In the past week, the Board of Governors of the Federal Reserve Board has announced numerous major initiatives to support the flow of credit to American families and businesses in the face of the widespread economic disruption caused by the novel coronavirus (COVID-19) pandemic. These measures are separate from the CARES Act legislation that has just been enacted.

The Federal Reserve’s March 23, 2020, announcement stated "The Federal Reserve's role is guided by its mandate from Congress to promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system. In support of these goals, the Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit to American families and businesses."

The initiatives include, among others, the Federal Reserve's establishment (or revival) of the following credit facilities:

1. Supporting credit to large employers

A. Primary Market Corporate Credit Facility (PMCCF)

• This facility is established to purchase qualifying corporate bonds directly from eligible issuers and provide loans directly to eligible issuers.

• Eligible corporate bonds and loans must meet the following criteria: (i) issued by an eligible issuer, (ii) issuer is rated at least BBB- or Baa3 by a major nationally recognized statistical rating organization (NRSRO), and, if rated by multiple major NRSROs, rated at least BBB- or Baa3 by two or more NRSROs, in each case subject to review by the Federal Reserve, and (iii) have a maturity of four years or less.

• Eligible issuers are US companies headquartered in the United States and with material operations in the United States. The scope of eligible issuers may be expanded in the future. Eligible issuers do not include companies that are expected to receive direct financial assistance under recently enacted federal legislation. Currently there is no further guidance on the meaning of "material operations."

• The maximum amount of total outstanding bonds/loans of an eligible issuer that borrows from the facility may not exceed a certain percentage of its maximum outstanding loans/bonds on any day between March 22, 2019, and March 22, 2020. The higher the issuer's bond rating, the higher the maximum lending limit.

• No specific interest rates are provided; the guidance states interest rates will be based on market conditions.

• An issuer may capitalize interest for the first six months. If this election is made, the issuer may not pay dividends or engage in stock buybacks during the period interest payments are not being made.

• The issuer will pay a commitment fee of 100 basis points (bps).

• The issuer can call the bonds/loans at any time at par.

• The facility will cease purchasing bonds or making loans on September 30, 2020, unless the Federal Reserve extends the period.

B. Secondary Market Corporate Credit Facility (SMCCF)

• The facility is established to purchase in the secondary market corporate debt issued by eligible issuers. The facility will purchase eligible individual corporate bonds as well as eligible corporate bond portfolios in the form of exchange traded funds (ETFs) in the secondary market.

• Bonds must meet the criteria set forth above under the PMCCF (with the exception that the maturity must be five years or less).

• Eligible issuers are US businesses with material operations in the United States. Eligible issuers do not include companies that are expected to receive direct financial assistance under recently enacted federal legislation. Currently there is no further guidance on the meaning of "material operations."

• The maximum amount of bonds that the facility will purchase from any eligible issuer will be capped at 10% of the issuer's maximum bonds outstanding on any day between March 22, 2019, and March 22, 2020.

• The facility will purchase eligible corporate bonds at fair market value in the secondary market.

• The facility will cease purchasing eligible corporate bonds and eligible ETFs no later than September 30, 2020, unless extended by the Federal Reserve.

C. Commercial Paper Funding Facility (CPFF)

• This facility is established to ensure the smooth functioning of the $1.2 trillion commercial paper market.

• Under this facility, the Federal Reserve Bank of New York will commit to lend, on a recourse basis, to a special purpose vehicle (SPV) that will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers.

• The SPV will purchase from eligible issuers three-month U.S. dollar-denominated commercial paper through the New York Fed's primary dealers.

• Eligible issuers are U.S. issuers of commercial paper, including municipal issuers and US issuers with a foreign parent company.

• Eligible commercial paper will be U.S. dollar-denominated commercial paper (including asset-backed commercial paper) that is rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A1/P1/F1 by two or more major NRSROs, in each case subject to review by the Federal Reserve.

• The maximum amount of a single issuer's commercial paper the SPV may own at any time will be the greatest amount of US dollar-denominated commercial paper the issuer had outstanding on any day between March 16, 2019, and March 16, 2020.

