United States: Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility

In a March 23, 2020, press release announcing the CCFs, the Fed stated that the purpose of the two facilities was to “support credit to large employers” (Board of Governors 2020d). The PMCCF provided for “new bond and loan issuance” while the SMCCF “provide[d] liquidity for outstanding corporate bonds” (Board of Governors 2020d). In the first report to Congress on the CCFs on March 30, the Fed stated that:

In the March 30 report, the stated purpose of the CCFs was “to help facilitate access to credit so that companies are better able to maintain business operations and capacity during the period of dislocations related to the pandemic” (Board of Governors 2020e).

On March 23, 2020, the Fed announced the creation of a number of emergency programs to support the economy, including the Corporate Credit Facilities (CCFs), the Term Asset-Backed Securities Loan Facility (TALF), an expanded Money Market Mutual Fund Liquidity Facility (MMLF), and an expanded Commercial Paper Funding Facility (CPFF) (Board of Governors 2020d). Before the creation of these facilities, the Fed also created the Primary Dealer Credit Facility (PDCF) on March 17, 2020, which offered 90-day credit to primary dealers at the Discount Window’s primary credit rate to “support smooth market functioning” (FRB 2020b).

The PMCCF and the SMCCF were authorized under Section 13(3) of the Federal Reserve Act. Section 13(3) permits the Fed, “in unusual and exigent circumstances,” to “discount for any participant in any program or facility with broad-based eligibility” (Federal Reserve Act 1913, vol. 12, sec. 13(3)).  As noted in an internal Fed legal memo from 2008, the Fed Board “consistently has viewed the term ‘discount’ under section 13(3) as including a Reserve Bank extension of credit...as well as a purchase by a Reserve Bank of third-party notes” (FRB 2008, 13).

The Treasury approved the facilities, consistent with the requirements of Section 13(3) (FRBNY n.d.b). The Treasury also committed a first-loss equity investment to the CCFs, using funds appropriated by Section 4027 of the CARES Act (CARES Act 2020, sec. 4027).

Pursuant to Section 13(3) of the Federal Reserve Act, the Fed submitted to Congress regular reports every 30 days including “the value of collateral, the amount of fees and other items of value received; and the expected or final cost to the taxpayer” (Board of Governors 2020g). The CARES Act additionally required the Board to publish these reports on its website within seven days of them being submitted to Congress (Board of Governors 2020g).

The Government Accountability Office (GAO) published one report surveying the Fed’s pandemic response and two reports on the Fed’s emergency lending facilities specifically (GAO 2020b; GAO 2021). The first report, released November 30, 2020, overviewed the emergency lending facilities created in response to the pandemic, and reiterated an earlier recommendation that the Fed strengthen its procedures for lending to high-risk borrowers and for estimating and tracking losses across emergency facilities (GAO 2020a).

The Federal Reserve Bank of New York (FRBNY) administered the CCFs and established a single special purpose vehicle (SPV) to be initially managed by BlackRock Financial Markets Advisory (FRBNY 2020b). BlackRock managed the facilities from March 24, 2020, through April 15, 2020, at which point State Street Bank & Trust Company became the custodian and administrator of the facilities following a competitive bidding process (FRBNY n.d.b). On February 8, 2021, the FRBNY announced that Payden & Rygel, a Los Angeles-based investment management firm, would serve as cash investment manager for the facility, also following a competitive bidding process (FRBNY n.d.b).

According to GAO, FRBNY staff in charge of administering the facility received daily updates from the investment manager on developments in the bond market and made decisions about the pace of purchases accordingly (GAO 2020b).

The SMCCF first purchased eligible ETFs on May 12, 2020, and individual corporate bonds on June 16, 2020 (FRBNY 2021b). The PMCCF became operational on June 29, 2020 but did not make any purchases (FRBNY 2021b).

The Fed strongly encouraged companies issuing bonds to the PMCCF to utilize “minority-, women-, and veteran-owned (MWV) businesses as underwriters” (FRBNY 2020b).

