Shearman And Sterling

coronavirus, COVID-19

Apr 12, 2020

The Fed Moves Beyond the Financial Crisis Playbook for Pandemic Response

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THE FED MOVES BEYOND THE FINANCIAL CRISIS PLAYBOOK FOR PANDEMIC RESPONSE

Please print a PDF of Federal Reserve Facilities: CARES Act and Beyond, a chart comparing the main features of the Fed’s facilities detailed below.  

In the face of the coronavirus (COVID-19) pandemic, the U.S. Federal Reserve Board (the Fed) and the U.S. federal banking agencies have announced several market and supervisory actions to address the sudden market stress and strain. As detailed in our prior memo, The Fed Repurposes the Financial Crisis Playbook for Pandemic Response, much of those initial actions were derived from the playbook for the last financial crisis.

The Fed announced on April 9 a dramatic expansion of its Section 13(3) emergency lending facilities, establishing four new facilities: the Municipal Liquidity Facility (MLF), the Main Street New Loan Facility (MSNLF), the Main Street Expanded Loan Facility (MSELF) and the Paycheck Protection Program Lending Facility (PPPLF). The Main Street Facilities are expected to purchase up to $600 billion in loans, and the MLF is expected to offer $500 billion in lending.

In addition, the Fed expanded the size and scope of three existing facilities: the Primary Market Corporate Credit Facility (PMCCF), which was increased from $10 billion in initial funding to $50 billion; the Secondary Market Corporate Credit Facility (SMCCF), which was increased from $10 billion in initial funding to $25 billion; and the Term Asset-Backed Securities Loan Facility (TALF), as to which the range of eligible collateral was broadened. The combined lending of the three programs is expected to be $850 billion.

When combined with the lending expected under the four new facilities, including up to $350 billion in loan support authorized under the PPP, the Fed delivers on $2.3 trillion in lending and purchase power. The Treasury is funding these facilities with up to $195 billion in funding, suggesting that over $250 billion of the $454 billion authorized under the CARES Act is still available for future facilities or upsizing of the existing facilities.

These updates to previously announced facilities, as well as new facilities, utilize the authority and the technology that were relied upon in the last financial crisis, but with a broader goal of getting funding and liquidity much more quickly, and more deeply, into the economy by supporting corporate borrowers (the Main Street Facilities, PMCCF, SMCCF); supporting individuals and asset backed lending (PPPLF and TALF); and supporting U.S. cities, states and counties (MLF). The Fed has noted that it will accept comments on the facilities until April 16.

This client note includes the details of the facilities previously announced by the Fed, as well as the new and expanded facilities announced by the Fed on April 9. We will update it as additional FAQs and terms and conditions are made public by the Fed.

Generally Applicable Terms and Considerations

As noted in the descriptions of the facilities below, certain terms are common across many of the facilities.

Compensation, Buyback and Dividend Restrictions. Direct loans to borrowers under Section 13(3) facilities are subject to the compensation, buyback and dividend restrictions in the CARES Act. Currently, the Main Street Facilities contemplate direct loans and, therefore, borrowers under those facilities are subject to the relevant restrictions. A chart summarizing the compensation and governance restrictions specifically applicable to the direct loans under the Fed’s Section 13(3) authority, in this case the Main Street Facilities, is detailed in our chart, “Compensation and Governance Restrictions on CARES Act Stimulus Recipients.”

Conflicts of interest provisions refer to the limitations in the CARES Act on making loans to companies in which members of the administration hold an interest. Specifically, any company in which the President, Vice President, executive department head or member of Congress, together with certain related persons of such individual, owns, controls or holds 20 percent or more, by vote or value, of the outstanding amount of any class of equity interest is not be eligible for loans, loan guarantees or investments, or participation in Fed facilities.

Disclosure. We note that borrowing under the Fed’s Section 13(3) authority is contemplated to be publicly disclosed, albeit with a time lag. Specifically, lending records, including details of the identity of the borrower and the terms of the loan, are to be publicly released a year after the facility is terminated or two years after the lending ceases, whichever comes first.

Oversight and Reporting. The CARES Act established the Office of the Special Inspector General for Pandemic Recovery and specified that the duties of the Inspector General include conducting, supervising and coordinating audits and investigations of the making, purchase, management and sale of loans, loan guarantees and other investments entered into by the Treasury Secretary under Title IV of the CARES Act, as well as submitting to Congress regular quarterly reports detailing loans, loan guarantees and other investments.

The CARES Act also established a Congressional Oversight Commission (Oversight Commission) comprised of 5 members appointed by the leadership of the House of Representative and the Senate. The Oversight Committee is responsible for conducting oversight of the implementation of Title IV by the Treasury Department and the Fed.

Finally, under the CARES Act, for the facilities and programs established by the Fed, the Fed must report to Congress within 7 days and once every 30 days. Likewise, the Fed must publish its report on its website within 7 days of the report to Congress. The Comptroller General must also conduct a study on the loans, loan guarantees and other investments made pursuant to the Act and provide a report to Congress within 9 months and annually thereafter.

