PMCCF, CPFF and CARES Act: summary of financial relief for the airline and air cargo industries

Primary Market Corporate Credit Facility

The Primary Market Corporate Credit Facility (“PMCCF”) serves as a funding backstop for corporate debt issued by eligible issuers. Under the PMCCF, the Federal Reserve Bank of New York (“FRB NY”) will commit to lend to a special purpose vehicle (“SPV”) on a recourse basis.

Eligible bonds and loans:  Under the PMCCF, the SPV will purchase eligible corporate bonds directly from eligible issuers and will make eligible loans to eligible issuers. Eligible corporate bonds and loans must meet each of the following criteria at the time of bond purchase or loan origination by the PMCCF:

• Issued by an eligible issuer (see below);
• Issuer is rated at least BBB-/Baa3 by a major nationally recognized statistical rating organization (“NRSRO”) and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs, in each case subject to review by the Federal Reserve; and
• Have a maturity of four years or less.

[Note that additional bonds or loans will need to comply with covenants in existing debt documents absent modification.  Consider Federal Reserve pronouncements encouraging modifications].

Eligible issuers:  Eligible issuers are U.S. companies headquartered in the United States and with material operations in the United States.

• The scope of eligible issuers may be expanded in the future.
• Eligible issuers do not include companies that are expected to receive direct financial assistance under the CARES Act.

Maximum overall leverage:  The maximum amount of outstanding bonds or loans of an eligible issuer (if that issuer borrows from the PMCCF) may not exceed the applicable percentage of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020:

• 140 percent for eligible assets/eligible issuers with a AAA/Aaa rating from a major NRSRO;
• 130 percent for eligible assets/eligible issuers with a AA/Aa rating from a major NRSRO;
• 120 percent for eligible assets/eligible issuers with a A/A rating from a major NRSRO; or
• 110 percent for eligible assets/eligible issuers with a BBB/Baa rating from a major NRSRO.

Interest rate:  The PMCCF will purchase bonds and make loans that have interest rates informed by market conditions.

PIK interest subject to condition:  At the borrower’s election, all or a portion of the interest due and payable on each interest payment date may be payable in kind for 6 months, extendable at the discretion of the Board of Governors of the Federal Reserve System. