Today, the Federal Reserve Bank announced several unprecedented emergency measures, including unlimited purchases of Treasury and agency mortgage-backed securities, three new lending facilities, and expansion of two programs announced last week. Of particular note is the unprecedented support of the corporate debt markets, with the creation of two facilities that will purchase corporate debt and make loans using corporate debt collateral. 

I. Unlimited Purchases of Treasury and Agency Mortgage-Backed Securities

The Federal Reserve indicated it would purchase unlimited amounts of Treasury and agency mortgage-backed securities (MBS) as needed to support the smooth functioning of those markets. Effective March 23, 2020:

• The Federal Reserve will increase holdings of Treasury securities and agency MBS in whatever amount is needed to support the smooth functioning of markets for those securities. Specifically, it plans to purchase approximately $75 billion of Treasury securities and approximately $50 billion of agency MBS each business day this week, subject to reasonable prices. In addition, the Federal Reserve will initiate purchases of agency commercial mortgage-backed securities (CMBS) this week. 
• To facilitate the additional purchase of agency MBS: 
  • The Federal Reserve will engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of its agency MBS transactions.
  • Any amounts resulting from principal payments from agency debt and agency MBS holdings will be reinvested in agency MBS (minus small deviations for operational reasons). 
• To facilitate the additional purchase of Treasury securities: 
  • The Federal Reserve will continue conducting term and overnight repurchase agreement operations to ensure that the supply of reserves remains ample and to support the smooth functioning of short-term US dollar funding markets. 
  • The Federal Reserve will conduct overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday or similar trading conventions) at an offering rate of 0.00 percent, in amounts limited only by:
    • the value of Treasury securities held outright in the Federal Reserve’s System Open Market Account that are available for such operations; and
    • a per-counterparty limit of $30 billion per day.
  • The Federal Reserve will continue rolling over at auction all principal payments from the Federal Reserve’s Treasury security holdings. 

II. Term Asset-Backed Securities Lending Facility

The Federal Reserve announced it would deploy the Term Asset-Backed Securities Lending Facility, or TALF, which it previously used during the financial crisis. Authorized by the Federal Reserve’s emergency powers under Section 13(3) of the Federal Reserve Act, the TALF is intended to lend money to investors for the purchase of securities backed by credit-card loans and other consumer debt of consumers and small businesses. The TALF is a funding backstop to facilitate the issuance of eligible Asset-Backed Securities (ABS) on or after March 23, 2020.

Under the TALF, the Federal Reserve will lend funds to a special purpose vehicle (SPV) on a recourse basis. The Treasury Department is using the Exchange Stabilization Fund to invest $10 billion in the SPV, which initially will make up to $100 billion of loans available. The Federal Reserve will provide more detailed terms and conditions at a later date, but stated the terms will be based primarily on (and therefore be similar to) terms and conditions used for the 2008 TALF. 

Who May Borrow: All US companies that own eligible collateral and maintain an account relationship with a primary dealer are eligible to borrow under the TALF. A US company is defined as a US business entity organized under the laws of the United States, or a political subdivision or territory thereof (including such an entity that has a non-US parent company), or a US branch or agency of a foreign bank. 

What Collateral Is Eligible: US dollar-denominated cash (that is, not synthetic) ABS that meet these criteria:

• Credit ratings:
  • In the highest long-term or the highest short-term investment-grade rating category from at least two eligible nationally recognized statistical rating organizations (NRSROs), and
  • That do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO.
• Issued on or after March 23, 2020.
• Underlying credit exposures:
  • All or substantially all of the credit exposures underlying the ABS must have been originated by a US company.
  • All or substantially all of the underlying credit exposures must be newly issued.
  • Credit exposures must be one of the following:
    • Auto loans and leases;
    • Student loans;
    • Credit card receivables (both consumer and corporate);
    • Equipment loans;
    • Floorplan loans;
    • Insurance premium finance loans;
    • Certain small business loans that are guaranteed by the Small Business Administration; or
    • Eligible servicing advance receivables.
  • Must not include exposures that are themselves cash ABS or synthetic ABS.
• Cannot include ABS that bear interest payments that step up or step down predetermined levels on specific dates.

