Federal Reserve Responds Boldly to Coronavirus-Related Economic Downturn

SANFORD MICHELMAN
MARCH 23, 2020

Given the downward spiral of U.S. markets and disruptions faced by the economy in the wake of the coronavirus outbreak, the Federal Reserve, in several unprecedented moves, has accelerated its rescue plan today and announced unlimited bond buying, three new credit facilities, and an upcoming Main Street lending program. Together, these historic programs inject an extraordinary amount of new financing into the economy, all in an attempt to support the flow of credit to American families and businesses, promote stability in the financial system, and to push back on an all-out financial crisis. Michelman & Robinson explains:

Q. How will quantitative easing expand?

A. The Fed will purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy. The Fed will buy at least $500B of Treasury securities and $200B of mortgage-backed securities, as well as agency commercial mortgage-backed securities.

Q. What is the Fed doing to support the flow of credit, whether to large employers, smaller businesses and consumers?

A. Using the Exchange Stabilization Fund (ESF), the Fed will provide $300B in new financing, backed by $30B from the ESF. This credit will be made available through the following facilities: (1) the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance; (2) the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds; and (3) the Term Asset-Backed Securities Loan Facility (TALF), which has been created 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.

Q. How will these credit facilities work?

A. The PMCCF will allow corporate bond issuers access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic. This facility 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 Fed’s discretion, in order to have additional cash on hand that can be used to pay employees and suppliers. The Fed will finance a special purpose vehicle (SPV) to make loans from the PMCCF to companies, and the Treasury 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 Fed for this facility.

Under the TALF, the Fed 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. In terms of the size of these loans, the Fed will lend an amount equal to the market value of the ABS less a percentage, and they 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 Fed for this facility.

Q. Has the Fed instituted any programs to benefit local governments?

A. Yes, it is facilitating the flow of credit to municipalities by expanding 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. Likewise, the Fed has broadened the Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper as eligible securities. In addition, the pricing of that facility has been reduced.

Q. Is anything else in the works to help small- and medium-sized businesses through these difficult times?

A. Yes, the Fed expects to announce the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized companies, complementing efforts by the SBA. As of this writing, details of this program are not available.

Q. What other steps has the Fed taken in recent days to address growing financial concerns?

A. Clearly, today’s announcement signals, by far, the most significant moves the Fed has taken to shore up the financial markets and support a shuttered U.S. economy. That being said, previously the Fed expanded central bank liquidity swap lines; enhanced the availability and eased terms for borrowing at the discount window; eliminated reserve requirements; issued guidance encouraging banks to be flexible with customers experiencing financial challenges related to the coronavirus and to utilize their liquidity and capital buffers in doing so; and made statements encouraging the use of daylight credit at the Fed.

Q. Big picture, what is the takeaway from the Fed’s actions?

A. In effect, the Fed has infused a massive amount of liquidity into financial markets and the banking system in order to prevent the coronavirus health crisis from completely crippling the economy. In terms of business, this effort by the Fed seeks to ensure that companies, large and small, have access to the credit they need to continue to exist in the face of a massive economic slowdown. In short, this should be very welcome news.

We are working diligently to keep our clients up to date on coronavirus-related developments. Nevertheless, these developments are changing daily and, in some cases even hourly, so it is important that you make sure you are dealing with the most current information. That being said, this alert is not offered, and should not be relied on, as legal advice. You should consult an attorney for guidance and counsel regarding any specific concern or situation.