Emergency Federal Reserve Board Measures to Support U.S. Corporate Borrowers and Debt Markets

PRIMARY MARKET CORPORATE CREDIT FACILITY

Facility: The PMCCF will serve as a funding backstop for corporate debt issued by eligible issuers. Under the PMCCF, the FRBNY will commit to lend to a special purpose vehicle (SPV) on a recourse basis.³ The SPV will (i) purchase qualifying bonds as the sole investor in a bond issuance and (ii) purchase portions of syndicated loans or bonds at issuance. Initially, BlackRock Financial Markets Advisory will be the investment manager for the PMCCF, although the role will be subject to a competitive bidding process at a later point.

Eligible Assets: 

Eligible corporate bonds as sole investor. 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 purchase by the PMCCF: (i) issued by an eligible issuer; and (ii) have a maturity of 4 years or less.

Eligible syndicated loans and bonds purchased at issuance. The PMCCF also may 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 purchase no more than 25% of any loan syndication or bond issuance.

Today’s guidance from the FRBNY makes it clear that, if the PMCCF is the sole participant in an offering, the SPV will only purchase fixed rate bonds. The PMCCF will generally only purchase fixed rate debt when participating in a syndicated issuance. To the extent that the PMCCF is approached through the investment manager to participate in a syndication of floating rate debt, the PMCCF will generally expect any debt priced off LIBOR to include adequate fallback language. It also makes clear that the PMCCF may purchase privately placed corporate bonds pursuant to Rule 144A, thereby clarifying that purchases will not be limited to securities registered with the SEC under the Securities Act of 1933. The PMCCF will only purchase bonds and loans denominated in U.S. dollars.

Eligible Issuers: To qualify as an eligible issuer, the issuer must satisfy the following conditions:

• The issuer is a business or a non-profit 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. As discussed in further detail below, today’s guidance from the FRBNY, among other things, clarifies how this requirement will be applied to groups that are subject to ultimate non-U.S. ownership and to issuers that are finance or operating subsidiaries.
• The issuer is rated at least BBB-/Baa3 as of March 22, 2020 by a major nationally recognized statistical rating organization (NRSRO) and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 as of March 22, 2020 by two or more NRSROs; provided, however, that issuers that were rated at least BBB-/Baa3 as of March 22, 2020, but are subsequently downgraded, are also eligible if they are rated at least BB-/Ba3 by a major NRSRO at the time of purchase and, if rated by multiple major NRSROs, are rated at least BB-/Ba3 by two or more NRSROs at the time of purchase (it being understood that, in every case, issuer ratings are subject to review by the FRB).
• 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. Today’s guidance from the FRBNY indicates that an issuer which has received a loan, loan guarantee or other investment from the U.S. Treasury under section 4003(b)(1)-(3) will be ineligible to participate. In addition, receiving a loan through one of the Main Street Lending Facilities will also make an issuer ineligible to participate. However, it also makes clear that the utilization of tax credits or tax relief available under the CARES Act will not make an issuer so ineligible.
• The issuer must satisfy the conflicts-of-interest requirements of section 4019 of the CARES Act.⁴

Leverage: The PMCCF will leverage the U.S. 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 PMCCF will leverage its equity at 7 to 1 when acquiring any other type of eligible asset.

Limits per Issuer: The maximum amount of outstanding bonds or loans of an eligible issuer that borrows from the PMCCF may not exceed 130% of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020, calculated at the consolidated top-tier parent level. The amount of outstanding bonds and loans includes current and non-current 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, non-recourse 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 March 22, 2019 to March 22, 2020 period, 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.

Issuers may approach the PMCCF through the investment manager to refinance outstanding debt from the period of three months ahead of the maturity date of such outstanding debt. Issuers may additionally approach the PMCCF through the investment manager at any time to issue additional debt, provided their rating is reaffirmed at BB-/Ba3 or above with the additional debt by each major NRSRO with a rating of the issuer.