Government Enforcement Actions and Private Litigation In Connection with COVID-19 Related Fraud. Similar to past crises, including the 2008 financial crisis, the U.S. Department of Justice (DOJ) has indicated it plans to prioritize the detection and prosecution of COVID-19-related fraud. In a March 16, 2020 memorandum to all U.S. Attorneys, Attorney General William Barr emphasized that “it is essential that the Department of Justice remain vigilant in detecting, investigating, and prosecuting wrongdoing related to the [COVID-19] crisis.” Consistent with this policy, Attorney General Barr directed U.S. Attorneys to appoint a “Coronavirus Fraud Coordinator” in each district who is responsible for coordinating enforcement and conducting community outreach. In addition, the DOJ has established a national hotline and government email address to make it easier for the public to report suspected fraud. Based on these actions, we expect the DOJ to be very active in investigating and prosecuting suspected fraud in connection with the receipt of COVID-19 funds.

In addition to the enhanced focus by the DOJ, private attorneys are publicly asking whistleblowers to come forward to report potential fraud in connection with the receipt of COVID-19 funds from the government. Under the False Claims Act (FCA), private citizens can file suits on behalf of the government (called qui tam suits) against those who have defrauded the government. Private citizens who successfully bring qui tam suits may receive a portion of the government’s recovery. Following the financial crisis, there was a sharp increase in FCA qui tam actions. We expect the same to occur over the next few years in connection with the government funds made available to address issues related to COVID-19.

The Main Street Facilities

The cornerstone of the Fed’s announcement on April 9 was the establishment of the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF) in order to facilitate unsecured loans to small and mid-sized businesses (together, the Main Street Facilities). The Fed has committed to lending to a single common SPV for the purposes of both the MSNLF and the MSELF. The combined lending power of the MSNLF and the MSELF will be up to $600 billion, supported by a $75 billion investment by Treasury using the Exchange Stabilization Fund (ESF). Lending under this program can be made to borrowers of significantly larger size than under the Paycheck Protection Program (PPP), though in the press release, the Fed indicated that companies can avail themselves of both the PPP and the Main Street Facilities.

SPV Purchases of Eligible Loans to Eligible Borrowers from Eligible Lenders. Under the MSNLF and the MSELF, a Federal Reserve Bank (the Reserve Bank) will commit to lend to an SPV on a recourse basis, and the SPV will purchase 95% participations in eligible loans or, in the case of the MSELF, 95% participations in the upsized tranche of the eligible loans, at par value from eligible lenders. The eligible lender will retain 5% of each eligible loan or upsized tranche of eligible loan. The SPV and the eligible lender will share risk on a pari passu basis.

  • In addition, under the MSELF, any collateral securing an eligible loan, whether such collateral was pledged under the original terms of the eligible loan or at the time of upsizing, will secure the loan participation on a pro rata basis. Under the MSELF, an “upsized tranche” is an extension of additional credit on a loan that is pre-existing and originated prior to April 8, 2020.

Eligible Lenders. Eligible lenders under the MSNLF and the MSELF are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. The MSNLF and the MSELF term sheets do not specifically state that a U.S. branch of a foreign banking organization would be an eligible lender.

Eligible Borrowers. Eligible borrowers under both programs are businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. An eligible borrower may participate in only one of the MSNLF, the MSELF or the Primary Market Corporate Credit Facility. However, per the Fed’s announcement, an eligible borrower can participate in a Main Street Facility and the PPP.

  • An eligible borrower 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.

MSNLF Eligible Loans. Under the MSNLF, an eligible loan is an unsecured term loan made by an eligible lender to an eligible borrower that was originated on or after April 8, 2020, provided that the loan has the following features:

  • 4 year maturity;
  • Amortization of principal and interest deferred for one year;
  • Adjustable rate of the secured overnight financing rate (SOFR) + 250–400 basis points;
  • Minimum loan size of $1 million;
  • Maximum loan size that is the lesser of (i) $25 million or (ii) an amount that, when added to the eligible borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the eligible borrower’s 2019 earnings before interest, taxes, depreciation and amortization (EBITDA); and
  • Prepayment permitted without penalty.

MSELF Eligible Loans. Under the MSELF, an eligible loan is a term loan made by an eligible lender to an eligible borrower that was originated before April 8, 2020, provided that the upsized tranche of the loan has the following features:

  • 4 year maturity;
  • Amortization of principal and interest deferred for one year;
  • Adjustable rate of SOFR + 250–400 basis points;
  • Minimum loan size of $1 million;
  • 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 EBITDA; and
  • Prepayment permitted without penalty.

Required Attestations. The following attestations will be required with respect to each eligible loan or, with respect to the MSELF, the upsized tranche of each eligible loan. In some cases, these are items to be attested to by the eligible lender, and in other cases the eligible borrower.

