On June 29, 2020, the Federal Reserve Board (FRB) and the Federal Reserve Bank of New York (FRBNY) published revised terms for the Primary Market Corporate Credit Facility (the Facility), as well as the more detailed arrangements for issuers, underwriters and others wishing to access it. With an initial US$50 billion of equity funded by the United States Treasury under the Coronavirus Aid, Relief and Economic Security Act (CARES Act), the Facility will serve as a funding backstop for the purchase of qualifying medium-term bonds and loans from eligible corporate borrowers to maintain business operations and capacity during the period of dislocation related to COVID-19.
The following are the principal features of the Facility, as reflected in the latest FRB Term Sheet, Frequently Asked Questions (FAQs) and related materials.
Investment Manager: BlackRock Financial Markets Advisory has been appointed as the initial investment manager for the Facility. However, it is anticipated the role will become the subject of a competitive bidding process.
Eligible Assets: The Facility will purchase (a) eligible corporate bonds as the sole investor in a bond issuance or (b) portions of syndicated loans or bonds that, in each case, have a maturity of four years or less. In the case of (b), the Facility may purchase no more than 25% of the relevant loan syndication or bond issuance. For the moment, the Facility appears to intend to focus on bond purchases where it is the sole purchaser. If the Facility is the sole purchaser, it will purchase only fixed-rate bonds. The Facility will also typically purchase fixed-rate debt when participating in a syndicated issuance. To the extent the Facility is approached to participate in a syndication of floating-rate debt, the Facility will generally expect any debt priced off the London interbank offered rate to include adequate fallback language. The Facility expects to purchase Securities and Exchange Commission (SEC)-registered bonds as well as bonds sold in reliance on Rule 144A under the Securities Act of 1933. It does not expect to purchase subordinated bonds. The Facility will purchase only U.S.-dollar-denominated bonds and loans. There is no minimum deal size, but eligible issuers are not expected to use the Facility to borrow very small amounts or a small percentage of the total deal.
Eligible Issuers: To qualify as an eligible issuer, the issuer must satisfy the following conditions:
- The issuer must be 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. If the issuer is a business development company (BDC), these requirements apply to the BDC’s manager and the BDC’s portfolio companies in the aggregate, and the BDC also must have procedures in place to ensure that proceeds are not transmitted to an insolvent portfolio company. As discussed further below, U.S. issuers with ultimate non-U.S. ownership and issuers that are finance subsidiaries may nonetheless satisfy this requirement.
- The issuer 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. In addition, an issuer that was rated at least BBB-/Baa3 as of March 22, 2020, but was subsequently downgraded must be rated at least BB-/Baa3 as of the date on which the Facility makes a purchase. If rated by multiple major NRSROs, the issuer must be rated at least BB-/Baa3 by two or more as of the date on which the Facility makes a purchase. Ratings are stated to be subject to review by the FRB, though it is not entirely clear what that means.
- The issuer may not be an insured depository institution, depository institution holding company or subsidiary of a depository institution holding company, as such terms are defined in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
- The issuer may not have received specific support pursuant to the CARES Act or any subsequent federal legislation. Specific support in this context refers to loans, loan guarantees and other investments made to the issuer by the Treasury under section 4003(b)(1)-(3) of the CARES Act. However, an issuer may utilize tax credits or tax relief available under the CARES Act without being precluded from participation in the Facility.
- The issuer must satisfy the conflicts-of-interest requirements of section 4019 of the CARES Act.
Since the initial announcement of the Facility, questions have arisen about the definition of eligible issuers and, in particular, whether entities subject to ultimate foreign ownership would qualify. It is now clear that an eligible issuer may be a subsidiary of a foreign company, provided (1) the eligible issuer itself is created or organized in the United States or under the laws of the United States, and (2) the eligible issuer on a consolidated basis has significant operations in and a majority of its employees based in the United States. Where the eligible issuer is a subsidiary of a foreign company, it must use the proceeds derived from participation in the Facility only for the benefit of the eligible issuer, its consolidated U.S. subsidiaries and other affiliates of the eligible issuer that are U.S. businesses, and not for the benefit of its foreign affiliates. For this purpose, and “while not an exhaustive definition,” the FRBNY will include as an eligible issuer a business “with greater than 50% of its consolidated assets in, annual consolidated net income generated in, annual consolidated net operating revenues generated in, or annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) generated in the United States as reflected in its most recent audited financial statements.” This further guidance has potentially extended the Facility to the U.S. businesses of non-U.S. auto, drug and other manufacturers.
