The U.S. Federal Reserve on Monday kicked off a long-awaited program to buy newly minted corporate bonds directly from companies, launching the last of the several programs created to stabilize financial markets rocked by the coronavirus.
Through the $500 billion Primary Market Corporate Credit Facility the Fed will support companies well rated before the crisis that need capital to keep their businesses afloat during the crisis.
The U.S. central bank’s pledge in late March to bolster the corporate credit market has allowed companies access to credit readily despite the uncertainty created by the pandemic.
The Fed said Monday it does not expect high usage of the facility given current market conditions. Nonetheless it wants the program in place in case market conditions deteriorate. It began purchasing shares of exchange-traded funds in mid-May, and started purchasing individual corporate bonds through the Secondary Market Corporate Credit Facility this month.
In contrast to the SMCCF, which purchases bonds in public markets after they are issued, the PMCCF requires companies wanting to participate to apply for certification, with those details disclosed on Monday. The Fed also updated the term sheet for the facility, including specifications on deal pricing.
Through the PMCCF, the Fed has two options to buy debt issued by a company. It can buy an entire new issue of bonds as the sole investor in a deal or it can buy portions of either syndicated loans or new bonds.
Companies can have their debt purchased through both the primary and secondary market facilities, as long as the total amount is not more than 1.5% of the combined maximum potential size of the facilities, which is $750 billion, or 10% of the issuer’s bonds outstanding.
Bonds purchased in the secondary market facility will track a broad corporate bond market index, and the Fed said it will not sell bonds in the secondary market program with the aim of rebalancing the index.