Fixed Income   |   April 23, 2020

Corporate Credit and the CARES Act and Federal Lending Programs

Over the past few weeks the government and the Fed have announced key programs that have helped to stabilize the credit markets. Below we outline the ones we believe are most critical to the high-grade markets:

Key implications across the corporate credit market

The backdrop for credit became more constructive post the announcements of these programs. We have seen record issuance for corporates given a more favorable backdrop and have seen a compression in high yield spreads.

The Federal Reserve released an FAQ for its bond buying program. Here are some of the points the FED addressed:

  • The FED will require statements of eligibility from program participants
  • Under the programsthe ratings criteria refer to ratings by Moody’s, S&P and Fitch
  • Eligible issuers may use the primary corporate credit facility to refinance existing debt
  • Eligible issuers must pay a facility fee of 100bps each time they access the facility
  • Investment grade senior secured bonds issued by non-investment grade issuers will not be eligible under the Primary Corporate Credit Facility
  • The Secondary Market Corporate Credit Facility will only purchase US dollar bonds of eligible issuers

But some questions remain outstanding:

  • When is the start date of the program?
  • Which part of the front end of the yield curve will the Fed look to buy?
  • The Fed has asked BlackRock to serve as the initial investment manager facilitating the program. How other
    managers will be determined still unclear.

The level of participation from investment grade companies is not clear as the primary corporate credit facility requires a 1% upfront fee. In addition, companies may be wary of having the US government as a creditor given concerns about potential limitations. We continue to see lower quality investment grade issuers tap the market prior to the programs beginning so does that imply they will be less inclined to participate? We will not know until the program begins but we continue to watch.

Read more Corporate Credit and the CARES Act and Federal Lending Programs

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