The FRB has also clarified that an eligible issuer can be a newly established subsidiary so long as the parent guarantor meets the rating and other required eligibility criteria. However, where the eligible issuer is a subsidiary whose sole purpose is to issue debt, a corporate affiliate to which 95% or more of the proceeds 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 United States on a consolidated basis. If there is no primary corporate beneficiary, corporate affiliates that, in each case, have significant operations in and a majority of its employees based in the United States on a consolidated basis must receive, in the aggregate, 95% or more of the proceeds.
The Facility will not purchase bonds issued by U.S. branches, agencies or subsidiaries of non-U.S. banking organisations.
Forms and Certifications: In order to borrow under the Facility, eligible issuers will need to complete several forms, including CARES Act and other eligibility certifications, a Regulation A certification that it is unable to secure adequate credit accommodations from other banking institutions and the capital markets and that it is not insolvent, as well as the Facility’s program-specific authorization form. For purposes of the Regulation A certification regarding the inability to secure adequate credit, issuers may consider economic or market conditions as compared to normal market conditions, including the availability and price of credit. However, lack of adequate credit does not mean that no credit is available. Credit may be available but at prices or on conditions that are inconsistent with a normal, well-functioning market. All of the forms and certifications are available on the website of the FRBNY.
Eligible issuers are strongly encouraged to complete the CARES Act certifications “well in advance” of expected issuance to expedite the Facility’s participation. If they are completed prior to the trade date, they must be returned by email to the FRBNY (CCFForms@ny.frb.org). If they are submitted on the trade date, they must be returned by email to the investment manager (firstname.lastname@example.org). The Regulation A certification must be completed on the trade date and sent to the investment manager at the same address.
The program-specific authorization forms must be completed by the issuer and the underwriter or initial purchaser named as billing and delivery agent (B&D Agent) for the transaction in question. Where the Facility is to be the sole investor, these forms should be completed in advance of the trade date, whereas they are to be completed on the trade date where the Facility is participating along with other investors. The forms should be sent directly to the investment manager at the above address.
Each borrowing under the Facility requires the completion of these forms and certifications.
Rating Agencies: The ratings criteria refer to major NRSROs, which include Fitch Ratings, Inc., Moody’s Investors Service, Inc., and S&P Global Ratings. Major NRSROs also include DBRS Morningstar, Kroll Bond Rating Agency, Inc., and A.M. Best Rating Services, Inc. (A.M. Best Rating Services, Inc. only with respect to insurance companies) to the extent that the issuer also has a qualifying rating from Fitch, Moody’s or S&P. In all cases, ratings from an NRSRO will not be accepted if the NRSRO did not rate the eligible issuer as of March 22, 2020.
Leverage: The Facility will leverage the Treasury equity at 10 to 1 when acquiring corporate bonds or syndicated loans from issuers that are investment grade at the time of purchase. The Facility will leverage its equity at 7 to 1 when acquiring any other type of eligible asset.
Limits per Issuer: Eligible issuers may approach the Facility to refinance outstanding debt from the period of three months ahead of the maturity date of such outstanding debt. Eligible issuers may additionally approach the Facility at any time to issue additional debt, provided their rating is reaffirmed at BB-/Baa3 or above with the additional debt by each major NRSRO with a rating of the issuer. The maximum amount of outstanding bonds or loans of an eligible issuer that borrows from the Facility may not exceed 130% of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019, and March 22, 2020. Also note that the maximum amount of instruments that the Facility and the SMCCF combined may purchase with respect to an eligible issuer is 1.5% of the combined potential size of the Facility and the SMCCF.
The amount of outstanding bonds and loans includes current and noncurrent portions of corporate bonds and loans, including drawn portions of term loans, drawn portions of long-term revolving facilities (i.e., maturity greater than one year) and long-term bonds (whether U.S. dollar denominated or otherwise). Any operating leases, nonrecourse debt, commercial paper and other short-term liabilities are not included. Information on debt should be consistent with the issuer’s audited financial reports maintained during the period March 22, 2019, to March 22, 2020, including the value of non-U.S.-dollar-denominated debt. Issuers that are public companies may not use a higher amount of outstanding bonds and loans than is reflected in public filings.
Pricing: Pricing of eligible corporate bonds where the Facility is the sole purchaser will be issuer specific, informed by market conditions, plus a 100 basis point facility fee. Pricing will also be subject to minimum and maximum spreads over yields on comparable maturity U.S. Treasury securities, and such spread caps and floors will vary based on an eligible issuer’s credit rating as of the date on which the Facility makes a purchase.