  • Use of Proceeds. The eligible lender must attest that the proceeds of the eligible loan will not be used to repay or refinance pre-existing loans or lines of credit made by the eligible lender to the eligible borrower including, with respect to the MSELF, the pre-existing portion of the eligible loan.
  • The eligible borrower must commit to refrain from using the proceeds of the eligible loan or, in the case of the MSELF, the upsized tranche of the eligible loan, to repay other loan balances. The eligible borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the eligible borrower has first repaid the eligible loan in full.
  • Outstanding Lines of Credit. The eligible lender must attest that it will not cancel or reduce any existing lines of credit outstanding to the eligible borrower. The eligible borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the eligible lender or any other lender.
  • Payroll and Employee Retention. The eligible borrower must attest that it requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and that, using the proceeds of the eligible loan or, with respect to the MSELF, the upsized tranche of the eligible loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the eligible loan, or with respect to the MSELF, the upsized tranche of the eligible loan.
  • Leverage Condition. The eligible borrower must attest that, after adding the eligible loan to the borrower’s existing outstanding and committed but undrawn debt, the total amount does not exceed, in the case of the MSNLF, four times the eligible borrower’s 2019 earnings before EBITDA, and in the case of the MSELF, six times the eligible borrower’s 2019 earnings before EBITDA.
  • Compensation, Stock Repurchase and Capital Distribution Restrictions. The eligible borrower must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act.
  • Conflicts of Interest Prohibition. Eligible lenders and eligible borrowers must each certify that they are eligible to participate in the MSNLF or MSELF, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.

Facility Fee. Under the MSNLF, an eligible lender must pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. The eligible lender may require the eligible borrower to pay this fee.

Origination/Upsizing Fee. In addition, under the MSNLF, an eligible borrower must pay an eligible lender an origination fee of 100 basis points of the principal amount of the eligible loan or, in the case of the MSELF, 100 basis points of the upsized tranche of the eligible loan at the time of upsizing.

Loan Servicing Fee. The SPV will pay an eligible lender 25 basis points of the principal amount of its participation in the eligible loan or, with respect to the MSELF, the upsized tranche of the eligible loan, per year for loan servicing.

Termination. Under both the MSNLF and the MSELF, the SPV will cease purchasing participations in eligible loans on September 30, 2020, subject to the discretion of both the Fed and Treasury. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold. 

The Paycheck Protection Program Lending Facility

 The Fed established the Paycheck Protection Program Lending Facility (PPPLF) on April 9 in order to facilitate lending by eligible borrowers to small businesses under the Paycheck Protection Program (PPP) under the CARES Act. Under the PPPLF, the Reserve Banks will lend to eligible borrowers in their district on a non-recourse basis at an interest rate of 35 basis points, taking only PPP loans as collateral. The principal amount of the loan is equal to the principal amount of the PPP loan pledged as collateral. There will not be any fees under the PPPLF.

Eligible Borrower. An eligible borrower under the PPPLF is any depository institution that originates PPP loans. The Fed stated that it is working to expand eligibility to other lenders that originate PPP loans in the near future. Our client memo regarding the PPP is available at, “Coronavirus Aid, Relief, And Economic Security Act (CARES Act): Paycheck Protection Program Summary.”

Maturity. The maturity date of a loan under the PPPLF will be the maturity date of the PPP loan pledged as collateral. The maturity date of the PPPLF’s loan will be accelerated if the underlying PPP loan goes into default and the eligible borrower sells the PPP loan to the Small Business Administration (SBA) to realize on the SBA guarantee. The maturity date of the PPPLF’s extension of credit also will be accelerated to the extent of any loan forgiveness reimbursement received by the eligible borrower from the SBA.

Risk Weighting. A PPP loan will be assigned a risk weight of zero percent under the risk-based capital rules of the federal banking agencies, in accordance with Section 1102 of the CARES Act. In addition, the Fed, the OCC, and the FDIC issued an interim final rule on April 9 to allow banking organizations to neutralize the effect of PPP loans financed under the PPPLF on leverage capital ratios.

Termination. The PPPLF will cease making extensions after September 30, 2020, subject to the discretion of both the Fed and Treasury.

The Municipal Liquidity Facility

The Fed announced on April 9 the establishment of the Municipal Liquidity Facility (MLF) to help state and local governments better manage cash flow pressures in order to continue to serve households and businesses in their communities. The MLF will support lending to U.S. states and the District of Columbia (States), U.S. cities with a population exceeding one million residents (Cities) and U.S. counties with a population exceeding two million residents (Counties).

SPV Purchases of Eligible Notes Issued by Eligible Issuers. Under the MLF, a Reserve Bank will lend to an SPV, on a recourse basis, which SPV will purchase up to $500 billion of eligible notes directly from eligible issuers at the time of issuance. The Reserve Bank loan will be secured by the assets of the SPV. Treasury will fund the SPV with an initial $35 billion equity investment.

Eligible Notes. Eligible notes are tax anticipation notes (TANs), tax and revenue anticipation notes (TRANs), bond anticipation notes (BANs), and other similar short-term notes issued by eligible issuers, provided that such notes mature no later than 24 months from the date of issuance. The eligibility of such notes is subject to Fed review. Eligibility is determined as of the time of issuance of the notes.

Eligible Issuers. An eligible issuer is a State, City or County, or an instrumentality thereof that issues on its behalf. Such issuers are subject to Fed review and approval. In addition, the Fed permits only one issuer per State, City or County to be eligible.

