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Authored by Mike Geraty

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. 

Primary Market Corporate Credit Facility (PMCCF)

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. 

Secondary Market Corporate Credit Facility (SMCCF)

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.

For more information on this topic, or to learn how Baker Tilly public sector investment specialists can help, contact our team.

This information should not be construed as a recommendation of a particular investment strategy, it is being provided for illustration purposes only.  The commentaries provided are opinions of Baker Tilly Investment Services, LLC.  While the information is deemed reliable, Baker Tilly Investment Services, LLC cannot guarantee its accuracy, completeness, or suitability for any purpose and makes no warranties with regard to any results to be obtained from its use, or whether any expressed course of events will actually occur.  Past performance does not guarantee future results.

Investment advisory services are offered through Baker Tilly Investment Services, LLC, a registered investment adviser.  Baker Tilly Investment Services, LLC is a wholly owned subsidiary of Baker Tilly Virchow Krause LLP, an accounting, tax and advisory firm.  Baker Tilly Virchow Krause LLP trading as Baker Tilly is a member of the global network of Baker Tilly International, Ltd., the members of which are separate and independent legal entities.

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