The maximum amount of instruments that the PMCCF and the SMCCF combined will purchase with respect to any eligible issuer (aggregated with the amount of instruments purchased from any affiliated issuers) is capped at 1.5% of the combined potential size of the PMCCF and the SMCCF.

There is no required minimum issuance amounts or percentages, but issuers are not expected to use the PMCCF to borrow very small amounts or small percentages of the total deal amount.

Pricing:

Eligible corporate bonds: Pricing will be issuer-specific, informed by market conditions, plus a facility fee of 100 basis points. Today’s guidance states the FRB’s expectation that market pricing should not be lowered for the purpose of decreasing demand from market participants in order to fill deal capacity via the PMCCF.

Eligible syndicated loans and bonds: The PMCCF will receive the same pricing as other syndicate members, plus a facility fee of 100 basis points on the PMCCF’s share of the syndication.

The FRBNY has today clarified that the facility fee will be applied to each issuance to, or borrowing from, the PMCCF.

Registration: Eligible issuers will need to register under the PMCCF in order to participate. However, unlike the CPFF, the relevant registration details have not yet been published by the FRBNY. Nonetheless, it is clear from today’s guidance that an eligible issuer will be required to provide written certification that it is eligible to participate in the PMCCF, is unable to secure adequate credit accommodations from other banking institutions and the capital markets, and is not insolvent. In so certifying inability to secure adequate credit accommodations, issuers will be entitled to 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. However, lack of adequate credit does not mean that no credit is available. Credit may be available, but on prices or conditions that are inconsistent with a normal, well-functioning market. Further information on required certifications will be determined and publicly announced by the FRBNY prior to commencement of the PMCCF. 

Program Termination: The PMCCF will cease purchasing eligible assets no later than September 30, 2020, unless the FRB and the U.S. Treasury extend the PMCCF. The FRBNY will continue to fund the PMCCF after such date until the PMCCF’s holdings either mature or are sold.

SECONDARY MARKET CORPORATE CREDIT FACILITY

Facility: Under the SMCCF, the FRBNY will lend, on a recourse basis, to a SPV that will purchase in the secondary market corporate debt issued by eligible issuers. The SPV will purchase in the secondary market eligible individual corporate bonds as well as eligible corporate bond portfolios in the form of exchange-traded funds (ETFs). The FRBNY will be secured by all the assets of the SPV. Initially, BlackRock Financial Markets Advisory will be the investment manager for the SMCCF, although the role will be subject to a competitive bidding process at a later point.

Eligible Assets: 

Eligible Individual Corporate Bonds. The SMCCF may purchase corporate bonds that, at the time of purchase, (i) were issued by an eligible issuer; (ii) have a remaining maturity of 5 years or less; and (iii) were sold to the SMCCF by an eligible seller.

Eligible ETFs. 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.

Today’s guidance from the FRBNY makes it clear that the SMCCF intends to purchase a range of bonds, including floating rate debt that is priced off LIBOR. It also makes clear that the SMCCF may purchase privately placed corporate bonds pursuant to Rule 144A. The SMCCF will only purchase bonds denominated in U.S. dollars.

Eligible Issuers for Individual Corporate Bonds: To qualify as an eligible issuer, the issuer must satisfy the same conditions as are set out above in relation to eligible issuers under the PMCCF.

Leverage: The SMCCF will leverage the U.S. Treasury equity at 10 to 1 when acquiring corporate bonds from issuers that are investment grade at the time of purchase and when acquiring ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds. The SMCCF will leverage its equity at 7 to 1 when acquiring corporate bonds from issuers that are rated below investment grade at the time of purchase and in a range between 3 to 1 and 7 to 1, depending on risk, when acquiring any other type of eligible asset.

Eligible Seller: Each institution from which the SMCCF purchases securities must be a business that is created or organized in the United States or under the laws of the United States with significant U.S. operations and a majority of U.S.-based employees. The institution also must satisfy the conflicts-of-interest requirements of section 4019 of the CARES Act. The FRBNY has today indicated that, to expedite the implementation of the SMCCF, the SMCCF will begin by transacting with primary dealers that meet above criteria and that it will add additional counterparties as eligible sellers, subject to adequate due diligence and compliance work. 