Limit on SPV Purchases. The SPV may purchase eligible notes issued by or on behalf of an eligible issuer in one or more issuances of up to an aggregate amount of 20% of the general revenue from own sources and utility revenue of the applicable State, City or County government for fiscal year 2017. In addition, States may request that the SPV purchase eligible notes in excess of the applicable limit in order to assist political subdivisions and instrumentalities that are not eligible for the Municipal Liquidity Facility.

Pricing. The SPV will purchase eligible notes at a price based on the eligible issuer’s rating at the time of purchase. The Fed noted it will provide more details in the future. In addition, the eligible issuer may call the eligible notes purchased by the SPV at any time at par.

Origination Fee. An origination fee equal to 10 basis points of the principal amount of the eligible issuer’s notes purchased by the SPV must be paid by the eligible issuer from the proceeds of the issuance.

Use of Proceeds. The proceeds of the sale of eligible notes to the SPV may be used to help manage the cash flow impact of income tax deferrals resulting from an extension of an income tax filing deadline; potential reductions of tax and other revenues or increases in expenses related to or resulting from the COVID-19 pandemic; and requirements for the payment of principal and interest on obligations of the relevant State, City, or County. In addition, the proceeds of the sale of eligible notes to the SPV may be used to purchase similar notes issued by, or otherwise to assist, political subdivisions and instrumentalities of the relevant State, City or County for the aforementioned purposes.

Termination. The SPV will cease purchasing eligible notes on September 30, 2020. The Fed and Treasury may extend the Municipal Liquidity Facility at their discretion. The Reserve Bank will continue to fund the SPV after September 30 until the SPV’s underlying assets mature or are sold.

The Primary Market Corporate Credit Facility

The Fed established the PMCCF in order to serve as a funding backstop for corporate debt issued by eligible issuers.

SPV Purchases of Qualifying Bonds or Syndicated Loans from Eligible Issuers. Under the PMCCF, the Federal Reserve Bank of New York (FRBNY) will commit to lend to an SPV on a recourse basis. The SPV will purchase qualifying bonds as the sole investor in a bond issuance and purchase portions of syndicated loans or bonds at issuance. The FRBNY loan will be secured by all the assets of the SPV. On April 9, the Fed announced that the initial funding of the PMCCF would be expanded from $10 billion to $50 billion.

The Fed has announced that it has hired Blackrock to administer PMCCF and the SMCCF. The Fed published the “Terms of Assignment for BlackRock on Behalf of the Federal Reserve Bank of New York Regarding Secondary Market Corporate Credit Facility” on March 27 (the Terms of Assignment). The Terms of Assignment noted that, with respect to the PMCCF, the parties expect to agree to terms and provisions substantially similar to those set for the SMCCF.

Eligible Issuer. An “eligible issuer” under the PMCCF 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.

  • In addition, the issuer must have been rated at least BBB-/Baa3 as of March 22, 2020.
  • The issuer must not be an insured depository institution or depository institution holding company, as defined by the Dodd-Frank Act, and not have received specific support pursuant to the CARES Act or any subsequent federal legislation.
  • In addition, the issuer must satisfy the conflict-of-interest requirements of section 4019 of the CARES Act.

Eligible Assets – Eligible Corporate Bonds as Sole Investor. The PMCCF may purchase corporate bonds as sole investor in a bond issuance that, at the time of the bond purchase by the PMCCF, are issued by an eligible issuer and have a maturity of four years or less.

Eligible Assets – Eligible Syndicated Loans and Bonds Purchased at Issuance. The PMCCF may also purchase portions of syndicated loans or bonds of eligible issuers at issuance that, at the time of the purchase by the PMCCF, are issued by an eligible issuer and have a maturity of four years or less. The PMCCF may purchase no more than 25% of any loan syndication or bond issuance.

Leverage. The PMCCF will leverage Treasury’s equity at 10-1 when acquiring corporate bonds or syndicated loans from issuers that are investment grade at the time of purchase. The PMCCF will leverage Treasury’s equity at 7-1 when acquiring any other type of eligible asset.

Borrowing Limits per Issuer. Eligible issuers may approach the PMCCF to refinance outstanding debt from the period of three months ahead of the maturity date of such outstanding debt.

  • Issuers may additionally approach the Facility at any time to issue additional debt, provided their rating is reaffirmed at BB-/Ba3 or above, with the additional debt [rated] 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 PMCCF may not exceed 130 percent of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020. 
  • The maximum amount of instruments that the PMCCF and the SMCCF combined will purchase with respect to any eligible issuer is capped at 1.5 percent of the combined potential size of the PMCCF and the SMCCF (i.e., $11.25 billion based on a combined maximum facility size of $750 billion).
 

Pricing. The price of eligible corporate bonds will be issuer-specific, informed by market conditions, plus a facility fee of 100 basis points. For 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.

Termination. The PMCCF will cease purchasing eligible assets no later than September 30, 2020, unless extended by the Fed. In addition, the FRBNY will continue to fund the PMCCF after September 30 until its holdings mature or are sold.