• For commercial paper rated A1/P1/F1, pricing will be based on the then-current three-month overnight index swap (OIS) rate plus 110 bps. For commercial paper rated A2/P2/F2, pricing will be based on the then-current three-month OIS rate plus 200 bps.

• An issuer must pay a facility fee equal to 10 bps of the maximum amount of its commercial paper the SPV may own.

• The SPV will cease purchasing commercial paper on March 17, 2021, unless extended by the Federal Reserve.

2. Supporting Flow of Credit to Consumers and Small Business

 A. Term Asset-Backed Securities Loan Facility (TALF)

• This facility is established to support lending to households, consumers, and small businesses by facilitating the issuance of asset-backed securities (ABS) and improving the market conditions for ABS generally.

• Under this facility, the Federal Reserve Bank of New York will commit to lend to an SPV on a recourse basis. The SPV initially will make up to $100 billion of loans available. The loans will have a term of three years, will be nonrecourse to the borrower, and will be fully secured by eligible ABS.

• Eligible borrowers under the facility are US companies that own eligible collateral and maintain an account relationship with a primary dealer.

• Eligible collateral includes US dollar-denominated ABS issued on or after March 23, 2020, that have a credit rating in the highest long-term or the highest short-term investment-grade rating category from at least two eligible NRSROs and do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. All or substantially all of the credit exposures underlying eligible ABS must have been originated by a US company.

• The credit exposures underlying eligible ABS must consist of one of the following: auto loans and leases, student loans, credit card receivables, equipment loans, floorplan loans, insurance premium finance loans, SBA-guaranteed small business loans, and eligible servicing finance receivables.

• The pledged eligible collateral will be valued and assigned a haircut according to a schedule based on its sector, the weighted average life, and historical volatility of the ABS.

• Pricing: For eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 100 bps over the two-year LIBOR swap rate for securities with a weighted average life less than two years, or 100 bps over the three-year LIBOR swap rate for securities with a weighted average life of two years or greater. The pricing for other eligible ABS will be set forth in the detailed terms and conditions.

• The SPV will assess an administrative fee equal to 10 bps of the loan amount on the settlement date for collateral.

• Each loan provided under this facility will have a maturity of three years. Loans will be pre-payable in whole or in part at the option of the borrower, but substitution of collateral during the term of the loan generally will not be allowed.

• No new credit extensions will be made after September 30, 2020, unless the facility is extended by the Federal Reserve.

B. Main Street Business Lending Program

• The Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small and medium-sized businesses, complementing efforts by the Small Business Administration.

3. Supporting Money Market Mutual Funds – Money Market Mutual Fund Liquidity Facility (MMLF)

• This facility is established to "assist money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy."

• The facility will make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from prime money market mutual funds.

• Eligible borrowers under the facility are all US depository institutions, US bank holding companies, and US branches and agencies of foreign banks.

• Eligible collateral will include US Treasury and agency securities, US government sponsored enterprise (GSE) securities, highly rated commercial paper and negotiable certificates of deposit issued by a US issuer, highly rated municipal short-term debt, and highly rated municipal variable rate demand notes and bank certificates of deposit.

• Collateral valuation will either be amortized cost or fair value. For asset-backed commercial paper, unsecured commercial paper, negotiable certificates of deposit, and US municipal short-term debt, including variable rate demand notes, the valuation will be amortized cost.

• Advances under the facility that are secured by US Treasuries and Agency securities or GSE securities will be made at a rate equal to the primary credit rate at the then-current rate offered by the Federal Reserve Bank of Boston to depository institutions. Advances secured by US municipal short-term debt, including variable rate demand notes, will be made at a rate equal to the primary credit rate at the then-current rate offered by the Reserve Bank to depository institutions plus 25 bps. All other advances will be made at a rate equal to the primary credit rate at the then-current rate offered by the Reserve Bank to depository institutions plus 100 bps.

• There are no special fees associated with the facility.

• Regulatory Capital Treatment: On March 19, 2020, the federal bank regulatory agencies issued an interim final rule to allow banking organizations to neutralize the effects of purchasing assets through the program on risk-based and leveraged capital ratios.

• No new credit extensions will be made after September 30, 2020, unless the facility is extended by the Federal Reserve.