (as of March 21, 2020)
- Agreements and documents (as of March 23, 2020)
- Term Sheet (as of March 23, 2020)
- Terms and Conditions (as of March 18, 2020)
Commercial Paper Funding Facility (CPFF)
Purpose: The Fed established this facility to improve and support liquidity in the commercial paper market, which is aimed indirectly to promote the availability of credit to individuals, businesses, and municipalities.
Mechanism: An SPV, using financing provided on a recourse basis by the New York Fed, will purchase from eligible issuers three-month U.S. dollar-denominated commercial paper through the New York Fed’s primary dealers.
Eligible Issuers and Limits: U.S. issuers of commercial paper, including municipal issuers and U.S. issuers with a foreign parent company. With limited exceptions, the commercial paper must be rated at least A1/P1/F1 by an NRSRO or, if rated by multiple major NRSROs, is rated at least A1/P1/F1 by two or more major NRSROs. The maximum amount of a commercial paper of an issuer that the SPV will own at any time will be the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between March 16, 2019 and March 16, 2020. Where an issuer’s rating was downgraded as described below, the maximum amount of the issuer’s commercial paper the issuer had outstanding the day before it was downgraded.
Eligible Commercial Paper: The commercial paper must be rated at least A1/P1/F1 by an NRSRO or, if rated by multiple major NRSROs, is rated at least A1/P1/F1 by two or more major NRSROs. Where an issuer’s rating is downgraded after March 17, 2020, the issuer may make a one-time sale of commercial paper as long as the issuer is rated at least A2/P2/F2 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A2/P2/F2 by two or more major NRSRO.
Pricing: For commercial paper rated A1/P1/F1, the interest rate will be based on the then-current 3-month overnight index swap (“OIS”) rate plus 110 basis points. For commercial paper rated A2/P2/F2, pricing will be based on the then-current 3-month OIS rate plus 200 basis points. In addition, at the time of its registration to use the CPFF, each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.
Program Termination: The SPV will cease purchasing commercial paper on March 17, 2021, unless the Board extends the facility. The New York Fed will continue to fund the SPV after such date until the SPV’s underlying assets mature.
1We refer to this as “TALF 2.0” to distinguish this program from the TALF facility of the same name in operation during the 2008-09 recession.
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