At the March 15 Federal Open Market Committee Meeting, the committee noted and discussed strains in the corporate bond market. The Fed noted that “activity and liquidity were at very low levels” and “primary issuance of investment-grade corporate bonds was sporadic, and that of speculative-grade corporate bonds and leveraged loans virtually stopped after late February” (Board of Governors 2020c, 2).

In the press release announcing the CCFs, the Fed stated that the purpose of the two facilities was to “support credit to large employers” which the PMCCF provided for “new bond and loan issuance” while the SMCCF “provide[d] liquidity for outstanding corporate bonds” (Board of Governors 2020d). Fed officials, including Daleep Singh, Executive Vice President of the FRBNY, emphasized in speeches that by supporting “companies’ access to funding, firms employing millions of Americans are in a better position to keep workers on payrolls” and cited statistics on the number of employees that public-bond-issuing companies had on payroll (Singh 2020; Powell 2021). Chair Jerome Powell stated that purchasing corporate bonds allowed companies “to go out and finance themselves. They’ve been able to avoid big layoffs” (Select Subcommittee on the Coronavirus Crisis 2020, 1).

Section 13(3) of the Federal Reserve Act required that the Fed submit two types of reports on emergency facilities authorized under Section 13(3) of the Federal Reserve Act to Congress. First, the Fed submitted a report within seven days of the Board’s authorization of the CCFs including “information regarding the justification for the exercise of the authority and information on the transactions and expected cost to taxpayers” (Board of Governors 2020g, 29). Second, the Fed wrote regular reports every 30 days including “the value of collateral, the amount of fees and other items of value received; and the expected or final cost to the taxpayer” (Board of Governors 2020g, 29). The CARES Act required the Board to publish these reports on its website within seven days of them being submitted to Congress.

The FRBNY administered the CCFs and established a single special purpose vehicle (SPV) (FRBNY 2020b). BlackRock managed the facilities from March 24, 2020, through April 15, 2020, at which point State Street Bank & Trust Company became the custodian and administrator of the facilities following a competitive bidding process (FRBNY n.d.b).

The FRBNY lent on a recourse basis to the SPV which purchased eligible corporate bonds in the secondary market (Board of Governors 2020b). The Treasury committed up to $75 billion to the SPV to support the two CCFs. The equity would be split so that $25 billion would support the SMCCF, and $50 billion would support the PMCCF (Board of Governors 2020b).

The Fed has viewed use of the SPV structure as providing management, accounting, and legal advantages to an intervention—especially when the Fed operates multiple Section 13(3) programs in parallel. (See also Bernanke, Geithner, and Paulson 2020, 156–58.) Use of an SPV allows the Fed to better tailor a 13(3) program to the goals of the intervention (Baxter 2009, 12–13). Each intervention has its own specific terms, timeline, capital structure, and management team. The management teams may also be in geographically separate reserve banks, depending on which one(s) is administering a given intervention.

The SPV structure simplifies the reporting of income and the management of any sales of assets discounted by the facility. As noted in Key Design Decision No. 7, Disclosure, the Fed provided separate annual financial statements for the CCFs that were independently audited by an outside accounting firm. These statements provided greater detail and transparency than existed for Fed facilities that did not utilize the SPV structure (Bernanke et al. 2020, 157; FRBNY 2021a; FRBNY 2022). Moreover, the degree of corporate separation from both the Fed and other 13(3) interventions provided by an SPV structure may afford those other entities some protection in the event a 13(3) program is sued.

SPVs are also typically easy and inexpensive to set up. The Fed has viewed its creation of the structures as falling under the “incidental powers as shall be necessary to carry on the business of banking within the limitations” of the Federal Reserve Act (Federal Reserve Act 1913, vol. 12, sec. 4(4); Bernanke et al. 2020, 156, fn 28).

The combined maximum size of the CCFs was up to $750 billion (Board of Governors 2020b). The CCFs were capitalized by up to $75 billion of equity investments from Treasury (Board of Governors 2020b). The PMCCF was authorized to leverage the equity funding 10 to 1 when purchasing investment grade individual bonds and syndicated loans, and 7 to 1 when purchasing all other types of eligible assets (Board of Governors 2020a). The SMCCF was authorized to leverage at 10 to 1 when buying investment grade corporate bonds and ETFs, 7 to 1 when buying below investment grade corporate bonds, and between 3 to 1 and 7 to 1 depending on risk for all other eligible assets (Board of Governors 2020b).

