Earlier today the Federal Reserve announced it would establish six new funding facilities supported by Treasury funding authorized by Section 4003(b)(4) of the CARES Act. The Federal Reserve also announced an expansion of the existing Term Asset-Backed Securities Loan Facility, which we will describe in a separate client alert. The Press Release announcing the six new facilities is available at this link: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm.
The six new facilities are:
- The “Main Street New Loan Facility,” which will purchase 95% participation interests in loans originated on or after April 8, 2020, by banks and savings and loans (including their holding companies) to US borrowers.
- The “Main Street Expanded Loan Facility,” which will also purchase 95% participation interests in loans originated by banks and savings and loans (including their holding companies), but it is limited to the “upsized tranche” (i.e., increased funding) provided for loans outstanding on April 8, 2020.
- The “Paycheck Protection Program Lending Facility,” which will purchase from banks, savings and loans, and credit unions (i.e., “depositories”)1 loans they originated under the “Paycheck Protection Program” described in our April 1, 2020, Client Alert Small Business Administration: The Paycheck Protection Program under the CARES Act.
- The “Primary Market Corporate Credit Facility,” which will purchase from US issuers or borrowers corporate bonds tailored for this facility, as “sole investor, or up to a 25% interest in a syndicated bank loan or bond issuance.
- The “Secondary Market Corporate Credit Facility,” which will purchase from US holders outstanding US bonds or ETFs for the US investment grade or high yield bond market.
- The “Municipal Liquidity Facility,” which will purchase tax, revenue, and bond “anticipation” securities from States, counties with more than 2 million inhabitants, and cities with more than 1 million inhabitants.
We will issue separate Client Alerts describing in more detail these six new facilities. For now, some of our first thoughts are:
Main Street New Loan Facility
The term sheet for this facility is attached as Attachment I.
Loan participations acquired by Federal Reserve Banks. This program provides for the individual district Federal Reserve Banks to purchase, through an SPV, 95% participations in loans originated on or after April 8, 2020 by US “depository institutions” and their holding companies (e.g., banks and bank holding companies) to US borrowers. The originating US bank or other eligible lender would be required to retain a 5% interest, which is a pro rata risk sharing.
Borrowers must be US companies and can have up to 10,000 employees or $2.5 billion in 2019 revenues. Each borrower must be a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States. It can have up to 10,000 employees or $2.5 billion in 2019 revenues.
Debt up to 4x EBITDA. Each loan is a minimum of $1 million and a maximum of $25 million, but the borrower’s total outstanding debt, and committed but undrawn credit commitments, after the loan can not exceed 4x EBITDA.
New money with no reduction in other available credit. Because the loans are intended to support a borrower’s continuing liquidity, they must not be used to pay other debt, and the borrower must commit not to reduce any other credit availability, except for mandatory payments on outstanding debt.
No dividends or buybacks and compensation limits for borrowers. Because this is a “direct loan” facility, the CARES Act requires that each borrower certify:
- No dividends or buybacks: until one year after the loan is repaid, it will not pay dividends, or make any other capital distribution, on its common stock or repurchase any of its or its parent’s equity securities, except under an agreement in effect on the date of the CARES Act.
- Restrictions on employee compensation and severance. from the date the loan agreement is executed until one year after the loan is fully repaid, no employee or officer (A) who received total compensation of more than $425,000 in 2019 (other than an employee paid under a collective bargaining agreement) can receive annual total compensation more than such person’s 2019 total compensation, and (B) who received total compensation of more than $3 million in 2019 can receive annual total compensation greater than $3 million plus 50% of the amount of total compensation above $3 million received in 2019.
Also, no such employee or officer receiving 2019 total compensation over $425,000 (other than under a collective bargaining agreement) will be paid severance or other termination benefits greater than twice the amount of such 2019 total compensation.
No participation in Main Street Expanded Loan Facility or Primary Market Corporate Credit Facility: A borrower under this facility can not participate in either of those facilities described in this Alert.
