Today, the Federal Reserve announced new lending facilities and expanded existing lending facilities for mid-sized “Main Street” businesses, larger investment grade businesses, capital markets and municipal securities. The Department of the Treasury (“Treasury”) and the Federal Reserve have not yet committed the full $454 billion of CARES Act money allocated for credit support to lending facilities; more loan programs, or expansion of these now existing loan programs, could be forthcoming.
Summary of Programs
The previously announced Primary Market Corporate Credit Facility (PMCCF) will continue to purchase corporate bonds or syndicated loans issued by or made to any borrower that is rated at investment grade (BBB-/Baa3 or higher), but now will also purchase those assets with respect to a borrower that was investment grade as of March 22, 2020, and was subsequently downgraded to not lower than BB-/Ba3. Refinancing near-maturity existing debt is an eligible purpose. Maximum loan size is 130% of maximum outstanding bonds and loans during the period of March 22, 2019, to March 22, 2020. The borrower may not have “received specific support pursuant to the CARES Act or any subsequent federal legislation.” The meaning of this is unclear. Pricing will be issuer-specific.
The previously announced Secondary Market Corporate Credit Facility (SMCCF) will function similarly to PMCCF, but will facilitate liquidity in existing corporate bonds and syndicated loans.
Borrowers can participate in only one of the two Main Street facilities and may not also participate in the PMCCF. The total Treasury equity for the PMCCF and SMCCF combined is $75 billion.
The Federal Reserve announced two new “Main Street” facilities. The first is the Main Street New Loan Facility (MSNLF), which will purchase 95% participations in new loans to businesses that have up to 10,000 employees or up $2.5 billion in 2019 annual revenue. This is phrased in the disjunctive, so borrowers with more than 10,000 employees but less than $2.5 billion in 2019 revenue may potentially qualify. Originating commercial banks will retain 5% of these loans; this risk retention feature may invite credit overlays. Loans eligible for purchase by the facility must have the following characteristics: 1) 4-year maturity; 2) amortization of P&I deferred for one year; 3) adjustable rate of SOFR + 250-400 bps; and 4) prepayment with no penalty. In addition, the maximum loan size is the lesser of: (a) $25 million or (b) an amount that does not result in the borrower’s pro forma leverage to exceed four times 2019 earnings before interest, taxes, depreciation and amortization (EBITDA). Borrowers must also make certain attestations, which may take the form of loan covenants, including an attestation that the proceeds will not be used to pay dividends or buy back stock while the loan is outstanding plus one year thereafter, or to increase certain executive compensation over 2019 levels.
The second “Main Street” facility is the Main Street Expanded Loan Facility (MSELF), which will purchase the upsized tranche of eligible loans. Eligible loans have the same characteristics as those eligible for purchase by the MSNLF, described above, except that the maximum loan size for this facility is the lesser of: (a) $150 million; (b) 30% of the borrower’s maximum (including undrawn) bank debt; and (c) an amount that does not result in the borrower’s pro forma leverage to exceed six times 2019 EBITDA. The total Treasury equity for the MSNLF and MSELF combined is $75 billion.
The previously announced Term ABS Loan Facility (TALF) was expanded to accommodate AAA CMBS issued before March 23, 2020, provided the exposure is to property in the United States or its territories. CMBS issued after that date is not eligible for pledge. Static CLO is eligible collateral; single-asset single-borrower CMBS and CRE CLO are not eligible. All collateral must be rated AAA; while the TALF was broadened to new collateral, there was no deepening of the TALF down the credit ladder. The total Treasury equity for the TALF remains $10 billion.
Finally, the Federal Reserve created the Municipal Liquidity Facility (MLF), which will purchase tax anticipation notes, tax and revenue anticipation notes, bond anticipation notes or other short-term notes by eligible issuers (< 24 months). An eligible issuer is a state, city, or county. The total Treasury equity for the MLF is $35 billion.
The Federal Reserve also announced the creation of a liquidity facility for Paycheck Protection Program loans.
The Federal Reserve did not make any changes to the previously announced Money Market Mutual Fund Liquidity Facility or the Commercial Paper Funding Facility.
Initial Observations
- There is not presently a lending facility for non-investment-grade companies with more than 10,000 employees and $2.5 billion in 2019 revenue.
- Loans from the Main Street facilities are issued by banks, which must retain 5% of the risk of the loan. As a result, although the Main Street facilities do not require a minimum credit rating or specified collateral, lenders may demand certain credit overlays to protect their credit exposure. In addition, these facilities impose certain leverage restrictions, as well as restrictions on stock buybacks, dividends and executive compensation. Borrowers can only participate in one of the two Main Street facilities and may not also participate in the PMCCF. According to the Treasury secretary, Treasury and Federal Reserve will discuss additional options for companies with more than 10,000 employees that do not fit within these lending facilities.
- Treasury and the Federal Reserve have not yet committed the full $454 billion of CARES Act money allocated for credit support to lending facilities; more loan programs, or expansion of these now existing loan programs, could be forthcoming.
- The Federal Reserve and Treasury will accept comments from lenders, borrowers and other stakeholders through a feedback form until April 16.
- Each of these facilities must comply with Section 13(3) of the Federal Reserve Act, which among other things, requires borrowers to not be insolvent. To date, the Federal Reserve has defined insolvency, in part, as not paying undisputed debts as they become due during the 90 days prior to the date of borrowing.
- It is important to note that the terms of each of the facilities announced today are subject to change and must be operationalized. We expect it to take several weeks before lending actually begins. However, in the meantime, interested borrowers should reach out to their lenders to discuss options.
Information is changing daily and some of the content included in this alert may have changed or been updated since publication.
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