The Federal Reserve stated it would consider adding other asset classes to the facility in the future.

How Will Collateral Be Valued: Eligible collateral will be valued and assigned a haircut according to a schedule based on its sector, the weighted average life and the historical volatility of the ABS. The Federal Reserve will publish the haircut schedule in the detailed terms and conditions of the TALF. It stated the haircuts will be roughly in line with the haircut schedule used for the TALF Facility established in 2008.

What Are the Terms: For eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 100 basis points over the two-year LIBOR swap rate for securities with a weighted average life less than two years, or 100 basis points over the three-year LIBOR swap 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 detailed terms and conditions. In addition, the SPV will assess an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral. Each loan provided under this facility will have a maturity of three years. Loans made under the TALF will be pre-payable in whole or in part at the option of the borrower, but substitution of collateral during the term of the loan generally will not be allowed.

Program Termination: No new credit extensions will be made after September 30, 2020, unless the TALF is extended.

III. Primary Market Corporate Credit Facility (PMCCF)

The Federal Reserve stated that the PMCCF will allow companies access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic. The PMCCF will serve as a funding backstop for purchases of newly issued corporate debt from eligible issuers. Those borrowers may 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 make loans pursuant to the PMCCF through an SPV on a recourse basis. The Federal Reserve loans will be secured by all the assets of the SPV. The Department of the Treasury, using the Exchange Stabilization Fund, will initially invest $10 billion in the SPV.

Who May Participate: Eligible issuers are US companies headquartered in the United States and with material operations in the United States, that are rated:

1. At least BBB-/Baa3 by a major NRSRO and,
2. 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. 

The scope of eligible issuers may be expanded in the future. Eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation.

What Assets Are Eligible for Purchase: Corporate bonds purchased directly from eligible issuers that have a maturity of four years or less.

What Limits Exist: The PMCCF will not lend an issuer more than a defined percentage of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019, and March 22, 2020. This percentage varies by the issuer’s credit rating from a major NRSRO:

What Are the Terms: The PMCCF will purchase bonds and make loans that have interest rates informed by market conditions. The issuer may call bonds and loans under the PMCCF at any time at par. In addition, participants will pay a commitment fee set at 100 bps.

In addition, borrowers participating in the PMCCF may elect to defer all or a portion of each interest payment due for six months, extendable at the discretion of the Federal Reserve. Such interest amount will be added to, and made part of, the outstanding principal amount of the bond or loan. During the period it is not paying interest, the borrower may not (1) pay dividends or (2) make stock buybacks.

Program Termination: The Facility will cease purchasing eligible corporate bonds or extending loans on September 30, 2020, unless it is extended.

IV. Secondary Market Corporate Credit Facility

Under the Secondary Market Corporate Credit Facility (SMCCF), the Federal Reserve will lend, on a recourse basis, to an 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 Department of the Treasury, using the Exchange Stabilization Fund, will make an initial $10 billion equity investment in the SPV.

What Assets Are Eligible: Corporate bonds and ETFs are eligible if they meet the following criteria:

• Corporate bonds must:
  • Be issued by an eligible issuer:
    • US businesses with material operations in the United States.
    • Does not include companies that are expected to receive direct financial assistance under pending federal legislation.
  • Meet ratings standards:
    • Rated at least BBB-/Baa3 by a major 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.
  • Have a remaining maturity of five years or less.
• Eligible ETFs:
  • US-listed.
  • Investment objective is to provide broad exposure to the market for US investment-grade corporate bonds.