Main Street Expanded Loan Facility
The term sheet for this facility is attached as Attachment II.
Larger "upsized" outstanding loans and greater EBITDA borrowing capacity. The terms are the same as for the Main Street New Loan Facility, except this facility covers increases in loans originated before April 8, 2020, that are "upsized" on or after April 8, 2020, the maximum loan amount is increased to $150 million, the loan can not exceed 30% of the borrower’s outstanding and committed but undrawn bank debt, and the limit for loans under the limit on total borrowings and unused commitments is increased to 6x EBITDA.
This facility, therefore, supports increased funding under loan facilities that were outstanding before April 8, 2020, while the Main Street New Loan Facility supports new loan facilities established on or after April 8, 2020.
No participation in Main Street New Loan Facility or Primary Market Corporate Credit Facility: A borrower under this facility can not participate in either of those facilities described in this Alert.
Paycheck Protection Program Lending Facility
The term sheet for this facility is attached as Attachment III.
Non-recourse loans to lenders under PPP facility. Any bank, savings and loan, or credit union that has lent under the Payroll Protection Program can refinance the full amount of each such loan through a non-recourse loan from its local district Federal Reserve Bank.
Removal of refinanced loan from leverage limit. The CARES Act specified that PPP loans would be risk-weighted at 0%. Any Federal Reserve Bank loan under this new facility will also permit the borrower to remove the PPP loan from its leverage ratio under an interim final rule issued by the three banking agencies today. The interim final rule is available at this link.
Primary Market Corporate Credit Facility
The term sheet for this facility is attached as Attachment IV.
FRBNY purchases of customized bond issuances or up to 30% of loan syndications and non-customized bond issuances. The Federal Reserve Bank of New York will use an SPV to purchase the full amount of customized (i.e, SPV as sole purchaser) bonds or up to 30% of loan syndications or non-customized bond issuances.
Rated US issuer requirement. Issuer’s must meet the same US borrower requirement as in Main Street Lending Program and be rated. The rating must have been investment grade as of March 22, 2020, and must be no lower than BB-/Ba3 at the time the SPV makes the purchase.
No bank or bank holding company issuers. An issuer can not be an insured depository institution or depository institution holding company.
Maximum issuer amounts: For each issuer total bond and loan funding under this facility and all other outstanding bonds and loans is limited to 130% of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020, and is also limited to no more than $11.25 billion (i.e., 1.5% of the maximum $750 billion facility) when combined with holdings by the SPV of securities of that issuer under the Secondary Market Corporate Credit Facility.
Prohibitions on Conflicts of interest and other CARES funding: The term sheets for this and the Secondary Market Corporate Credit Facility specify that the issuer “must satisfy the conflicts of interest requirements of section 4019 of the CARES Act.” This will also be true for the borrowers under the two Main Street programs. Section 4019 prohibits any Section 4003 program from funding an entity “controlled” by the President, Vice President, head of an Executive Department, or Member of Congress or by any of their immediate family (including son or daughter in-law). The term sheets for this and the Secondary Market Corporate Credit Facility also require that the “issuer has not received specific support pursuant to the CARES Act or any subsequent federal legislation.”
Secondary Market Corporate Credit Facility
The term sheet for this facility is attached as Attachment V.
FRBNY purchases from US holders US corporate bonds and ETFs covering US investment grade or high yield bond markets. The Federal Reserve Bank of New York will use the same SPV as in the Primary Market Corporate Credit Facility to purchase from US holders corporate bonds of rated US issuers or ETFs that provide “broad coverage” to the US investment grade or high yield bond markets.
Individual issuers must be rated. As with the Primary Market Corporate Credit Facility, an issuer must be rated and the rating must have been investment grade as of March 22, 2020, and no lower than BB-/Ba3 at the time the SPV makes the purchase.
ETFs purchased will primarily be investment grade, but some high yield. The “preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds,” but there will also be purchases of ETFs “whose primary investment objective is exposure to U.S. high-yield corporate bonds.”