PMCCF

For the PMCCF, eligible issuers were limited by the “130% issuer cap”: the PMCCF would purchase debt from an eligible issuer up to the point that the issuer’s outstanding bonds and loans were less than 130% of its maximum outstanding bonds and loans on any day between March 22, 2019, and March 22, 2020 (FRBNY 2020b).

SMCCF

The SMCCF would purchase no more than 10 percent of an eligible issuer’s outstanding bonds on any day between March 22, 2019, and March 22, 2020 (Board of Governors 2020b). The SMCCF would not purchase ETF shares if, after the purchase, the SMCCF would have held 20 percent of the ETF’s total outstanding shares (FRBNY 2020b).

Combined Limit

The FRBNY also imposed individual limits on the two facilities combined. Total purchases by both CCFs of any single eligible issuer’s bonds could constitute no more than 1.5% of the combined potential size of the CCFs (Board of Governors 2020b).

Initially, the Treasury committed a $20 billion equity investment from the Exchange Stabilization Fund (ESF) in the CCFs—$10 billion for each facility (Board of Governors 2020e; Board of Governors 2020f). After the passage of the CARES Act, the Treasury instead offered $75 billion from CARES Act funds to the facilities as first-loss protection, replacing the ESF funds: $50 billion toward the PMCCF and $25 billion toward the SMCCF (FRBNY 2020b). Ultimately the Treasury contributed $37.5 billion to the SPV. The peak utilization of the facilities at $14.1 billion never exceeded the size of Treasury’s equity investment (Board of Governors 2020).

Both the PMCCF and SMCCF restricted eligibility to corporate bond issuers that:

• Were created or organized in the US, with significant operations in the US, and a majority of its employees in the US;
• Had investment-grade ratings, defined as ratings of at least BBB-/Baa3 as of March 22, 2020, by a major nationally recognized statistical rating organization (“NRSRO”). If the business was rated BBB-/Baa3 as of March 22 but subsequently downgraded, it must have been rated at least BB-/Ba3 at the time of purchase;
• Were not an insured depository institution, depository institution holding company, or a subsidiary of a depository institution holding company;
• Had not received specific support from the CARES Act or subsequent federal legislation;
• Satisfied the conflict-of-interest clauses pursuant of section 4019 of the CARES Act (Board of Governors 2020a).^FNSection 4019 prohibits entities that certain government officials have a “controlling interest” in from participating in some government programs. See (FRBNY n.d.e).

ETFs purchased by the SMCCF could invest in bonds that did not meet these criteria (Board of Governors 2020b). The SMCCF purchased both investment-grade and high-yield ETFs, which by definition may invest in bonds that do not have investment-grade ratings. The SMCCF also purchased ETFs that had exposure to depository institutions. As of September 2020, over 26% of the SMCCF’s portfolio was invested in bank bonds, through ETFs (Kelly 2020).

The PMCCF required that issuers certify eligibility through the submission of certification documents, including CARES Act certifications, a Regulation A^FNRegulation A constitutes the Fed’s rule-making consistent with its authority from 12 C.F.R pt. 201 to extend credit to financial institutions (Board of Governors 2022). certification, and a PMCCF specific authorization form (FRBNY 2020b). In a May 25, 2020, FAQ, the FRBNY stated that all eligible issuers under both the PMCCF and SMCCF would be required to certify compliance with eligibility criteria (FRBNY 2020a). The SMCCF ultimately did not require certification by issuers whose bonds FRBNY purchased to create the Broad Market Index portfolio.

The SMCCF did not ultimately purchase individual corporate bonds outside of the index portfolio. FRBNY’s FAQs noted that, if it did, any issuers would be required to meet the eligibility requirements in the original Term Sheet. The final version of the FAQs in December 2020 noted that “the requirements and processes for issuer certification will be provided before the SMCCF begins any Eligible Individual Corporate Bond purchases” (FRBNY 2020b).

