Federal Reserve Credit Facilities: An Overview

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Two weeks ago the Federal Reserve announced a set of measures that largely mirrored the response to the 2008 financial crisis. Though nuanced in some respects, the credit facilities introduced by the Fed were generally in alignment with previous practices – albeit more aggressive than in crises past. Today all of that changed. The Fed announced an additional $2.3 trillion in loans and purchases in an attempt to stabilize a volatile and languishing economy. What makes today’s measures truly unprecedented, however, is that this is the first time in their 107 year history that the Fed agreed to purchase investment grade corporate bonds – effectively nationalizing the bond market.

With the blessing of the Treasury, the Fed has officially exhausted every conceivable measure at their disposal by extending credit to the most vulnerable verticals of the bond market – junk bonds, municipal bonds, and collateralized loan obligations (CLOs) are officially fair game. At this point, the only thing missing from the Fed’s “toolkit” is the extension of credit to purchase equities outright (but never say never). Though my opinion is clearly starting to bleed through, I will save my thoughts on the Fed’s response to the pandemic for another day. The objective of this post is to provide an overview of each credit facility that has been introduced by the Fed as of today. Considering the breadth of the existing measures, I consider it unlikely that the Fed will follow up with another announcement. For the time being, what’s presented below is an exhaustive summary of the Fed credit facilities. Highlights were taken directly from the Fed’s website.

Main Street Lending Program

  • The Fed will purchase 95% of the loan and the lender will retain 5% on its books – this is a full recourse loan with a tenor of 4 years.
  • Eligible Borrowers: businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Each eligible borrower must be a business that is created or organized in the United States with significant operations in and a majority of its employees based in the United States.
  • Loan Specifics:
    • 4 year maturity;
    • Amortization of principal and interest deferred for one year;
    • Adjustable rate of Secured Overnight Financing Rate (SOFR) +250-400 basis points;
    • Minimum loan size of $1 million;
    • Maximum loan size that is the lesser of (i) $150 million, (ii) 30% of the Eligible Borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”); and
    • Prepayment permitted without penalty.
  • There are a number of attestations that the Borrower must make to receive loan funds, but the crux of them focus on not utilizing funds to repay other loan balances. The Borrower must also make “reasonable” efforts to maintain its payroll/employees and agree to limits on compensation and stock buybacks.
  • Total Allocation: $600 billion and it will be seeded by $75 billion from the Treasury.
  • The program has not been finalized and the Fed will be receiving comments until April 16th. Details to come.

Municipal Liquidity Facility

  • The Fed will establish a Special Purpose Vehicle (SPV) to purchase municipal notes directly from eligible issuers.
  • Eligible Issuers:
    • U.S. states and the District of Columbia
    • U.S. cities with population over 1 million
    • U.S. counties with population over 2 million
  • Eligible Collateral:
    • Tax Anticipation Notes (TANs)
    • Tax and Revenue Anticipation Notes (TRANs)
    • Bond Anticipation Notes (BANs)
    • *All notes must mature in less than 2 years
  • Maximum Amount: the SPV can purchase is capped at 20% of the issuer’s fiscal year 2017 general revenue and utility revenue.
  • Pricing: will be based on the issuer’s bond rating (details forthcoming) and an origination fee of 10 basis points must be paid to participate in the facility.
  • Total Allocation: The SPV can purchase up to $500 billion in municipal notes and will be seeded with $35 billion from the Treasury. As it stands, the facility will sunset on September 30th, 2020.

Paycheck Protection Program Lending Facility

  • This facility exists to facilitate additional lending to small businesses under the PPP provision of the CARES Act. The Fed will take the PPP note as collateral, with no recourse to the borrower.
  • Eligible Borrowers: Depository institutions that are approved to originate PPP loans. The program will likely expand to include non-depository institutions participating in the program.
  • Rate and Fees: Extension of credit under the facility will be made at a rate of 35 basis points; there are no fees associated with this facility.
  • Collateral Valuation: PPP loans pledged as collateral to secure extensions of credit under the facility will be valued at the principal amount of the PPP loan.
  • Maturity Date: Credit extended by the Fed will have a maturity date equal to the PPP loan, but the maturity rate will be accelerated if the underlying asset goes into default and the eligible borrower sells the underlying asset to the SBA to realize the 100% SBA guarantee.
  • Regulatory Capital Requirements: The PPP loan will be assigned a risk weighting of 0% and PPP loans financed by this facility can be neutralized by banking organizations for leverage capital ratio requirements.