The Secondary Market Corporate Credit Facility

SPV Purchases of Eligible Individual Corporate Bonds and Eligible ETFs from Eligible Sellers. Under the SMCCF, the FRBNY will lend, on a recourse basis, to an SPV that 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. The FRBNY loan will be secured by all the assets of the SPV. On April 9, the Fed announced that the initial funding of the SMCCF would be expanded from $10 billion to $25 billion.

Eligible Individual Corporate Bond. An “eligible individual corporate bond” under the SMCCF is a corporate bond that, at the time of the bond purchase by the SMCCF, is issued by an eligible issuer, has a remaining maturity of five years or less and was sold to the SMCCF by an eligible seller.

  • The SMCCF will purchase eligible corporate bonds at fair market value in the secondary market.

Eligible Issuer for Individual Corporate Bonds. An “eligible issuer for individual corporate bonds” 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.

  • In addition, the issuer must have been rated at least BBB-/Baa3 as of March 22, 2020. 
  • The issuer must not be an insured depository institution or depository institution holding company, as defined by the Dodd-Frank Act, and not have received specific support pursuant to the CARES Act or any subsequent federal legislation.
  • In addition, the issuer must satisfy the conflict-of-interest requirements of section 4019 of the CARES Act.

Eligible Seller. An “eligible seller” is 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 business also must satisfy the conflicts-of-interest requirements of Section 4019 of the CARES Act.

Eligible ETF. An “eligible ETF” is a U.S.-listed ETF 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. The remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds. 
  • 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.

Leverage. The SMCCF will leverage Treasury’s equity at 10-1 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 Treasury’s equity at 7-1 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.

Purchase Limits per Issuer/ETF. The maximum amount of instruments that the SMCCF and the PMCCF combined will purchase with respect to any eligible issuer is capped at 1.5 percent of the combined potential size of the SMCCF and the PMCCF (i.e., $11.25 billion based on a combined maximum facility size of $750 billion).

  • The maximum amount of bonds that the SMCCF will purchase from 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. 
  • 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. 

Termination. The SMCCF will cease purchasing eligible corporate bonds and eligible ETFs no later than September 30, 2020, unless extended by the Fed. However, the FRBNY will continue to fund the SMCCF after such date until the SMCCF’s holdings either mature or are sold.

The Term Asset-Backed Securities Loan Facility

The TALF was established to facilitate the issuance of asset-backed securities (ABS) and improve the market conditions for ABS more generally. On April 9, the scope of the TALF was expanded to add as eligible collateral commercial mortgage-backed securities (CMBS), and ABS where the underlying credit exposure is to equipment leases or leveraged loans.

SPV to Make Non-Recourse Loans to Eligible Borrowers Fully Secured by Eligible Collateral. Under the TALF, the FRBNY will lend to an SPV on a recourse basis. Treasury will make an equity investment of $10 billion in the SPV, and the SPV will make up to $100 billion of non-recourse loans available with three-year terms. Such loans will be fully secured by eligible ABS.

Eligible Borrower. Under the TALF, an “eligible borrower” is a U.S. company that owns eligible collateral and maintains an account relationship with a primary dealer.

  • A U.S. company is a business that is 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.

Eligible Collateral. “Eligible collateral” includes U.S. dollar denominated cash ABS, that have a credit rating in the highest long-term or, in the case of non-mortgage backed ABS, the highest short-term investment-grade rating category and do not have a credit rating below the highest investment-grade rating category.

  • In addition, all or substantially all of the credit exposures underlying eligible ABS must have been originated by a U.S. company and the issuer of eligible collateral must be a U.S. company. 
  • Eligible ABS, except CMBS, must be issued on or after March 23, 2020. 
  • CMBS issued on or after March 23, 2020, will not be eligible. The underlying credit exposures of CMBS must be to real property located in the United States or one of its territories.
  • Single-asset single-borrower (SASB) CMBS and commercial real estate collateralized loan obligations (CRE CLOs) will not be eligible collateral. 
  • Only static Collateralized Loan Obligations (CLOs) will be eligible collateral. 
  • The Fed noted that the feasibility of adding other asset classes to the facility or expanding the scope of existing asset classes will be considered in the future.
  • Eligible collateral must not bear interest payments that step up or step down to predetermined levels on specific dates. 

Conflicts of interest. Eligible borrowers and issuers of eligible collateral will be subject to the conflicts of interest requirements of section 4019 of the CARES Act.

Underlying Credit Exposures. The underlying credit exposures of such ABS may not  include exposures that are themselves cash ABS or synthetic ABS and must be one of the following: 

  • Auto loans and leases;
  • Student loans;
  • Consumer or corporate credit card receivables;
  • Equipment loans and leases;
  • Floorplan loans;
  • Insurance premium finance loans;
  • Certain small business loans that are guaranteed by the Small Business Administration;
  • Leveraged Loans; or
  • Commercial mortgages.

The TALF’s terms contain a Haircut Schedule that is consistent with the haircut scheduled used for the TALF established in 2008.