The SMCCF purchased eligible corporate bonds and ETFs on a standing basis (FRBNY 2020b). The pace of purchases was based on “a percentage of average daily volumes in the respective markets” (FRBNY 2020b). The PMCCF was also open to eligible companies on a standing basis (FRBNY n.d.a). (See Key Design Decision No. 14, Eligible Assets, for a discussion of the facilities’ pricing mechanics.)

Initially, the SMCCF purchased ETFs while it developed its “Broad Market Index” of individual corporate bonds (Singh 2020). As the index program became available and market functioning improved, the SMCCF scaled back purchases of ETFs and began purchasing individual bonds across the index portfolio. The facility ceased purchasing ETFs in late July. FRBNY Executive Vice President Daleep Singh stated in a speech that the SMCCF would scale up purchases of individual corporate bonds for the index portfolio if “market stress were to return…and in a scenario of significant market stress, we could buy both bonds and ETFs” (Singh 2020).

The Fed relied on a single SPV to purchase, lending to the SPV which in turn purchased from issuers (Board of Governors 2020b). The CCFs were authorized to purchase eligible corporate bonds, ETFs, syndicated loans, and broad market index funds (FRBNY 2020a).

A report by the Government Accountability Office (GAO) stated that the Fed created economic indicators across sectors that it analyzed daily to determine if the credit market for each sector was deteriorating and improving. These indicators included “transaction cost estimates, bid-ask spreads, credit curve shape, spread levels and volatility, trading volumes, and dealer inventories” (GAO 2021, 24). The Fed increased or decreased the distribution of its purchases according to these indicators.

PMCCF

The PMCCF was authorized to purchase individual corporate bonds at issuance, subject to eligibility requirements. Specifically, the SPV was authorized to purchase corporate bonds, or portions of syndicated loans or syndicated bonds. It could purchase no more than 25% of any loan syndication or bond issuance. It could purchase bonds or loans with maturities less than four years (FRBNY n.d.a).

To prove eligibility at the PMCCF, an issuer had to submit nine forms, including a CARES Act certification form, a PMCCF-specific form, and a Regulation A certification form (FRBNY n.d.d).

SMCCF

The SMCCF was authorized to purchase individual corporate bonds and exchange-traded funds (ETFs). The SMCCF purchased individual corporate bonds to create a portfolio based on a broad, diversified market index of US corporate bonds. It could also purchase individual corporate bonds outside of these portfolio purchases, although it did not ultimately do so. The SMCCF purchased both investment-grade and high-yield ETFs (Board of Governors 2020b).

Before April 9, only corporate bonds with at least investment grade (BBB-/Baa3 or higher) credit ratings were eligible for purchase by the SMCCF. On April 9, the SMCCF revised the terms of the facility to include corporate bonds that were investment grade as of March 22, but subsequently downgraded to at least BB-/Ba3 by two or more nationally recognized statistical rating organizations (NRSROs). These corporate bonds were termed “fallen angels,” and credit spreads for these bonds improved considerably after the announcement (S&P Global Market Intelligence 2020). This announcement coincided with the passage of the CARES Act, which expanded the Treasury’s committed equity investment in the CCFs from $20 billion to $75 billion (Board of Governors 2020e; Board of Governors 2020f).

To inform the SMCCF’s index portfolio purchases, the Fed created a Broad Market Index with the intention of tracking the market of secondary bonds that met the criteria in the Term Sheet (FRBNY n.d.c). To create the index, all eligible issuers were given a weight based on market capitalization, yielding an individual issuer weight. This number was used to calculate the index contribution for each eligible issuer, subject to the constraints that the weight not be higher than 10% of an issuer’s maximum historical outstanding bonds, and not higher than 1.5% of the combined CCF facility size (FRBNY 2021b). The Fed updated the composition of the index every 4-5 weeks.

For example, the September 8, 2020, Broad Market Index included 1,005 eligible corporate bonds and 16 eligible ETFs. The FRBNY also published monthly the Broad Market Index sectoral breakdown. The sectoral breakdown sorted eligible corporate bonds by industry (FRBNY n.d.c) (see Figure 6).

