The Federal Reserve Bank of New York (Fed) will lend up to $750 billion to a special purpose vehicle (SPV) that will purchase primary and secondary market corporate debt. The Department of the Treasury will make a $75 billion equity investment in the SPV to cover losses.
The programs are funded with money authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and will terminate by Sept. 30, 2020, unless extended. The Fed wants to keep the bond market functioning during the COVID-19 crisis.
An eligible issuer may use the PMCCF to refinance outstanding debt three months prior to maturity or to issue new debt. The debt must be rated at least Ba3/BB- and have a maturity of four years or less.
The SMCCF was originally created to buy “eligible individual corporate bonds” and “eligible ETFs.” The debt must also be rated Ba3/BB- and have a maturity of five years or less.
“Eligible individual corporate bonds” proved to be problematic: the Fed buys eligible corporate bonds in the open market, but issuers must certify compliance with the CARES Act. The logistics of certification were insurmountable.
On June 15, 2020, the Fed announced that they would start buying corporate bonds in the form of “eligible broad market index bonds.” This eliminated the compliance issue. The Fed will buy corporate bonds across industries. The portfolio will mimic the index, subject to ratings and maturity constraints.
Fed purchases will drive down corporate bond yields, which will lower corporate borrowing costs, which will help keep workers employed.
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