Term Asset-Backed Securities Loan Facility

  • The Term Asset-Backed Securities Loan Facility (TALF) is intended to help meet the credit needs of consumers and businesses by facilitating the issuance of asset-backed securities (ABS).
  • Under TALF, the Federal Reserve Bank of New York will commit to lend to an SPV on a recourse basis.
  • Eligible Borrowers: All U.S. companies that own eligible collateral and maintain an account relationship with a primary dealer are eligible to borrow under TALF.
  • Eligible Collateral: Must be an ABS where the underlying credit exposures are one of the following:
    • Auto loans and leases;
    • Student loans;
    • Credit card receivables (both consumer and corporate);
    • Equipment loans and leases;
    • Floorplan loans;
    • Insurance premium finance loans;
    • Certain small business loans that are guaranteed by the SBA;
    • Leveraged loans; or
    • Commercial Mortgages
    • *Eligible collateral will not include ABS that bear interest payments that step up or down to predetermined levels on specific dates. In addition, the underlying credit exposures of eligible collateral must not include exposures that are themselves cash ABS or synthetic ABS.
  • Term: Three years; non-recourse to borrower.
  • Pricing:
    • For CLOs, the interest rate will be 150 basis points over the SOFR;
    • For SBA Pool Certificates (7(a) Loans), the interest rate will be the top of the federal funds target range plus 75 basis points
    • For SBA Development Company Participation Certificates (504 Loans) the interest rate will be 75 basis points over the 3-year fed funds overnight index swap (OIS) rate.
    • For all other eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 125 basis points over the 2-year OIS rate for securities with a weighted average life less than two years, or 125 basis points over the 3-year OIS 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.
  • Fees: The SPV will assess an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral.
  • Total Allocation: The TALF SPV will initially make $100 billion of loans available and will be seeded with $10 billion from the Treasury.

Primary Market Corporate Credit Facility

  • This facility will serve as a funding backstop for corporate debt issued by eligible users. Under the facility, the Federal Reserve Bank of New York will commit to lend to an SPV on a recourse basis.
  • The SPV will purchase:
    • Qualifying bonds as the sole investor in a bond issuance;
    • Purchase portions of syndicated loans or bonds at issuance.
  • Collateral: The Reserve Bank will be secured by all assets of the SPV.
  • Eligible Assets:
    • Eligible corporate bonds as sole investor. Eligible corporate bonds must: be issued by an eligible issuer and have a maturity of 4 years or less.
    • Eligible syndicated loans and bonds purchased at issuance. Eligible syndicated loans and bonds must: be issued by an eligible issuer and have a maturity of 4 years or less. The facility may purchase no more than 25 percent of any loan syndication or bond issuance.
  • Eligible Issuers:
    • Must be a business that is created or organized in the U.S. or under the laws of the U.S.
    • Must be rated at least BBB-/Baa3 as of March 22, 2020 by a major nationally recognized statistical rating organization (NRSRO).
      • Issuers that were rated at least BBB-/Baa3 as of March 22, 2020, but are subsequently downgraded, must be rated at least BB-/Ba3 at the time the Facility makes a purchase.
    • The Issuer is not an insured depository institution or depository institution holding company.
    • The Issuer must satisfy conflicts-of-interest requirements as set forth by the CARES Act.
  • Leverage: Corporate bonds & loans can be levered 10:1, other assets can be levered 7:1.
  • Pricing:
    • Eligible corporate bonds: Pricing will be issuer specific, pursuant to market conditions, plus a 100 basis point facility fee.
    • Eligible syndicated loans and bonds: The facility will receive the same pricing as other syndicate members, plus a 100 basis point fee on the facility’s share of the syndication.
  • Total Allocation: Not to exceed $750 billion, seeded by $75 billion in Treasury funding.

