The Federal Reserve expanded the criteria for its $600 billion “Main Street” lending facility on Thursday, opening the pandemic rescue program to a whole host of big, household names.
A day earlier, Fed Chairman Jerome Powell said the coronavirus pandemic is likely to cause significant damage to the U.S. economy and that Congress and the Fed both will likely need to do more to help battered businesses and millions of unemployed workers.
But signs also are emerging that the $2.3 trillion set aside to help bridge Main Street, Wall Street, municipalities and credit markets through the coronavirus pandemic are working.
“Broadly speaking, across leveraged finance and investment grade corporate credit, we think much of the worst is behind us with regard to price volatility,” Stephen Oh, global head of credit and fixed-income at PineBridge Investments in Los Angeles, wrote in a post Thursday.
“While spreads could slide back somewhat, it’s hard to fathom a return to the peak spread levels during March, given the forceful nature of central bank actions.”
Here’s a breakdown of the Fed’s efforts:
Small(er) Businesses:
April 30: Fed expands its $600 billion Main Street Lending Facility to include bigger firms with more employees. That means up to $5 billion in annual revenue, up from $2.5 billion initially. The Fed also lowered its minium loan size to $500,000 from $1 million, potentially pitting smaller companies against big, household names for emergency funding.
See: Under Fed’s new criteria, Equifax, Nasdaq and Tiffany & Co. are ‘Main Street’ companies
April 24 Congress injected it with another $320 billion into the Fed’s hallmark $350 billion Paycheck Protection Program. House Speaker Nancy Pelosi has begun to question aspects of the small-business lending effort. The PPP quickly ran out of funds after a rocky start on April 3.
Municipal bonds:
April 28: The Fed expanded its Municipal Liquidity Facility, an up to $500 billion program, to buy bonds directly from states and cities by allowing in smaller locales. Initially, the plan in March was to tackle problems in the short-term money-market sector. As yields soared, the Fed on April 9 unfurled its first iteration of the municipal loan program, offering short-term loans to states and municipalities, with funding through the CARES Act. Its expanded version allows debt of up to 3-year debt.
Term Asset-Backed Securities Loan Facility (TALF 2.0)
April 9: TALF is expanded to include existing AAA-rated commercial mortgage-backed securities, or bonds used to finance office towers, shopping malls and other commercial property types. Collateralized loan obligations, which are funds that buy up loans to debt-laden companies, will also be eligible. The size of the facility stays at $100 billion. March 23: Fed revives TALF, giving companies like Ford Motor F, -3.23%, American Express AXP, -5.06% and others heavily involved in consumer credit an easy way to sell new asset-backed bonds for funding without much risk, since the Fed is providing a backstop. To be eligible, the bonds must be AAA-rated, and backed by new or recently originated student loans, unsecured consumer loans or small business loans
Primary and Secondary Market Corporate Credit Facilities
April 9: Fed beefed up its primary and secondary corporate credit facilities to provide up to $750 billion worth of credit, now also including “fallen angels,” or companies whose BBB credit ratings have been downgraded to junk territory. However, the facility won’t fund banks that take customer deposits or companies that received specific support from the $2.2 trillion CARES Act.
March 23: Facilities target existing corporate debt with investment-grade ratings, including exchange-traded funds, which were pummeled by record outflows. The primary facility opens to investment-grade companies seeking new loans or bond financing. The idea is to prevent companies facing pandemic fallout from shedding employees and business relationships, which could further damage the economy.
Bond purchases:
March 23: In a dramatic move, the Fed said aggressive action was needed to soften the blow of the pandemic. It vowed to buy an unlimited amount of bonds that already have government backstops, including some commercial mortgage debt. March 15: Plan initially was to buy at least $700 billion of U.S. Treasury debt and “agency” mortgage bonds, or assets with government backing, in a bid to soothe tumult, even safe-haven assets, as investors rush to sell what they can to raise cash.
Currency swap lines:
March 20: The Fed and five other major central banks move together to bolster their global funding efforts by moving to daily seven-day U.S. dollar funding facilities, up from weekly ones. In addition, the group of central banks will keep offering weekly 84-day maturity U.S. dollar operations to help tamp down market turmoil.
Global market volatility led to a desperate dash for U.S. dollars, the world’s reserve currency, writes MarketWatch’s Greg Robb, in no small part because the greenback is used for most international trade and payments. Analysts say the rush into dollars has amplified the world-wide equity selloff and volatility across financial markets, as many industrial nations all but shutter their borders in an attempt to contain the spreading pandemic.
March 19: To help ease dollar funding strains, the Fed sets up $30 billion to $60 billion worth of U.S. dollar swap lines with nine central banks in Asia, South America and Europe, which are expected to stay in place for at least the next six months. The Fed already had standing facilities with central banks in Canada, England, Japan, New Zealand and the European Central Bank.
Primary Dealer Credit Facility
March 18: Program to supply key dealers of securities on Wall Street with up to 90-day loans to jump-start trading again and boost liquidity across financial markets. A range of collateral will be eligible, from existing commercial paper to municipal bonds to asset-backed securities, as well as equities.
Commercial paper:
March 17: Fed invokes section 13(3) of the Federal Reserve Act to provide a backstop for a key source of short-term funding for big businesses, after calls by investors for the U.S. central bank to unclog the so-called commercial paper market. It is a roughly yearlong program that aims to support the real economy, rather than just the financial sector, by helping businesses meet payrolls, inventory payments and other short-term liabilities.
Interest rates:
March 15:In a surprise weekend move, the Fed cut benchmark rates by 100 basis points to a range of zero to 0.25%, but said not to expect U.S. benchmark rates to be pushed into negative territory, like some foreign central banks.The central bank also announced it would be using its balance sheet to help lenders, businesses and households absorb the shock of daily American life grounding to a halt.
Repos:
Since chaos erupted in the overnight lending market in September, the Fed has been offering billions of dollars’ worth of short-term loans to Wall Street’s roughly two dozen “primary” securities dealers to help ease pressure in this key corner of the market.
What do market participants say?
“Looking forward, there are two areas where we expect the Fed to do more in coming meetings,” wrote John Bellows, portfolio manager at Western Asset Management.
“If the current contraction in economic activity does indeed have medium-term consequences, then it’s likely that the Fed will keep rates close to zero well past the point of the economy having ‘weathered recent events’ and well into the recovery,” he wrote in a recent post.
The second area would be bolstering its current “as needed” stance on buying of Treasury and agency mortgage bonds to one that puts “downward pressure on yields, in order to both support financial conditions and also to facilitate a continued fiscal response.”
