On April 9, the Federal Reserve took the following actions to provide up to an additional $2.3 trillion in economic aid to support the economy during the coronavirus pandemic:
- Supplying liquidity to financial institutions participating in the Paycheck Protection Program (PPP).
- Establishing the Main Street Lending Program, under which the Federal Reserve (the Fed) will purchase up to $600 billion in loans made by eligible lenders to U.S. companies with up to 10,000 employees or up to $2.5 billion in 2019 annual revenue.
- Expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF).
- Expanding the scope of the Term Asset-Backed Securities Loan Facility (TALF).
- Establishing the Municipal Liquidity Facility, under which up to $500 billion in loans may be made to states and municipalities. The Fed also released the term sheets for the programs referenced above. The terms of these programs are detailed below. Unless extended, each of these programs terminates on September 30, 2020.
The Fed’s actions are the latest in a series of emergency monetary policy interventions to support the ailing U.S. economy during the COVID-19 pandemic. Taken together, they represent an unprecedented exercise of the Fed’s lending authority, including its first direct lending facility to state and local governments.
With interest rates already at zero and quantitative easing underway, these new facilities demonstrate that the Fed will continue to act so long as the crisis continues, even deploying measures outside the Fed’s usual toolkit. As a result, we believe businesses, consumers and now even governmental entities can expect continued support by monetary policymakers for as long as the adverse economic effects of the COVID-19 pandemic continue.
As with the Small Business Administration (SBA) PPP when it was announced, there remain many open questions regarding these new facilities. Additional details should be forthcoming, and we also anticipate changes to the programs in response to lender and borrower concerns. For example, conditions on taking Main Street loans (such as restrictions on dividends and stock buybacks) may well be relaxed if enough companies are deterred from applying. We are closely following developments and will report on additional guidance as it becomes available.
Paycheck Protection Program Lending Facility
All depository institutions that originate PPP loans are eligible to borrow under the PPP lending facility, which is intended to facilitate lending of PPP loans. The Fed indicated that it intends to expand eligibility to other PPP lenders in the near future. This will be critical in enabling fintechs and other nonbank lenders to participate, since their capital costs otherwise make participation impractical.
Only PPP loans are eligible to serve as collateral for this loan facility, and the PPP loans pledged as collateral will be valued at the principal amount of the PPP loans. Extensions of credit will be made in a principal amount equal to the principal amount of the PPP loans pledged and will be made without recourse to the borrower and assigned a risk weight of 0% under the risk-based capital rules of the federal banking agencies. The maturity date of an extension of credit will equal the maturity date of the PPP loan, though this may be accelerated in certain situations. Extensions of credit will be made at a rate of 35 basis points, and there are no associated fees.
Main Street New Loan Facility
The Main Street New Loan Facility provides for the creation of a special purpose vehicle (SPV) by the Federal Reserve Bank that will purchase from eligible lenders new unsecured term loans made to eligible borrowers originated on or after April 8, 2020. Eligible lenders under the Main Street New Loan Facility are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. All businesses with up to 10,000 employees are eligible borrowers, including businesses with 500 or fewer employees; businesses with more than 10,000 employees can qualify if their 2019 annual revenue was less than $2.5 billion. Note that this program may be an option for private equity or venture capital-backed businesses that may have otherwise had difficulty qualifying for the PPP given the SBA’s affiliation rules as to employee head count. The Main Street Lending Program is available to businesses in addition to loans received under PPP for small businesses.
An eligible loan is an unsecured term loan made by an eligible lender to an eligible borrower originated on or after April 8, 2020, with (1) a four-year maturity; (2) amortization of principal and interest deferred for one year; (3) an adjustable rate of SOFR + 250-400 basis points; (4) a minimum loan size of $1 million; (5) a maximum loan size that is the lesser of $25 million or an amount that makes the borrower’s undrawn debt exceed four times the borrower’s 2019 earnings before interest, taxes, depreciation and amortization; and (6) prepayment permitted without penalty. Ninety-five percent of the loan will be purchased at par value by the Main Street program SPV, and the lender will retain 5%. Certain attestations are required, including that it will make reasonable efforts to maintain its payroll and retain its employees while the Main Street Lending Program debt remains outstanding.
An eligible lender will pay a facility fee of 100 basis points, and the lender may require the borrower to pay this fee. An eligible borrower will pay an eligible lender an origination fee of 100 basis points, and the SPV will pay an eligible lender 25 basis points of the principal amount of its participation per annum for loan servicing.
The Main Street New Loan Facility and the Main Street Expanded Loan Facility (described below) both require a borrower to agree to certain significant restrictions during the term of the loan and for 12 months thereafter, including (i) prohibiting stock repurchases, dividends and capital distributions, and (ii) prohibiting the borrower from increasing compensation to employees who earned more than $425,000 in 2019 and requiring reductions in compensation to employees who earned more than $3 million in 2019.