Limits per Issuer/ETF: The maximum amount of instruments that the SMCCF and the PMCCF combined will purchase with respect to any eligible issuer (aggregated with the amount of instruments purchased with respect to any affiliated issuers) is capped at 1.5 % of the combined potential size of the SMCCF and the PMCCF. The maximum amount of bonds that the SMCC will purchase in the secondary market of any eligible issuer is also capped at 10 percent of the issuer’s maximum bonds outstanding on any day between March 22, 2019 and March 22, 2020, calculated at the consolidated top-tier parent level. The SMCCF will not purchase shares of a particular ETF if after such purchase the SMCCF would hold more than 20 percent of that ETF’s outstanding shares. 

Pricing: The SMCCF will purchase eligible corporate bonds at fair market value in the secondary market. The SMCCF 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 FRBNY has today clarified that the SMCCF will generally not purchase shares of an ETF that are trading at a premium above the lower of the following limits relative to the prior end-of-day official net asset value (NAV): (a) 1%, or (b) the 1-standard deviation level of the ETF’s premiums to end-of-day NAV observed over the prior 52 weeks, on a rolling basis. The stated policy goals of these pricing requirements are to avoid overpayment for an ETF relative to the cost of purchasing its underlying assets, and avoid contributing to elevated demand that an ETF may already be experiencing, while affording operational flexibility.

Registration: Eligible sellers will need to register under the SMCCF in order to participate. However, the relevant registration details have also not yet been published by the FRBNY. Nonetheless, it is clear from today’s guidance that eligible sellers will be required to provide written certification that they are eligible to participate in the SMCCF. The FRBNY has also indicated that eligible issuers will be required to certify compliance with the eligibility criteria, although it is less clear to what extent an eligible seller will be able to cause that to happen. Further information on required certifications will be determined and publicly announced by the FRBNY prior to the commencement of the SMCCF.

Program Termination: The SMCCF will cease purchasing eligible corporate bonds and eligible ETFs no later than September 30, 2020, unless extended by the FRB and the U.S. Treasury. The FRBNY will continue to fund the SMCCF after such date until the holdings either mature or are sold.

COMMERCIAL PAPER FUNDING FACILITY

Facility: The CPFF is structured as a credit facility to an SPV established by the FRBNY and became operational on April 14, 2020. The SPV serves as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers. The FRBNY has committed to lend to the SPV on a full recourse, secured basis. The SPV will hold the commercial paper until maturity and will use the proceeds from maturing commercial paper and other assets of the SPV to repay its loan from the FRBNY. 

The U.S. Treasury has made a $10 billion equity investment in the SPV. The FRB did not specify a maximum size for the facility. The effective limit is the sum of the maximum amounts of commercial paper that all individual eligible issuers would be able to sell under the CPFF.

Pacific Investment Management Company, LLC is serving initially as asset investment manager and State Street Bank and Trust Company is serving initially as custodian and administrator.

Eligible Assets: The SPV will purchase from eligible issuers three-month U.S. dollar-denominated unsecured and asset-backed commercial paper through the FRBNY’s primary dealers (which must notify the asset investment manager of the amount daily by 10:30 a.m ET). The commercial paper may not be interest bearing and must therefore be sold at a discount. The minimum transaction size is $100,000. 

Eligible Issuers: Eligible issuers are U.S. issuers of commercial paper, including municipal issuers, U.S. branches of foreign banks and U.S. issuers with a foreign parent company. Each legal entity that issues commercial paper is considered a separate issuer within the construct of the CPFF. For example, if a parent company and a subsidiary issue commercial paper separately, they are considered separate issuers for the purposes of the CPFF. If there are co-issuers on a program, so long as one of them is a U.S. issuer and it meets all other program terms and conditions, the commercial paper will be considered eligible.