Maximum amounts: Aside from the combined $11.25 billion issuer limit mentioned in the above description of the Primary Market Corporate Credit Facility, the “maximum amount of bonds that the Facility will purchase from the secondary market of any eligible issuer is also 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 shares of a particular ETF if after such purchase the Facility would hold more than 20 percent of that ETF’s outstanding shares.”
Municipal Liquidity Facility
The term sheet for this facility is attached as Attachment VI.
Through a single SPV local district Federal Reserve Banks purchase “tax anticipation” and other similar short-term notes: An SPV will be established to purchase such notes funded by loans from the district Federal Reserve Banks.
States and large counties and cities as permitted issuers: Any State, including the District of Columbia, and any city with a population of more than 1 million or county with a population of more than 2 million can sell securities to the SPV, subject to Federal Reserve review. Each such State, county, or city can issue the securities directly or through an “instrumentality,” but each such State, county, or city can sell securities under this facility from only one issuer.
Each State, county, and city limited to 20% of its 2017 general revenue own sources and utility revenue: Through its selected “single issuer” each eligible State, county, or city can sell an aggregate amount of securities up to an amount equal to 20% of the general revenue from own sources and utility revenue of the applicable State, City, or County government for fiscal year 2017.
States can exceed limit if approved by Federal Reserve: The term sheet notes: “States may request that the SPV purchase Eligible Notes in excess of the applicable limit in order to assist political subdivisions and instrumentalities that are not eligible for the Facility.”
Proceeds to be used for COVID-19 related delays in or losses of revenue and increases in expenses, including requirements for the payment of principal and interest on obligations of the relevant State, City, or County: The term sheet explains this under “Eligible Use of Proceeds.”
Purchase of securities from ineligible local governments as permitted use of proceeds: The last sentence of the term sheet’s Eligible Use of Proceeds section explains that an “Eligible Issuer may use the proceeds of the notes purchased by the SPV to purchase similar notes issued by, or otherwise to assist, political subdivisions and instrumentalities of the relevant State, City, or County for the purposes enumerated” above in the Eligible Use of Proceeds section.
Maximum Program Amounts and Treasury Support
- Two Main Street Facilities capped at $600 billion and supported by $75 billion in equity from Treasury. Because the two facilities are linked, the SPV will be supported by the same $75 billion for both facilities and will limit its loans to $600 billion in total for both programs.
- Two Corporate Credit Facilities capped at $750 billion and supported by $75 billion in equity from Treasury. Although the same SPV makes purchases under both of these programs and the aggregate limit is $750 billion for both combined, the Federal Reserve specified an “initial allocation” of $50 billion in equity to the “primary” and $25 billion in equity to the “secondary” facility.
- PPP Support Facility only capped by amount of underlying PPP facility (currently $349 billion). The CARES Act directly established the PPP program, which is currently limited to $349 billion, but Congress is considering increasing that amount.
- Municipal Liquidity Facility capped at $500 billion and supported by “initial” Treasury equity of $35 billion. The term sheet seems to contemplate increases in the amount of equity provided by Treasury. Presumably, that will depend upon the Federal Reserve’s analysis of the creditworthiness of the applicants for funding under this facility.
- Treasury retains $254 billion in equity to expand these or support further Federal Reserve lending programs. This means that, for now, Treasury has allocated $185 billion to the five programs described above established under Section 4003(b)(4) of the CARES Act. Today the Treasury also allocated $15 billion of the CARES Act funding for Section 4003(b)(4) programs to an expanded TALF program described in our Client Alert issued today, Expanded Term Asset-Backed Loan Facility 2020 (updating a March 24, 2020 Client Alert). That leaves at least $254 billion in equity for additional programs or expansions of these programs, based on the minimum $454 billion in minimum funding available to Treasury to support Federal Reserve programs under Section 4003(b)(4).
- The press release notes that: “The Board is working to expand eligibility to other lenders that originate PPP Loans in the near future.” That would include bank and savings and loan holding companies.