Specifically, the pricing methodology will take into consideration the spreads above equivalent Treasuries on existing bonds issued by the same or comparable (e.g., by sector, rating) issuers adjusted by tenor (as needed), which would be added to the rate on a comparable maturity on-the-run Treasury. Additionally, a ratings-based concession (spread premium) will be applied to lower-rated issuers to account for the likelihood that underwriting fees may reflect a lesser degree of marketing activity and underwriting risk. All pricing determinations for sole-investor transactions will be made by the Facility and will not be subject to bespoke negotiations.
Spreads are expected to rise in stressed market conditions but will be capped at spread levels based on historical distributions for each ratings notch. These levels are to be set at around the 95th to 97th percentile of spreads over the last 15 years on three- to five-year senior debt of U.S. firms (excluding banks) to maturity-matched on-the-run Treasuries. In all cases, spreads will be floored at or around the 50th percentile of spreads for each ratings notch.
As regards eligible syndicated loans and bonds, the Facility will receive the same pricing as other syndicate members, plus a 100 basis point facility fee on the Facility’s share of the syndication.
Call Features: Call options are included in the standard terms and vary based on whether the eligible issuer is rated at or above BBB-/Baa3 (or comparable) at the time of issuance or below BBB-/Baa3 (or comparable) at the time of issuance.
Repurchase Obligation: When the Facility purchases bonds at issuance, the eligible issuer will be required to enter into a letter agreement under which it will agree to repurchase the bonds sold to the Facility upon demand at 100% of the principal amount thereof plus accrued interest if the eligible issuer has made any knowing material misrepresentation or there is a material breach of the use of proceeds provisions under the Facility’s transaction-specific documentation. A similar agreement will be required when the Facility participates in a syndicated loan transaction, and the form of that agreement will be published at such time as the Facility begins transacting in syndicated loans. The indenture or loan agreement for bonds or loans in which the Facility is a co-investor or co-lender must provide that any payments to the Facility under the letter agreement are not subject to any sharing clause or similar provision requiring ratable application of recoveries from an issuer or borrower among note holders or lenders. In transactions that rely on a guarantee, the guarantor will be jointly and severally liable with the issuer for the repurchase obligation. The execution a delivery of the letter agreement is a condition to the Facility’s purchase of bonds or closing of loans.
Sole Investor Covenant Package: The indenture relating to any bonds to be purchased by the Facility where the Facility is to be the sole purchaser will be expected to have terms consistent with market conventions and the issuer’s most recent bond issuance but will also be required to incorporate a standard set of terms reflecting minimum covenants and other protections applicable to the Facility. These terms, which are available on the FRBNY website and include provisions applicable to the issuer and any guarantor, may be updated from time to time. Bonds purchased by the Facility should include the most recent version as of the date the bonds are issued. If the issuer’s most recent prior bond issuance includes more investor-favorable terms than the Facility terms, such other terms will also be required to be included as described in the Facility’s standard terms. If an issuer incorporates specific Facility standard terms into its own formulation of specified covenants, that formulation is required to encompass all of the restrictions set out in the corresponding standard terms. If all of the Facility’s standard terms are not included in the indenture, the Facility may decline to participate in the transaction. The Facility’s standard terms also include a requirement that the rating conditions referenced in the term sheet are included as a condition precedent in the related underwriting agreement.
Facility Fee: The Facility fee of 100 basis points is a requirement for participation and is based on the par amount of the Facility participation in an offering. The fee is to be paid by the issuer; however, for purposes of settlement in a bond offering, the underwriter or initial purchaser serving as B&D Agent is required to pay the fee to the Facility on the issuer’s behalf no later than the close of business on the settlement date. The issuer is responsible for directing the B&D Agent to pay the Facility on its behalf. The investment manager will provide documentation to the B&D Agent at the time of approaching the Facility, including details of where to send the payment. Fee payments are to be made by separate wire transfer to the Facility and not netted against the purchase price for loans and bonds purchased by the Facility. The facility fee will be payable in respect of each issuance to, or borrowing from, the Facility.
Underwriters and Initial Purchasers: When the Facility purchases eligible corporate bonds, the eligible issuer is required to use two or more underwriters to facilitate the transaction. One or more of the underwriters in the transaction must have significant experience with transactions of the size and complexity possible in the Facility and must have underwritten a minimum of 100 transactions and US$10 billion of investment grade corporate bonds, excluding self-led transactions, in the capacity of active bookrunner between March 22, 2019, and March 22, 2020. These criteria are also required for the B&D Agent. The FRB has strongly encouraged issuers to use minority, women and veteran (MWV)-owned businesses as underwriters. Where an MWV-owned business does not meet the criteria outlined above, it may still participate in the transaction as an additional underwriter. The amount paid for underwriting services is to be determined entirely between the eligible issuer and the relevant underwriters.
