The Federal Reserve announced Monday that it will use the “full range of [its] authorities to provide powerful support for the flow of credit to American families and businesses.” New measures have been added to the Fed’s list of planned actions to address the Covid-19 pandemic. Additional planned actions by the Fed include the following (information provided by the U.S. Federal Reserve):
Support for lending institutions to continue the flow of credit to businesses.
- The Federal Open Market Committee (FOMC) will purchase Treasury securities and agency mortgage-backed securities, including agency commercial-mortgage backed securities, as needed to maintain economic activity during the pandemic. The FOMC had previously announced it would purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities, but those amounts may be increased as needed.
- Establish the Term Asset-Backed Securities Loan Facility (TALF) to enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.
- Under the TALF, the Federal Reserve will lend on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. Treasury, using the ESF, will also make an equity investment in the SPV established by the Federal Reserve for this facility.
Direct support for borrowing businesses.
- Establish new business programs to provide up to $300 billion in new financing. The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $30 billion in equity to these facilities.
- Create two new credit facilities to support credit to large employers to maintain operations during the pandemic – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.
- The PMCCF is open to investment grade companies and will provide bridge financing of four years. Borrowers may elect to defer interest and principal payments during the first six months of the loan, extendable at the Federal Reserve’s discretion, in order to have additional cash on hand that can be used to pay employees and suppliers. The Federal Reserve will finance a special purpose vehicle (SPV) to make loans from the PMCCF to companies. The Treasury, using the ESF, will make an equity investment in the SPV.
- The SMCCF will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds. Treasury, using the ESF, will make an equity investment in the SPV established by the Federal Reserve for this facility.
- Create a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.
Support for Municipalities.
- Expand the Money Market Mutual Fund Liquidity Facility (MMLF) to include a wider range of securities, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit. This will increase credit flow to municipalities impacted by the pandemic.
- Expand the Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper as eligible securities. In addition, the pricing of the facility has been reduced.
As these new programs take shape, Coats Rose will continue to provide updates for businesses and public bodies on how to access and deploy funds.