Secondary Market Corporate Credit Facility

  • This program is very similar to the primary market corporate credit facility. The main difference here is that this facility will be used to purchase corporate bonds as well corporate bond portfolios issued on the secondary market.
  • Key differences are eligible asset classes, eligible sellers, and pricing. All other requisites remain the same as above.
  • Eligible Assets:
    • Eligible Individual Corporate Bonds: Must purchase bonds that were issued by an eligible issuers; have a maturity of 5 years or less; were sold to the facility by an eligible seller.
    • Eligible ETFs: The Facility also may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.
  • Eligible Seller: Each institution from which the facility purchases securities must be a business that is created or organized in the United States or under the laws of the United States with significant U.S. operations and a majority of U.S.-based employees. The institution also must satisfy the conflicts-of-interest requirements of section 4019 of the CARES Act.
  • Pricing: The facility will purchase eligible corporate bonds at fair market value in the secondary market. The facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.


This was a longer post than usual and certainly dense, but I hope you were able to find this information useful. These are the tools that will be utilized to stabilize credit markets in the U.S. and (hopefully) divert a deep recession as we navigate the coronavirus pandemic. As always, if you found this informative please like, subscribe, and share with your network.

Payment Protection Program Lending – Additional $250 Billion on the Way?

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Two weeks ago I published a blog on the SBA’s new loan program, the Payment Protection Program (PPP) that outlined eligibility, how to apply, and funding mechanism. The CARES Act allotted $349 billion to this program initially, but it appears that this may not have been enough. We’re less than two weeks into the new program and there are already concerns that funding will dry up – leaving several small business owners without relief. In line with these concerns, Treasury Secretary Mnuchin announced on Tuesday, April 7th via Twitter that he had asked for an additional $250 billion in funding for the program. Though the request appears justified, there have been significant issues with the rollout of this program. The existing issues with PPP and initial reactions from legislators, banks, and news outlets to additional funding will be discussed below.

A Rocky Start

According to an article published by Reuters on April 6th, there have been a myriad of issues with the administration of the PPP thus far. One major issue stems from ETRAN – the portal used to submit PPP loan packages to the SBA for approval. Some banks reported that the system crashed on Monday for hours, leaving them unable to process applications. Moreover, in addition to the clunky interface, there has also been some confusion around what documentation is required for the SBA to issue an authorization which has been a pain point for lenders.

This has effectively created a log jam, resulting in tension between all relevant stakeholders. Lenders are frustrated with incomplete and conflicting guidance from the Treasury/SBA which prohibits them from processing applications efficiently, this is turn leads to frustration from borrowers who feel lenders have been unresponsive or restrictive (some banks have restricted access to PPP loans to existing clients). In fact, the implementation of the existing program has been so mired with issued that the Fed had to once again step in and offer a facility to banks to move the process along. Specifically, the Fed has agreed to provide “term financing backed by PPP loans” which is a fancy way of saying the Fed will purchase PPP loans originated by banks concerned about the costs associated with originating/servicing the loans.

The Rational for Additional Funding

Despite the lackluster rollout, demand for PPP funding is high and continues to grow. Many small business owners are concerned that funding will run out before they can get access to relief. This appears to be a sentiment shared by Senators McConnell and Rubio. The former issued a statement on April 7th stating “it is quickly becoming clear that Congress will need to provide more funding or this crucial program may run dry. Nearly 10 million Americans filed for unemployment in just the last two weeks. Congress needs to act with speed and total focus to provide more money for this uncontroversial bipartisan program. The latter tweeted on April 6th that “the fear that PPP will run out of money is creating tremendous anxiety among small business.”

In addition to concerns from legislators and small business owners, banks have weighed in to express concerns about the existing allocation for the program. Bank of America and Wells Fargo have reported a combined $42.6 billion in applications – more than 10% of the total allocation over the course of five days. This is an issue that goes beyond large corporate banks, several community banks have also expressed technical and logistical issues with the program so far, issues that are compounded by increasing demand from small business owners. Moreover, small businesses have started to complain about access to capital. Many lenders are backed up with thousands of applications and have started to decline new applicants, which will ultimately accelerate the need for additional funding or incentives for banks to process these loans – likely both.


Though more funding appears to be justified, it is my opinion that the real issues lie in the administration of the program. If lenders and the Treasury/SBA cannot get on the same page quickly, implementation of the program will be underwhelming. Despite the best efforts of Congress and the Fed, if the program is not accessible to Main Street than money will not flow to those who need it the most, this will in return result in a failure of the program. I believe efforts to provide additional funding to the initial PPP allocation should also include clear guidance from federal administrators to lenders to ensure the program can be implemented more efficiently moving forward.