Pricing. The interest rate for CLOs will be 150 basis points over the 30-day average SOFR. The interest rate for SBA Pool Certificates (7(a) loans) will be the top of the federal funds target range plus 75 basis points. The interest rate for SBA Development Company Participation Certificates (504 loans) will be 75 basis points over the 3-year fed funds overnight index swap (OIS) rate.

Pre-Payment and Termination. A borrower under the TALF may, at its option, pre-pay its loan, in whole or in part, but the TALF does not permit substitution of collateral during the term of the loan. Unless extended by the Fed, the TALF will not issue new credit after September 30, 2020. 

The Money Market Mutual Fund Liquidity Facility

The Fed announced on March 18 the establishment of a Money Market Mutual Fund Liquidity Facility (MMMLF), which was followed by publication of an interim final rule on March 19 and the expansion of the facility on March 20. On March 27, the Fed published updated MMMLF FAQs (the FAQs) to clarify the scope and procedures of the MMMLF. The goal of the MMMLF is to assist money market funds in meeting redemptions by households and other investors, ensuring proper functioning of the market and flow of credit to the broader economy.

Money Market Mutual Funds. Under the MMMLF, the Federal Reserve Bank of Boston (Boston Fed) will make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from a Prime, Single State or Other Tax Exempt money market fund. Loans made under the MMMLF are made without recourse to the borrower, provided the requirements of the MMMLF are met. Treasury will provide $10 billion to fund the MMMLF, using the ESF.

Eligible Financial Institutions. Under the MMMLF, “eligible financial institutions” include all U.S. depository institutions, U.S. bank holding companies (parent companies incorporated in the United States or their U.S. broker-dealer subsidiaries) or U.S. branches and agencies of foreign banks are eligible to borrow under the Facility.

One Year Facility. The maturity date of a loan will be the maturity date of the eligible pledged collateral to secure the loan made under the MMMLF, except in no case will the maturity date of a loan exceed 12 months.

Broad Range of Collateral. Under the MMMLF, assets must be concurrently purchased and pledged as collateral in order to secure a loan. An eligible financial institution may not borrow under the MMMLF against collateral it owned prior to the creation of the facility. The following is an exhaustive list of acceptable collateral under the MMMLF: 

  • U.S. Treasuries & Fully Guaranteed Agencies;
  • Securities issued by U.S. GSEs;
  • Rated asset-backed commercial paper that is issued by a U.S. issuer;
  • Rated unsecured commercial paper that is issued by a U.S. issuer; and
  • Rated municipal short-term debt that has a maturity that does not exceed 12 months.

A “U.S. issuer” is an entity organized under the laws of the United States or a political subdivision or territory thereof, or is a U.S. branch of a foreign bank.

Also, floating rate instruments are acceptable collateral under the same fixed-rate terms and purchase price as other loans. Accordingly, the interest rate risk will be borne by the borrower.

Commercial paper that has an extendable feature such that the CP maturity date can be extended under certain conditions is not eligible to be pledged to the MMMLF.

In addition, the MMMLF may accept receivables from certain repurchase agreements. However, the facility will not, at this time, accept variable rate demand notes or tender option bonds.

Regulatory Capital Treatment. The Fed, OCC and FDIC will fully exempt from risk-based capital and leverage requirements (i) any asset pledged to the MMMLF and (ii) any asset purchased from a fund on or after March 18, 2020 that the firm intends to pledge to the MMMLF upon its opening. This is reflected in the agencies’ interim final rule published on March 19, which states that a banking organization would be permitted to exclude non-recourse exposures acquired as part of the MMMLF from its total leverage exposure, average total consolidated assets, advanced approaches-total risk-weighted assets and standardized total risk-weighted assets, as applicable.

FAQs. The FAQs provided, among other things, the following clarifications:

  • It is not necessary to have a master account with the Boston Fed or any other Federal Reserve Bank in order to borrow under MMMLF. If an eligible financial institution has an account with any Federal Reserve Bank, the loan will settle through the existing account. In addition, eligible financial institutions without a Federal Reserve Bank account may borrow through a correspondent that does have such account.
  • The documentation required to participate in the MMMLF will be posted at www.frbdiscountwindow.org. Prior to receiving a loan, a prospective borrower must provide written certifications that it and the money market mutual fund are not insolvent, as the term is used in the Fed’s Regulation A.
  • Eligible financial institutions may pledge commercial paper bought from proprietary funds under this facility. However, asset purchases are still subject to applicable banking laws, securities laws and all other applicable laws.

The FAQs also addressed specific instructions to follow and documentation necessary to submit when requesting a loan under the MMMLF.

Termination. Absent Fed extension, the MMMLF will cease making loans on September 30, 2020.

The Commercial Paper Funding Facility

The Fed announced on March 17 the establishment of a Commercial Paper Funding Facility (CPFF). An update to the terms of the CPFF was later announced on March 23 and an updated set of FAQs was released on April 10. The Fed engaged PIMCO to serve as investment manager for the program, and State Street Bank as custodian and accounting administrator. The program documents, including Registration Materials, have been publicly posted on the FRBNY website.