For issuers of asset-backed commercial paper, the issuer is the special purpose entity issuing such commercial paper. The SPV will not purchase asset-backed commercial paper from issuers that were inactive prior to the announcement of the CPFF – i.e. did not issue such commercial paper to third parties for any consecutive period of 3 months or longer between March 16, 2019 and March 16, 2020.

Except as provided below, the SPV will purchase only U.S. dollar-denominated commercial paper (including asset-backed commercial paper) that is rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A1/P1/F1 by two or more major NRSROs, in each case subject to review by the FRB.

An issuer that, on March 17, 2020, was (1) rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, was rated at least A1/P1/F1 by two or more major NRSROs and (2) is subsequently downgraded will be able to make a one-time sale of commercial paper to the SPV so 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 NRSROs, in each case subject to review by the FRB.

An eligible issuer will not be prohibited from financing the repurchase of its outstanding commercial paper with the proceeds from the issuance of commercial paper to the SPV under the CPFF.

Limits per Issuer: The maximum amount of a single issuer’s commercial paper the SPV may 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. The SPV will not purchase additional commercial paper from an issuer whose total commercial paper (including extendable commercial paper) outstanding to all investors (including the SPV) equals or exceeds the issuer’s limit.

For an issuer that, on March 17, 2020, was (1) rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, was rated at least A1/P1/F1 by two or more major NRSROs and (2) 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 NRSROs, the maximum amount of the issuer’s commercial paper that the SPV will purchase, and may own at any time, is the amount of U.S. dollar-denominated commercial paper the issuer had outstanding the day before it was downgraded.

Upon registration under the CPFF, each eligible issuer will be required to certify the maximum amount of U.S. dollar commercial paper it can sell to the SPV. If an issuer has multiple commercial paper programs, it should use the aggregate outstandings across all its programs for purposes of this calculation.  If an issuer’s credit rating changes subsequent to registration, it will be required to certify the rating change and new maximum amount of U.S. commercial paper it can sell to the SPV. As with all eligibility requirements, the FRBNY reserves the right to prohibit or otherwise limit participation in the CPFF.

Pricing: For commercial paper rated A1/P1/F1, pricing will be based on the three-month overnight index swap (OIS) rate on the day of purchase plus 110 basis points. For commercial paper rated A2/P2/F2, pricing will be based on the three-month OIS rate on the day of purchase plus 200 basis points. The CPFF daily rates will be posted on the FRBNY’s website each day by 8 a.m. ET and published on the BLOOMBERG PROFESSIONAL BOOM® platform. 

Registration; Facility Fee: Eligible issuers will need to register under the CPFF in order to sell commercial paper to the SPV. Issuers are required to register at least two business days in advance of their intended participation. Registration materials, including wire instructions, a registration form (including a request for limit verification for an issuing and paying agent) and certifications regarding issuer eligibility, are available on the FRBNY’s website. At the time of registration, an eligible issuer must provide a written certification that (a) it is unable to secure adequate credit accommodations from other banking institutions, and (b) it is not insolvent and is not participating in the CPFF for the purpose of lending the proceeds to a person or entity that is insolvent. Upon registration, each eligible issuer will be required to pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own, even if it does not intend to sell the maximum amount of commercial paper permitted under the CPFF.

Program Termination: The SPV will cease purchasing commercial paper on March 17, 2021, unless the FRB extends the CPFF. The FRBNY will continue to fund the SPV after such date until the SPV’s underlying assets mature.

UPDATED GUIDANCE IN RELATION TO ELIGIBLE ISSUERS AND ELIGIBLE SELLERS UNDER THE RELEVANT FACILITIES

Since their initial announcement, there has been some uncertainty about which entities will likely qualify as “eligible issuers” or “eligible sellers” for purposes of the Relevant Facilities and, in particular, whether groups with ultimate non-US ownership (including groups with non-US parent companies and US operating and/or finance subsidiaries) could qualify.