Thank you for taking the time to read this. If found this content valuable, please be sure to like, subscribe, and share it with others!

SBA’s Payment Protection Program – What You Need to Know

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Last week I discussed the differences between monetary policy and fiscal policy and framed both within the context of the COVID-19 pandemic. This week I thought it would be beneficial to provide an overview of the SBA’s new Payment Protection Program, since this is a good contemporary example of fiscal policy in action.

The Payment Protection Program (PPP) is part of the broader CARES Act that was approved by Congress last week. This program is specific to small business owners and has been implemented with the aim of providing payroll relief in the form of low interest loans, so small business owners can retain employees. In addition to employee retention, the PPP also allows loan proceeds to be used for mortgage payments, utilities, health insurance, and retirement contributions. Moreover, so long as borrowers can demonstrate that they have allocated loan proceeds to eligible uses, they will be eligible for loan forgiveness. A more detailed overview of the PPP is provided below.


The PPP authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. All loan terms will be the same for everyone. The loan amounts will be forgiven as long as:

  • The loan proceeds are used to cover payroll costs, most mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and
  • Employee and compensation levels are maintained.

Payroll costs are capped at $100,000 on an annualized basis for each employee. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. Loan payments will be deferred for 6 months.

Eligible Borrowers

All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries (click HERE for additional detail).

For this program, the SBA’s affiliation standards are waived for small businesses (1) in the hotel and food services industries (click HERE for NAICS code 72 to confirm); or (2) that are franchises in the SBA’s Franchise Directory (click HERE to check); or (3) that receive financial assistance from small business investment companies licensed by the SBA. *Additional guidance may be released as appropriate.

Eligible Purposes of the Loan

You should use the proceeds from these loan on:

  • Payroll costs, including benefits;
  • Interest on mortgage obligations, incurred before February 15, 2020;
  • Interest on mortgage obligations, incurred before February 15, 2020; and
  • Utilities, for which services began before February 15, 2020.

A Deeper Look at Payroll

Eligible payroll costs include the following:

  • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
  • Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
  • State and local taxes assessed on compensation; and
  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self employment, capped at $100,000 on an annualized basis for each employee.

Max Loan Amount and Number of Loans

Eligible borrowers will only be allowed to qualify for one loan; however, these loans are unique to individual businesses and the SBA has waived its affiliation basis requirements. Therefore, borrowers with multiple businesses will be able to apply for relief on a business by business basis – so long as the loan request(s) are in line with the eligible payroll applications.

Loans can be for up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount. That amount is subject to a $10 million cap. If you are a seasonal or new business, you will use different applicable time periods for your calculation. Payroll costs will be capped at $100,000 annualized for each employee.

Loan Structure

PPP loans will be fixed at 0.50% for the life of the loan. The maximum allowable term will be 2 years. All payments are deferred for 6 months (however, interest will continue to accrue over this period). There are no prepayment penalties for these loans, no collateral is required, and the personal guarantee has been waived.

How to Apply

You will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020. Click HERE for the application.

You can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. Visit www.sba.gov for a list of SBA lenders.

Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and certain expenses through existing SBA lenders. Starting April 10, 2020, independent contractors and self employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders. *Other regulated lenders will be available to make these loans as soon as they are approved and enrolled in the program.

Required Certifications

As part of the application process, borrowers must certify in good faith that:

  • Current economic uncertainty makes the loan necessary to support your ongoing operations.
  • The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
  • You have not and will not receive another loan under the program.
  • You will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of eligible payroll costs.
  • Loan forgiveness will be provided for the sum of documented eligible payroll costs. *Due to the likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
  • All information provided in your application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program is punishable by law.


This is arguably the most comprehensive relief package put together by the Federal Government and it is designed with the primary goal of ensuring small businesses are able to retain their employees and maintain essential overhead during these uncertain times. Moreover, the underwriting guidelines for this program have been significantly relaxed to maximize utilization of the program and empower lenders to close transactions efficiently.

If you know any small business owners that would benefit from this program, please share this post far and wide! If you are a small business owner, I hope this post was helpful and that you take advantage of this program and get access to much needed relief.