Limits per Issuer/ETF: The maximum amount of bonds or ETFs the SMCFF will purchase from any eligible issuer will be capped:

• Bonds: 10% of the issuer’s maximum bonds outstanding on any day between March 22, 2019, and March 22, 2020;
• ETFs: 20% of the assets of any particular ETF as of March 22, 2020.

Pricing: The Facility will purchase eligible corporate bonds at fair market value in the secondary market. The Facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.

Program Termination: The SMCCF will cease purchasing eligible corporate bonds and eligible ETFs no later than September 30, 2020, unless it is extended. The Federal Reserve will continue to fund the SMCCF after such date until the Facility’s holdings either mature or are sold.

V. Expansion of Money Market Mutual Fund Liquidity Facility

The Federal Reserve announced it would expand the Money Market Mutual Fund Liquidity Facility (MMLF) it introduced on March 18, and initially expanded on March 20, to include a wider range of securities. Prime, Single State or Other Tax Exempt money market funds may now sell a broader range of collateral, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit, to banks that finance these purchases with non-recourse loans from the MMLF. The complete list of eligible collateral for MMLF loans now includes:

• US Treasuries and fully guaranteed agencies;
• Securities issued by US government sponsored entities;
• Asset-backed commercial paper, unsecured commercial paper or a negotiable certificate of deposit that is issued by a US issuer and that has a short-term rating at the time purchased from the Fund or pledged to the Reserve Bank in the top rating category (e.g., not lower than A1, F1 or P1, as applicable) from at least two major NRSROs or, if rated by only one major NRSRO, is rated within the top rating category by that NRSRO;
• US municipal short-term debt (excluding variable rate demand notes) that:
  • Has a maturity that does not exceed 12 months; and
  • At the time purchased from the Fund or pledged to the Reserve Bank:
    • Is rated in the top short-term rating category (e.g., rated SP1, MIG1 or F1, as applicable) by at least two major NRSROs or, if rated by only one major NRSRO, is rated within the top rating category by that NRSRO; or
    • If not rated in a short-term rating category, is rated in one of the top two long-term rating categories (e.g., AA or equivalent or above) by at least two major NRSROs or, if rated by only one major NRSRO, is rated within the top two rating categories by that NRSRO.
• Variable rate demand note that:
  • Has a demand feature that allows holders to tender the note at their option within 12 months; and
  • At the time purchased from the Fund or pledged to the Reserve Bank:
    • Is rated in the top short-term rating category (e.g., rated SP1, VMIG1 or F1, as applicable) by at least two major NRSROs or, if rated by only one major NRSRO, is rated within the top rating category by that NRSRO; or
    • If not rated in a short-term rating category, is rated in one of the top two long-term rating categories (e.g., AA or equivalent or above) by at least two major NRSROs or, if rated by only one major NRSRO, is rated within the top two rating categories by that NRSRO.

• In addition, the MMLF may accept receivables from certain repurchase agreements.

The Federal Reserve stated it would consider the feasibility of adding other asset classes to the MMLF in the future.

VI. Expansion of Commercial Paper Funding Facility

In order to facilitate the flow of credit to municipalities, the Federal Reserve expanded the Commercial Paper Funding Facility (CPFF) it introduced on March 17. Whereas commercial paper issued by municipal issuers was not initially included as an asset eligible for purchase, municipal issuers are now expressly included as eligible issuers. Therefore the CPFF will now purchase (through the Federal Reserve’s primary dealers) high-quality, tax-exempt commercial paper, as well as corporate issuances.

In addition, pricing has been reduced for higher-rated commercial paper. Whereas funding for all commercial paper purchases was initially based on the then-current three-month overnight index swap (OIS) rate plus 200 basis points, the Federal Reserve has now stated that for commercial paper rated A1/P1/F1, pricing will be based on the then-current three-month OIS rate plus 110 basis points. For commercial paper rated A2/P2/F2, pricing will continue to be based on the then-current three-month OIS rate plus 200 basis points.