Source: FRBNY n.d.c.

The Fed published monthly data on the weighted average maturity and credit rating distribution of the SMCCF’s portfolio (see Figure 7).

Source: FRBNY n.d.c.

The Fed also published data on the breakdown of ETFs purchased (see Figure 8). By the end of July, all of the SMCCF’s new purchases were of individual corporate bonds (Singh 2020).

Source: FRBNY n.d.c.

PMCCF

Pricing for the PMCCF was issuer-specific and informed by market conditions. The PMCCF also charged an additional penalty rate consistent with the Fed’s Regulation A, which requires that emergency facilities charge a rate that is a premium to a “normal” market rate, afford liquidity in unusual and exigent circumstances, and encourage repayment (COC 2020; Board of Governors 2022). The pricing methodology considered spreads on existing bonds issued by similar issuers (e.g. by sector and rating) over comparable-maturity Treasuries. This calculated spread was then added to the rate on a comparable-maturity newly issued (“on-the-run”) Treasury. The PMCCF applied a ratings-based spread premium for lower-rated issuers. It also charged a 100bps facility fee (FRBNY 2020b). Maximum spreads were capped by historical ratings: “these levels are set around the 95th to 97th percentile of spreads over the past 15 years on three- to five-year senior debt of US firms (excluding banks) to maturity matched on-the-run Treasuries” (FRBNY 2020b).

SMCCF

The SMCCF purchased eligible bonds at fair market value in the secondary market (Board of Governors 2020b). The SMCCF avoided purchasing eligible ETFs that traded at prices that materially exceeded the estimated net asset value of the underlying portfolio (Board of Governors 2020b). Specifically, the SMCCF would “generally not purchase shares of an ETF that were determined to have closed at a premium above the lower of the following limits relative to the prior end-of-day official net asset value (NAV): (a) 1%, or (b) the mean premium observed over the prior 52 weeks, on a rolling basis, plus the 1-standard deviation of the premium for the same period” (FRBNY 2020b).

The SMCCF did not charge a penalty rate, unlike the PMCCF. The Fed stated to the Congressional Oversight Commission that it interpreted Regulation A as applying to primary-market purchases but not purchases in the secondary market (COC 2020).

This Key Design Decision does not apply to the CCFs.

This Key Design Decision does not apply to the CCFs.

In addition to a ratings-based spread premium, the PMCCF charged a 100 bps facility fee upon closing on the amount issued to the PMCCF (FRBNY 2020b). As the SMCCF purchased in the secondary market, it did not charge a facility fee.

This Key Design Decision does not apply to the CCFs.

This Key Design Decision does not apply to the CCFs.

This Key Design Decision does not apply to the CCFs.

This Key Design Decision does not apply to the CCFs.

When the CCFs were first announced, the Fed indicated that the facility would function through September 30, 2020, unless extended by the Board of Governors and the Treasury (FRBNY 2020b). On July 28, 2020, the Fed extended the CCFs through December 31, 2020 (FRB 2020a). By late July 2020, the facility ceased purchasing ETFs, instead purchasing individual corporate bonds for its broad market index portfolio (Singh 2020).

On November 19, 2020, Secretary of the Treasury Steven Mnuchin requested in a letter to Chair Powell that the Fed return unused CARES Act Treasury funds, consistent with Secretary Mnuchin’s interpretation of Section 4029 of the CARES Act (Mnuchin 2020). Fed Chair Powell responded with a letter on November 20, 2020, stating:

Some commentators described the interaction as unusually politically fraught (Conti-Brown 2020; Siegel and Stein 2020).

On June 2, 2021, the Fed announced that the SMCCF would begin selling its portfolio in a “gradual and orderly” way, so as to minimize any adverse impact on market functionality (Board of Governors 2021). On June 3, the FRBNY indicated that the SMCCF would begin selling ETFs on June 7 (FRBNY 2021c). On July 8, the FRBNY indicated that the SMCCF would begin selling individual corporate bonds (FRBNY 2021d). The Fed completely wound down the portfolio by the end of August 2021 (FRBNY 2021c; J. Powell 2021).