To commence the process of a Facility investment in a bond offering, the underwriters are expected to contact the investment manager by email (email@example.com with a copy to the Facility (firstname.lastname@example.org) to request Facility participation in a transaction with other investors or as the sole investor. For a sole investor transaction, this contact should occur approximately two weeks prior to pricing. For a transaction with other investors, it should occur as soon as the underwriters expect to bring the transaction to the Facility for consideration, but it should occur no later than 1 p.m. ET on the pricing day. The FRBNY has published mandatory provisions for inclusion in underwriting and purchase agreements where it is to be the sole investor in a deal. These are also available on the FRBNY website.
Program Termination: The Facility will cease purchasing eligible assets no later than September 30, 2020, unless the Facility is extended by the FRB and the Treasury. The FRBNY will continue to fund the Facility after such date until the Facility’s holdings either mature or are sold.
Required Disclosures: Eligible issuers are required to make their own determinations concerning their disclosure obligations under applicable securities laws. Companies subject to Regulation FD under the Securities Exchange Act of 1934 (the Exchange Act) should not expect the Facility to maintain in confidence any material nonpublic information provided to it or the investment manager in connection with a sale of bonds to the Facility. For bonds issued pursuant to Rule 144A by an issuer that is not an Exchange Act reporting company, the Facility will expect that the offering document and indenture for the bonds, and any material nonpublic information with respect to the issuer or its securities provided to the Facility (or any other investors) in connection with that offering, will be made available on a website accessible by (i) the Facility or any other investor in connection with the relevant distribution and (ii) other prospective purchasers and sellers of bonds of the issuer who are qualified institutional buyers for purposes of Rule 144A. In addition, issuers and underwriters are expected to ensure that appropriate disclosure is made of the fees to be paid to the Facility in transactions where the Facility is a co-investor.
Other Required Documentation: It is expected that bonds sold to the Facility, whether as the sole investor or as a purchaser in a syndicated offering, will be documented in a manner customary for SEC-registered bond offerings or bond offerings conducted pursuant to Rule 144A. The Facility will purchase bonds from underwriters as part of an SEC-registered offering or from initial purchasers making a Rule 144A resale. The Facility will purchase bonds solely as an investor and not as an underwriter or dealer and will not purchase directly from an issuer or through an arranger acting only as a placement agent. For Rule 144A offerings, the Facility will expect to receive an offering circular or offering memorandum describing the issuer, the terms and conditions of the bonds, risk factors, and other matters typically addressed in such materials. In connection with all bond issuances, it is expected that underwriters/initial purchasers will perform customary due diligence and receive customary closing documents such as auditor comfort letters, 10b-5 disclosure letters and legal opinions.
Open Questions: Although the latest terms and guidance from the FRB and the FRBNY are helpful, there are still some concerns as to how the Facility will operate in practice. Where the Facility is the sole purchaser of a bond offering, it should be relatively straightforward to coordinate the required documentation and funding of transactions that otherwise satisfy the Facility’s requirements. However, where the Facility is expected to participate as one of several investors in a syndicated bond offering or loan, the situation is likely to be more complicated. Accordingly, we can expect the FRB and the FRBNY to publish further information in due course, including the more detailed terms that will need to be included in related documentation.
In its guidance published so far, the FRBNY has indicated that when it does purchase portions of syndicated bond or loan issuances of eligible issuers, the Facility’s participation is expected to be alongside that of other participants, at the same terms and price, with the additional 100 basis point facility fee. However, this guidance seems to confirm that the Facility does not plan to participate in an offering from the outset but only after it has become apparent that Facility’s participation is essential to the deal. In the words of the FRBNY: “After a transaction is announced and shown to prospective purchasers, in the event of insufficient demand (i.e., demand for less than 100 percent of the offering) and a desire by the issuer to approach the [Facility] for participation to complete the transaction, the issuer and all leads on the syndication may approach the [Facility] via the investment manager and request participation by the [Facility] in up to 25 percent of the offering.” In addition to being required to certify compliance with all eligibility criteria, issuers will be expected to provide additional data on the proposed transaction at that time, “including, but not limited to, tenor, seniority, offering format, transaction size, initial price talk and expected final yield.”
Although many market participants had expected the Facility to potentially participate at an earlier stage in some offerings, the foregoing guidance appears to reflect the FRBNY’s desire to ensure that the Facility’s participation is not used to decrease demand from other potentially available investors or otherwise unnecessarily affect transaction pricing. Such market participants are still evaluating the published terms of the Facility and the latest FRBNY guidance in relation to the sequencing of any Facility participation in a transaction. They are also considering the likely impact on prospectus disclosures and other transaction documents insofar as the Facility’s participation is concerned.
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