On March 23, 2020, the Federal Reserve announced several new measures aimed at confronting the economic fallout from the COVID-19 pandemic and keeping credit markets functioning. One of these measures is the establishment of a Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuances with the goal of providing liquidity to large employers.
The PMCCF will be open to domestic investment-grade companies and will provide bridge financing of up to four years. Under the PMCCF, the New York Federal Reserve, through a special-purpose vehicle, will buy corporate bonds directly from eligible issuers and make loans to eligible issuers. In order to provide even more immediate relief, borrowers have the flexibility to elect to make interest payments during the first six months in kind, extendable at the Federal Reserve's discretion. Borrowers that elect in-kind interest payments are prohibited from paying dividends or making stock buybacks during such period.
The Federal Reserve's announcement also set forth basic terms of the PMCCF, such as a maximum loan or bond maturity of up to four years, a commitment fee of 100 bps and a call right by the issuer for the bonds and loans under the PMCCF at any time at par. Interest rates will be set based on market conditions. The PMCCF will cease purchasing bonds or extending loans on September 30, 2020, unless extended by the Federal Reserve. The PMCCF will continue to be funded after such date until the PMCCF's underlying assets mature.
Key Considerations for Interested Companies
While the Federal Reserve has not yet provided procedures or a timeline for accessing the PMCCF, there are certain steps interested companies can take now in order to prepare for access to the PMCCF.
- Determine Eligible Issuer Status. In order to be eligible, an issuer (A) must (i) be a U.S. company, (ii) be headquartered in the U.S., (iii) have material U.S. operations and (iv) be rated at least BBB-/Baa3 by a major nationally recognized statistical rating organization (NRSRO) (or by two or more NRSROs if rated by multiple major NRSROs) and (B) cannot be a company expected to receive direct financial assistance under pending federal legislation.
- Determine Amount of Outstanding Debt. The PMCCF limits the maximum amount of bonds or loans under the PMCCF to the applicable percentage of the eligible issuer's maximum outstanding bonds and loans on any day between March 22, 2019, and March 22, 2020, such percentage being 110 to 140 percent depending on the issuer's credit rating.
- Determine Additional Debt Capacity. Eligible issuers should review their existing debt instruments, organizational documents, applicable regulations and credit rating limitations in order to assess additional debt capacity. In addition, issuers with multiple eligible subsidiaries should consider which entity is most suitable to issue additional debt.
- Obtain Necessary Approvals. Interested companies should review their organizational documents, existing debt instruments and applicable regulatory requirements to determine any necessary approvals to issue bonds or borrow under the PMCCF, such as board, shareholder, lender or regulatory approval.
- Monitor announcements by Federal Reserve and contact your bankers. Interested companies should monitor announcements by the Federal Reserve regarding timing, logistics and other additional or modified requirements related to the PMCCF. In addition, we expect that member banks will be invaluable in helping corporate issuers interface with the New York Federal Reserve as the program rolls out, so interested companies should reach out to their key bankers to stay ahead of the curve. We will be providing regular updates as more information becomes available from the Federal Reserve.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.