In the 2008 financial crisis, the seizing up of the commercial paper market was viewed as having significant knock-on effects, including on money market mutual funds. The Fed aims to encourage continued term lending in the commercial paper market by eliminating the risk that eligible issuers of commercial paper will not be able to repay investors by rolling over their maturing commercial paper obligations.

SPV to Purchase Eligible CP from Eligible Issuers. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a SPV that will purchase unsecured and asset-backed commercial paper rated A1/P1 (as of March 17, 2020 or at the time of the sale) directly from eligible issuers. If such issuer is subsequently downgraded, a one-time sale of commercial paper to the SPV will be permitted so long as the issuer is rated at least A2/P2/F2. The FRBNY does not specify a maximum size for the facility; however the FAQs state that the effective limit will be the sum of the maximum amounts all individual eligible issuers would be able to issue to the facility.

Treasury Funding. The FRBNY will provide financing to the SPV on a recourse basis, and the obligation of the SPV to the FRBNY will be secured by all of the assets of the SPV. As part of the CPFF, the U.S. Treasury will use the ESF to make an equity investment of $10 billion in the SPV.

Eligible Issuers of CP. The SPV will purchase from solely from eligible issuers three-month U.S. dollar-denominated commercial paper through the FRBNY’s primary dealers. Eligible issuers are U.S. issuers of commercial paper, including municipal issuers and U.S. issuers with a foreign parent company.

  • Commercial paper issued by co-issuers will be purchased, subject to the FRBNY’s discretion, if at least one of the co-issuers is an eligible issuer.
  • In addition, the SPV will not purchase commercial paper from issuers that were inactive prior to the creation of the CPFF. Under the CPFF, an issuer will be deemed inactive if it did not issue commercial paper to institutions other than the sponsoring institution for any consecutive period of at least three months between March 16, 2019 and March 16, 2020.
  • A U.S. branch of a foreign banking organization with commercial paper outstanding between March 16, 2019, and March 16, 2020 may sell such commercial paper to the SPV, subject to any other requirements of the CPFF. The U.S. branch, however, may not sell any commercial paper issued by other parts of the banking organization to the SPV. In addition, in determining its applicable commercial paper limit, the U.S. branch must not include any commercial paper issued by other parts of the organization.
  • Municipal commercial paper issuers may not participate in the CPFF.

Limits on SPV Purchases. The SPV may not own more than the greatest amount of U.S. dollar-denominated commercial paper of a single issuer that the issuer had outstanding on any day between March 16, 2019 and March 16, 2020. In addition, the SPV will not purchase additional commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer’s limit. An issuer must include extendable commercial paper when calculating the maximum amount of the issuer’s commercial paper that the SPV may own at one time. For any issuer that was downgraded from A1/P1/F1 to A2/P2/F2 after March 17, 2020, the SPV will not purchase more of the issuer’s commercial paper than the amount of U.S. dollar-denominated commercial paper the issuer had outstanding the day before it was downgraded. If an issuer’s credit ratings are split, at least two of such ratings must be A1/P1/F1 or A2/P2/F2 to be treated as A1/P1/F1 or A2/P2/F2, respectively. The SPV will not purchase interest-bearing commercial paper.

Repurchase of Commercial Paper. An eligible issuer may repurchase its own outstanding commercial paper from investors and finance that repurchase by selling commercial paper to the SPV through the FRBNY’s primary dealers.

SPV Pricing. The CPFF’s pricing will be based on the then-current three-month overnight index swap rate plus 110 basis points for commercial paper rated A1/P1/F1 and 200 basis points for commercial paper rated A2/P2/F2. Each issuer’s facility fee (payable at the time the issuer registers to use the CPFF) will be equal to 10 basis points of the maximum amount of its commercial paper the SPV may own. An issuer may not base its facility fee on the amount of commercial paper it intends to sell to the SPV if it does not intend to sell its maximum allowable amount of commercial paper to the SPV.

Termination. Absent Fed extension, the CPFF will become operational in the first half of April 2020 and terminate on March 17, 2021. The FRBNY will continue to fund the SPV after such date until its underlying assets mature.

The Primary Dealer Credit Facility

In a parallel action, the Fed announced, on March 17, 2020, the establishment of a Primary Dealer Credit Facility (PDCF). In addition, the FRBNY released a set of FAQs concerning the PDCF on March 19.

Broad Range of Collateral. Under the PDCF, primary dealers of the FRBNY will have access to credit that may be collateralized by, among other things, investment grade corporate debt securities, international agency securities, commercial paper, municipal bonds, mortgage-backed securities, asset backed securities, as well as certain equity securities. Foreign currency denominated securities are not among the eligible collateral, however. The Fed has also kept open the possibility of adding additional collateral in the future.

Interest Rate. The FRBNY will offer overnight and term funding with maturities up to 90 days beginning on March 20. (This is a difference from the PDCF offered between 2008 and 2010, which only provided overnight loans.) The interest rate charged will be the primary credit rate, or discount rate, at the FRBNY. Loans will be made recourse to the primary dealer entity.

