“The speed of the response has been unprecedentedly fast,” said Roberto Perli, a partner at Cornerstone Macro and former Fed economist. “It is a ‘whatever it takes’ moment, but backed by actions, not just by words.”
The economic situation has been particularly painful for both large and small businesses, as shops, airplanes and hotels have abruptly emptied out. Many will need financial support to survive, whether in the form of loans or new debt issuance. As buyers have become unwilling to snap up outstanding corporate debt, it has pushed up interest rates, making it too expensive for companies to raise money by selling new bonds.
The Fed’s plan to bolster the corporate bond market, which has been under pressure as companies find themselves on shaky ground, will work through two new programs established using the Fed’s emergency lending powers. They should help market functioning while allowing companies to stay afloat.
One of them, the Primary Market Corporate Credit Facility, is open to investment-grade companies and will provide bridge financing of four years, according to the Fed’s release. The Fed will create a special purpose vehicle that will both purchase bonds from eligible issuers and extend loans.
The program defers interest payments on that bridge financing “for six months, extendable at the discretion of the Board of Governors” to get companies through the worst of the coronavirus period. But the support comes with restrictions — companies taking that option are not allowed to buy back shares or pay out dividends, both of which eat into a firm’s cash position.
The other program, the Secondary Market Corporate Support Facility, will purchase already-issued debt, which has become hard to trade, including by buying exchange-traded funds that bundle bonds together. The Fed said that together the programs were intended “to support credit to large employers.”
Fed officials are also taking measures to support smaller businesses, resurrecting a program from the 2008 financial crisis, the Term Asset-Backed Securities Loan Facility or TALF, that encouraged lending to small businesses and households. Officials also announced that they would set up a new program, the Main Street Business Lending Program, that would “support lending to eligible small-and-medium sized businesses,” though they gave few details as to how.