In the case of the PMCCF and SMCCF, it has been clear that an eligible issuer must be created or organized in the United States or under the laws of the United States and must have significant operations in and a majority of its employees based in the United States. However, in the guidance published by it today, the FRBNY has now clarified that an eligible issuer may be a subsidiary of a foreign company, provided that (i) the eligible issuer itself is created or organized in the United States or under the laws of the United States, and (ii) 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 PMCCF 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, the FRBNY will include as an eligible issuer (or eligible seller under the SMCCF) 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 would seem to potentially extend these facilities to the US businesses of otherwise non-US auto, drug and other manufacturers.

The FRBNY indicated today that an eligible issuer can be a newly established subsidiary for purposes of the PMCCF, so long as the parent guarantor meets the ratings and other required eligibility criteria. However, where the eligible issuer is a subsidiary whose sole purpose is to issue debt, any corporate affiliate to which 95 percent 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, it is required that corporate affiliates that, in each case, have significant operations in and a majority of their employees based in the United States on a consolidated basis must receive, in the aggregate, 95 percent or more of the proceeds. Similar requirements were announced today in relation to the SMCCF requirements for eligible sellers. Finally, the FRBNY today confirmed that a U.S. subsidiary or U.S. branch or agency of a foreign bank would be considered to be created or organized in the United States or under the laws of the Unites States, but must also satisfy all of the other criteria specified in the relevant term sheet to qualify as an eligible seller under the SMCCF. This clarification is consistent with the FRBNY’s previously announced position under the CPFF. However, the CPFF is still potentially available to a wider universe of non-U.S. borrowers as there are no similar use of proceeds restrictions in the CPFF.

POTENTIAL ISSUES RELATING TO LIKELY OPERATION OF PMCCF

Although today’s further guidance from the FRBNY is helpful, there are nonetheless concerns as to how the PMCCF will operate in practice. Where the PMCCF 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 PMCCF requirements. However, where the PMCCF is expected to participate as one of several investors in a syndicated bond offering or loan, the situation is likely to be more complicated.

In its guidance published today, the FRBNY indicated that, when it does purchase portions of syndicated bond or loan issuances of eligible issuers, the PMCCF’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 PMCCF does not plan to participate in an offering from the outset, but only after it has become apparent that PMCCF 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 PMCCF for participation to complete the transaction, the issuer and all leads on the syndication may approach the PMCCF via the investment manager and request participation by the PMCCF 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 PMCCF to potentially participate at an earlier stage in some offerings, the foregoing guidance appears to reflect the FRBNY’s desire to ensure that PMCCF participation is not used to decrease demand from other potentially available investors or otherwise unnecessarily impact transaction pricing. Such market participants are still evaluating the published terms of the PMCCF and the latest FRBNY guidance in relation to the sequencing of any PMCCF participation in a transaction. They are also considering the likely impact on prospectus disclosures and other transaction documents in so far as PMCCF participation is concerned. 

OTHER MEASURES ANNOUNCED AND TO BE EXPECTED FROM THE FRB

Although the PMCCF, SMCCF and CPFF are expected to be important measures for corporate borrowers in the United States, the FRB has indicated that it is committed to using its full range of tools to support households, businesses and the U.S. economy overall at this time. For example, in addition to the above facilities, the FRB has announced its Main Street New Loan Facility and Main Street Expanded Loan Facility in addition to several previously announced facilities such as the Term Asset-Backed Securities Loan Facility.⁵ These and the other measures announced by the FRB are of relevance to a much broader range of issuers and other market participants and should help stabilize the U.S. capital markets. However, it should be noted that today’s announcement from the FRBNY confirms its previous guidance that issuers participating in the PMCCF may not also participate in the Main Street Lending Facility.

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Please contact any of the named Sidley lawyers or your usual Sidley contact if you have any questions relating to the Relevant Facilities and/or governmental support measures being adopted in the United States, United Kingdom and other countries in which Sidley operates.