Six Month Facility. The PDCF will be in place for the next six months, unless extended.

Liquidity Coverage Ratio. Notably, the FAQs clarifies, among other things, how funding provided through the PDCF will be treated with respect to the Liquidity Coverage Ratio (LCR). According to the FRBNY, entities subject to the LCR rule are not be required to recognize an outflow for a secured funding transaction that matures more than 30 calendar days from the calculation date. Accordingly, primary dealers that are affiliates of entities subject to the LCR rule would not recognize an outflow for so long as the maturity of the loan is not within 30 calendar days of a firm’s calculation date. The FRBNY noted that as the remaining maturity of the loan declines, the primary dealer may choose to pre-pay the loan and request a new loan up to 90 days.

Other Fed Actions

Fed Discount Window and Reserve Requirements

The Fed announced on March 15 (a Sunday) that it would cut its benchmark federal funds rate by a full percentage point to zero. As of the date of this publication, the Fed Funds target rate was in a range of 0 to 0.25 percent, down from a range of 1 to 1.25 percent.

  • Aiming to instill confidence in the market, a group of major banks announced they had accessed the Fed Discount Window (which in normal circumstances might be seen as a sign of financial weakness) shortly after the Fed and other banking agencies urged banks to do so on March 16. On March 15, the Fed had lowered the primary credit rate by 150 basis points to 0.25 percent.
  • The Fed also announced that depository institutions could borrow from the discount window for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis.
  • The Fed also reduced the reserve requirement ratios to zero percent on March 15, 2020. This reduction will be effective on March 26, 2020, which marks the beginning of the next reserve maintenance period. The Fed has not indicated whether weekly reporting of deposits will continue.

Also on March 15, the Fed, together with the European Central Bank, Bank of England, Bank of Japan and the Swiss National Bank, announced coordinated action to enhance liquidity through standing U.S. dollar liquidity swap line arrangements. The pricing on such arrangements will be the U.S. dollar overnight index swap rate plus 25 basis points, which represents a reduction in the rate by 25 basis points.

Additional Fed Swap Lines and Temporary Repo Facility

The Fed has taken measured steps to help bolster global U.S. dollar funding markets. The Fed first announced on March 19 the establishment of temporary U.S. dollar liquidity arrangements (swap lines) with additional central banks. A set of FAQs was released the same day, which provides a policy explanation of this Fed action and description of how the swap lines are structured. The Fed then announced on March 31 the establishment of a temporary repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility), along with a set of FAQs.

The additional central banks represent countries with which the Fed established lines during the last financial crisis, but which had been allowed to expire.

  • Swap Lines. The swap lines will support $60 billion in U.S. dollar liquidity each for the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Korea, the Banco de Mexico, the Monetary Authority of Singapore, and the Sveriges Riksbank (Sweden). In addition, $30 billion will be available to each of the Danmarks Nationalbank (Denmark), the Norges Bank (Norway) and the Reserve Bank of New Zealand.
  • Termination. The swap lines will terminate in 6 months.
  • No Change. The Fed maintains its existing swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank.

Under the FIMA Repo Facility, central banks and other international monetary authorities with accounts at the FRBNY (FIMA account holders) may enter into repurchase agreements with the Fed. As part of these repurchase agreements, such account holders temporarily exchange their U.S. Treasury securities held with the Fed for U.S. dollars. These U.S. dollars can then be made available to institutions in their jurisdictions.

Eligibility. Only FIMA account holders will be eligible to apply to use the FIMA Repo Facility.

Structure. FIMA account holders will be able to sell U.S. Treasuries to the Fed’s Open Market Account and agree to buy them back at the maturity of the repurchase agreement. The term of the repurchase agreements will be overnight, but will have the option of being rolled over as needed. The margin requirements applicable to the collateral are similar to those applicable to the Discount Window.

Rate. The repurchase transaction would be conducted at an interest rate of 25 basis points over the rate on Interest on Excess Reserves (IOER). This generally exceeds the private repo rates when the Treasury market is functioning well, so this facility would be primarily for unusual circumstances.

Authorization. The FIMA Repo Facility was authorized by the FOMC. In addition, the Fed may approve or deny requests by foreign central banks to use the facility.

Authors and Contributors

Reena Agrawal Sahni

Partner

Financial Institutions Advisory & Financial Regulatory

+1 212 848 7324

+1 212 848 7324

New York

Timothy J. Byrne

Counsel

Financial Institutions Advisory & Financial Regulatory

+1 212 848 7476

+1 212 848 7476

New York

Bradley K. Sabel

Of Counsel

Financial Institutions Advisory & Financial Regulatory

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+1 212 848 8410

New York

Le-el Sinai

Associate

Financial Institutions Advisory & Financial Regulatory

+1 212 848 7550

+1 212 848 7550

New York

Gillian Emmett Moldowan

Partner

Compensation, Governance & ERISA

+1 212 848 5356

+1 212 848 5356

New York

Jeffrey J. Resetarits

Partner

Litigation

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+1 212 848 7116

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John A. Nathanson

Partner

Litigation

+1 212 848 8611

+1 212 848 8611

New York