Main Street Expanded Loan Facility
The term sheet for the Main Street Expanded Loan Facility mostly mirrors that for the Main Street New Loan Facility but provides that the Main Street Program SPV will purchase 95% participations in upsized tranches of existing loans made to eligible borrowers and has the following exceptions:
- Eligible borrowers must not be participating in the Main Street New Loan Facility.
- The maximum loan size is the lesser of $150 million, 30% of the eligible borrower’s existing outstanding and committed but undrawn bank debt, or an amount that makes the borrower’s existing outstanding and committed but undrawn debt exceed six times the borrower’s 2019 earnings before interest, taxes, depreciation and amortization.
- Any collateral securing an eligible loan will secure the loan participation on a pro rata basis.
- There is no facility fee.
Term Asset-Backed Securities Loan Facility (TALF)
TALF is a facility intended to help lenders meet the credit needs of households and U.S. businesses by supporting the issuance of asset-backed securities. All U.S. companies (created and organized in the U.S. or under U.S. laws and having significant operations and a majority of its employees in the U.S.) that own eligible collateral and maintain an account relationship with a primary dealer are eligible to borrow under the TALF. Under the expanded program, both commercial mortgage-backed securities and collateralized loan obligations (CLOs) other than commercial real estate CLOs will also be included in the assets that are eligible to be pledged to the Fed under the TALF.
Eligible collateral includes U.S. dollar-denominated cash asset-backed securities (ABS) for one of the delineated credit exposures 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 from at least two eligible nationally recognized statistical rating organizations (NRSROs) and do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO.
For CLOs, the interest rate will be 150 basis points over the 30-day average secured overnight financing rate (SOFR). For SBA Pool Certificates (7(a) loans), the interest rate will be the top of the federal funds target range plus 75 basis points. For SBA Development Company Participation Certificates (504 loans), the interest rate will be 75 basis points over the three-year federal funds overnight index swap (OIS) rate. For all other eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 125 basis points over the two-year OIS rate for securities with a weighted average life less than two years, or 125 basis points over the three-year OIS rate for securities with a weighted average life of two years or greater.
The pricing for other eligible ABS will be set forth in the forthcoming detailed terms and conditions. The SPV will assess an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral, and each loan provided will have a maturity of three years.
Primary Market Corporate Credit Facility (PMCCF)
The PMCCF is an SPV created by the Fed designed to maintain the flow of credit to large employers in the face of the coronavirus pandemic. The Fed will lend money to the SPV, which will make loans to investment-grade corporations and buy eligible corporate bonds and portions of syndicated loans or bonds from eligible issuers to help them continue to function through the crisis.
To be an eligible issuer, a U.S. company (1) must be rated at least BBB-/Baaa3 as of March 22, 2020 (and at the time of purchase) by an NRSRO; (2) must not be an insured depository institution or depository institution holding company; (3) must not have received specific support pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act or any subsequent federal legislation; and must satisfy the conflicts-of-interest requirements of Section 4019 of the CARES Act. Limits are also placed on eligible issuers.
Pricing for eligible corporate bonds will be issuer-specific, informed by market conditions and include a 100 basis point facility fee. Pricing for eligible syndicated loans and bonds will be the same pricing as that of other syndicate members along with a 100 basis point facility fee on the PMCCF’s share of the syndication.
Secondary Market Corporate Credit Facility (SMCCF)
The SMCCF is an SPV launched by the Fed to support the corporate bond market in the face of the pandemic. The SMCCF will purchase eligible corporate bonds and bond electronically traded funds (ETFs) in the secondary market. The SMCCF will purchase eligible corporate bonds at fair market value, and will not purchase shares of eligible ETFs when they are trading at prices that materially exceed the estimated net asset value of the underlying portfolio.
To be an eligible issuer, a U.S. company (1) must be rated at least BBB-/Baaa3 as of March 22, 2020 (and at the time of purchase) by an NRSRO; (2) must not be an insured depository institution or depository institution holding company; (3) must not have received specific support pursuant to the CARES Act or any subsequent federal legislation; and must satisfy the conflicts-of-interest requirements of Section 4019 of the CARES Act. Eligible sellers must be U.S. companies that satisfy the conflicts-of-interest requirements discussed above.
Municipal Liquidity Facility
The Municipal Liquidity Facility will commit to lend to an SPV, which will purchase eligible notes directly from eligible issuers at the time of issuance. Eligible notes include tax anticipation notes, tax and revenue anticipation notes, bond anticipation notes, and other similar short-term notes issued by eligible issuers. Eligible issuers include states, cities and counties with a limit on the aggregate amount of 20% of general revenue for fiscal year 2017 and a limit of one issuer per state, city or county.
Pricing will be based on the eligible issuer’s rating at the time of purchase, with details to be provided later. Each eligible issuer that participates must pay an origination fee equal to 10 basis points of the principal amount of the notes purchased. There are also restrictions on the use of proceeds.
