Jenner & Block

Client Alert: Loaded for Bear: An Overview of the Federal Reserve’s Corporate Credit Facilities

On June 29, 2020, the Primary Market Corporate Credit Facility (Primary Market CCF) began accepting requests to purchase newly-issued and syndicated corporate debt from eligible issuers. That announcement followed the earlier opening of the Secondary Market Corporate Credit Facility (Secondary Market CCF), through which the Board of Governors of the Federal Reserve (Federal Reserve) began purchasing corporate bonds and corporate bond ETFs on the secondary market. Together, the two facilities (the Corporate Program) may inject up to $750 billion into the market for US corporate debt, aiding large businesses and the capital markets in which they operate, signifying an unprecedented intervention by the Federal Reserve.

As explained in our prior alert, the Corporate Program was designed to help large US businesses access the credit markets by purchasing newly issued as well as currently outstanding corporate debt. It is broken into two parts. The Primary Corporate program entails the Federal Reserve purchasing debt directly from issuers, whereas the Secondary Program has the Federal Reserve purchasing debt on the secondary market. As explained by Federal Reserve Chairman Jerome Powell, the program is intended as a backstop to preserve and stabilize the capital markets—by providing companies ready access to credit amidst the uncertainty created by the pandemic. In contrast to the “Main Street” program—which the Federal Reserve has stated is designed for mid-size and smaller companies—the Corporate Program is targeted at larger issuers with investment-grade debt ratings, as well as so-called “fallen angels” whose ratings were downgraded from that status since March 22, 2020. As of August 5, 2020, the outstanding amount of assets purchased by the Corporate Program was more than $12.3 billion.

Although so far the facility has been sparsely used, its announcement in late March had a major impact, with the market for corporate debt recovering significantly. The program is intended to maintain confidence in the corporate debt markets by ensuring a federal backstop should conditions destabilize again. Federal Reserve officials have stated that the rate at which the Corporate Program spends money has and will continue to depend on the state of liquidity in the corporate debt markets, with purchases already scaling down in the Secondary Market CCF as the capital markets maintain stability.[1] Similarly, in the Primary Market CCF, which has not yet announced any purchases, illiquidity in the markets is a prerequisite for certain borrowers, who must be able to certify that they are “unable to secure adequate credit accommodations from other banking institutions and the capital markets.”[2]

Since our prior alert, the Federal Reserve has modified the terms of the facilities, released several clarifying FAQs with guidance for potential participants, extended the expiration date of the facility, and began making purchases. Understanding the current requirements of the Primary Market CCF will be crucial for businesses capable of issuing eligible corporate debt should corporate debt markets begin to tighten again. And likewise, understanding the scope of the Secondary Market CCF will inform businesses on how the market for their corporate debt may be impacted. With the continuing surge of COVID-19 cases in states across the country creating increased economic uncertainty, the opening of the Primary Market CCF and evolution of the Secondary Market CCF could soon serve as a backstop for individual companies and the markets in general, when and if bear markets return.

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This client alert builds on our prior alert and provides a summary of the key features of the Corporate Program. We encourage you to follow up with any questions or concerns. Led by our COVID-19 Response Team, Jenner & Block offers a wide array of resources and lawyers with experience necessary to help our clients navigate the implications of these important new programs. The firm is well positioned to help our clients manage the challenging issues related to the current crisis, from applications for funds, to managing workforce concerns, to the Congressional oversight and government investigations that inevitably come along with any such financial assistance.

This team includes lawyers who played key, leading roles in the country’s response to the last economic crisis and who have been recognized nationally for their insight in this one, with clients, policy makers, and Congressional committees turning to us for advice and guidance. It includes government veterans whose senior positions meant that they were intimately involved in the design of many of the government’s most recent bailout programs, oversaw the loan application and distribution processes that were a key part of them, and ran and responded to the investigations that followed. It also includes transactional lawyers who have engaged with clients seeking to avail themselves of aspects of the government programs described in this and our prior alerts.

Additional materials prepared by the COVID-19 Response Team are available on Jenner & Block’s COVID-19 Resource Center. For more information on the CARES Act, please reach out to CARESAct@jenner.com or your primary Jenner & Block contact.

To read the full alert, please click here.