The $2 T federal stimulus package provides $500 B for the U.S. Treasury Department to backstop through its Exchange Stabilization Fund two loan programs of the Federal Reserve Bank being used to support large companies. Millions of unemployed and concerns with gathering in airports, car dealers and other business are going to lead to a double-digit decline in the U.S. Gross Domestic Product and a major destabilization of many of America’s largest companies. The Federal Reserve Bank’s 13(3) lending is a critical tool that can be used in times of crisis to help mitigate extraordinary pressure in financial markets that would otherwise have severe adverse consequences for households, businesses, and the U.S. economy.

To address this large company destabilization, the Federal Reserve Bank on March 23, 2020 established two new organizations to support highly rated U.S. corporations. The Primary Market Corporate Credit Facility (PMCCF) allows the Fed to lend directly to corporations by buying new bond issuances and providing loans. $10 B in initial funding was provided to the PMCCF. The PMCCF will purchase eligible corporate bonds directly from eligible issuers and will make eligible loans to eligible issuers Borrowers must be U.S. headquarters companies may defer interest and principal payments for at least the first six months so that they have cash to pay employees and suppliers. But during this period, borrowers may not pay dividends or buy back stocks. The maximum amount of outstanding bonds or loans of an eligible issuer that borrows from the Facility may not exceed the applicable percentage of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020: 140 percent for eligible assets/eligible issuers with a AAA/Aaa rating from a major NRSRO; 130 percent for eligible assets/eligible issuers with a AA/Aa rating from a major NRSRO; 120 percent for eligible assets/eligible issuers with a A/A rating from a major NRSRO; or 110 percent for eligible assets/eligible issuers with a BBB/Baa rating from a major NRSRO. The PMCCF will purchase bonds and make loans that have interest rates informed by market conditions. At the borrower’s election, all or a portion of the interest due and payable on each interest payment date may be payable in kind for 6 months, extendable at the discretion of the Board of Governors of the Federal Reserve System. Such interest amount will be added to, and made part of, the outstanding principal amount of the bond or loan. A borrower that makes this election may not pay dividends or make stock buybacks during the period it is not paying interest. The commitment fee will be set at 100 bps, and bonds and loans under the Facility are callable by the eligible issuer at any time at par. Finally, the PMCCF will cease purchasing eligible corporate bonds or extending loans on September 30, 2020, unless the Facility is extended by the Board of Governors of the Federal Reserve System. The Reserve Bank will continue to fund the Facility after such date until the Facility’s underlying assets mature.

Also, the Federal Reserve Bank created the Secondary Market Corporate Credit Facility (“SMCC”), the Federal Reserve Bank of New York (“Reserve Bank”) to lend, on a recourse basis, to a special purpose vehicle (“SPV”) that will purchase in the secondary market corporate debt issued by eligible issuers. The SPV 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 Reserve Bank will be secured by all the assets of the SPV. The SMCC may purchase corporate bonds that meet each of the following criteria at the time of purchase by the SMCC: issued by an eligible issuer; rated at least BBB-/Baa3 by a major nationally recognized statistical rating organization (“NRSRO”) and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs, in each case subject to review by the Federal Reserve; and have a remaining maturity of five years or less. The SMCC also may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds. Eligible issuers for direct purchases of individual corporate bonds on the secondary market are U.S. businesses with material operations in the United States. Eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation. The maximum amount of bonds that the SMCC will purchase from any eligible issuer will be capped at 10 percent of the issuer’s maximum bonds outstanding on any day between March 22, 2019 and March 22, 2020. The facility will not purchase more than 20 percent of the assets of any ETF as of March 22, 2020. The SMCC will purchase eligible corporate bonds at fair market value in the secondary market, avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio, and cease purchasing eligible corporate bonds and eligible ETFs no later than September 30, 2020, unless the Facility is extended by the Board of Governors of the Federal Reserve System.

The additional federal funding for the Federal Reserve lending programs from the Congress did not come without some strings. The federal stimulus legislation produced program rules that must be following and made the following program funding and policy restrictions:
⦁ Provides $500 B to Treasury’s Exchange Stabilization Fund to provide loans, loan guarantees, and other investments, distributed as follows:
⦁ Direct lending, including:
⦁ $25 B for passenger air carriers, eligible businesses that are certified under part 145 of title 15, Code of Federal Regulations, and approved to perform inspection, repair, replace, or overhaul services, and ticket agents;
⦁ $4 B for cargo air carriers; and
⦁ $17 B for businesses important to maintaining national security.
⦁ $454 B, as well as any amounts available but not used for direct lending, for loans, loan guarantees, and investments in support of the Federal Reserve’s lending facilities to eligible businesses, states, and municipalities.
⦁ All direct lending must meet the following criteria:
⦁ Alternative financing is not reasonably available to the business;
⦁ The loan is sufficiently secured or made at an interest rate that reflects the risk of the loan and, if possible, not less than an interest rate based on market conditions for comparable obligations before the coronavirus outbreak;
⦁ The duration of the loan shall be as short as possible and shall not exceed 5 years;
⦁ Borrowers and their affiliates cannot engage in stock buybacks, unless contractually obligated, or pay dividends until the loan is no longer outstanding or one year after the date of the loan;
⦁ Borrowers must, until September 30, 2020, maintain its employment levels as of March 24, 2020, to the extent practicable, and retain no less than 90 percent of its employees as of that date;
⦁ A borrower must certify that it is a U.S.-domiciled business and its employees are predominantly located in the U.S.;
⦁ The loan cannot be forgiven; and
⦁ In the case of borrowers critical to national security, their operations are jeopardized by losses related to the coronavirus pandemic.
⦁ Any lending through a 13(3) facility established by the Federal Reserve under this Section must be broad-based, with verification that each participant is not insolvent and is unable to obtain adequate financing elsewhere.
⦁ Loan forgiveness is not permissible in any such credit facility.
⦁ Treasury will endeavor to implement a special 13(3) facility through the Federal Reserve targeted specifically at nonprofit organizations and businesses between 500 and 10,000 employees, subject to additional loan criteria and obligations on the recipient, such as:
⦁ The funds received must be used to retain at least 90 percent of the recipient’s workforce, with full compensation and benefits, through September 30, 2020;
⦁ The recipient will not outsource or offshore jobs for the term of the loan plus an additional two years;
⦁ The recipient will not abrogate existing collective bargaining agreements for the term of the loan plus an additional two years; and
⦁ The recipient must remain neutral in any union organizing effort for the term of the loan.
⦁ Prohibits recipients of any direct lending authorized by this Title from increasing the compensation of any officer or employee whose total compensation exceeds $425,000, or from offering such employees severance pay or other benefits upon termination of employment which exceeds twice the maximum total annual compensation received by that employee, until one year after the loan is no longer outstanding.
⦁ Officers or employees making over $3 M last year would also be prohibited from earning more than $3 M plus fifty percent of the amount their compensation last year exceeded $3 M.

COVID 19 is pushing traditionally conservative institutions to take radical steps. The Federal Reserve loan programs are just one of those steps the federal government is taking to address the COVID 19 driven economic slowdown.

Contact David Robinson at drobinson@montrosegroupllc.com of the Montrose Group if you need assistance with these Federal Reserve Bank loan programs.