Thread: The Fed's Planned Corporate Credit Facilities (CCFs)

I've been meaning to do a thread with some highlights/thoughts from this FAQs Fed memo about the Fed's bond buying program released on 5/4/20

https://www.newyorkfed.org/markets/primary-and-secondary-market-faq/corporate-credit-facility-faq

Note: Expect typos/grammar errors.

A discussion (see thread below) yesterday prompted me to re-focus on doing the thread. So here goes. https://twitter.com/EconomPic/status/1259645005985013760?s=20

The Fed's planned bond buying program; the Corporate Credit Facilities (CCFs) is made up of :
1) the Primary Market Corporate Credit Facility (PMCCF)
2) the Secondary Market Corporate Credit Facility (SMCCF)

The PMCCF supports the primary bond markets
The SMCCF supports the secondary bond markets

Timing:
The SMCCF is expected to begin purchasing eligible ETFs in early May. The PMCCF is expected to become operational and

the SMCCF is expected to begin purchasing eligible corporate bonds soon thereafter. Additional details on timing will be made available as those dates approach."

The CCFs will cease purchasing eligible corporate bonds, eligible syndicated loans, and eligible ETFs

no later than 9/30/20, unless the CCFs are extended by the Fed and the Treasury. The New York Fed will continue to fund the CCFs after such date until the CCF’s holdings either mature or are sold.

What can the CCFs invest in?

PMCCF
(i) sole investor of bonds in primary

(ii) portions of syndicated loans or bonds at issuance

SMCCF may purchase in the secondary market
(i) IG
(ii) IG rated as-of 3/22/20, and that remain rated at least BB-/Ba3 (HY rated) at time of purchase
(iii) US-listed IG ETFs
(iv) US-listed HY ETFs

Is there a limit to the size of the SPV?
The combined size of the CCFs will be up to $750 billion.
You can read the fine print in the FAQ doc for the levered stats.

Which investment managers are supporting the CCFs?
Initially, BlackRock Financial Markets Advisory.

Once the exigent need to commence operations of the facilities has passed, the investment manager role will be subject to a competitive bidding process.

How will pricing work under the PMCCF?
For bonds that the PMCCF purchases as sole investor, pricing will be issuer-specific,

informed by market conditions, plus a 100 bps facility fee. For eligible syndicated loans and bonds purchased at issuance, the PMCCF will receive the same price as other syndicate members, plus a 100 bps facility fee paid by the borrower on the PMCCF’s share of the issuance.

What are the issuer limits for the SMCCF?

The maximum amount of corporate bonds that the SMCCF will purchase on the secondary market of any Eligible Issuer is capped at 10 percent of the Eligible Issuer’s maximum bonds outstanding on any day between 3/22/19 and 3/22/20.

At what price will the SMCCF purchase corporate bonds in the secondary market?

The SMCCF will purchase eligible corporate debt at market prices from Eligible Sellers in the secondary market.

ETF Pricing (see pic)

*My Commentary* This is completely unrealistic to think that debt will be bought at the market's offer side. Buys buy the Fed/Blackrock are likely to be done higher than current markets show (which will have already been reflected higher as the CCF program gets priced in.

May maturing loans be refinanced by corporate bonds under the PMCCF?

Yes. Maturing loans from the period of 3 months ahead of the maturity date may be refinanced and replaced with corporate bonds under the PMCCF. All borrowings are subject to per-issuer limits.

What are Eligible Assets that will be purchased by the PMCCF?

The PMCCF may purchase eligible corporate bonds as the sole investor in a bond issuance. Eligible corporate bonds must, at the time of purchase, be issued by an Eligible Issuer & have a maturity of 4 years or less.

The PMCCF also may purchase portions of syndicated loans or bonds of Eligible Issuers at issuance. Eligible syndicated loans or bonds must, at the time of purchase, be issued by an Eligible Issuer and have a maturity of 4 years or less. The PMCCF may purchase no more than 25%

of any syndicated loan or bond issuance. To start, the PMCCF will focus on purchasing bonds at issuance.

Pricing for loans and bonds tend to fluctuate throughout the day of issuance. How will this impact PMCCF participation?

When the PMCCF purchases portions of syndicated loans

or bonds of Eligible Issuers, participation is expected to be alongside that of other participants at the same pricing. However, borrowing under the PMCCF is intended for issuers who are unable to secure adequate credit accommodations. Market pricing should not be lowered for the

purpose of decreasing demand from market participants in order to fill deal capacity via the PMCCF.

*Personal Commentary* The last 2 sentences in the above paragraph are interesting & potentially problematic. If the credit new issue market is struggling to clear deals, is it

because the credit markets "are broken" such that investors are unable to set a realistic price in which a deal clears? Or are new issues struggling because the deals themselves are priced with unfavorable investor terms which would otherwise clear at better deal terms?

If the issue is more the later of the 2, than the Fed will be acting more as a facilitator of poorly priced & structured new issues. Clearing deals in this "backstopped" or artificial fashion at non-market clearing prices will lead to future untenable credit markets

because of poorly placed new issues deals.

End Thread

cc: @EconomPic @philbak1

Investment Mgt Agreement b/c The Federal Reserve Bank of NY & Blackrock Financial Mgt as-of 3/25/20
https://www.newyorkfed.org/medialibrary/media/markets/special_facilities/ima-blackrock-fma?mod=article_inline&mod=article_inline

Terms of Assignment for BlackRock on Behalf of the Federal Reserve Bank of NY Regarding Secondary Market Corporate Credit Facility as-of 3/27/20
https://www.newyorkfed.org/medialibrary/media/markets/special_facilities/SMCCF_Terms_BlackRock.pdf?mod=article_inline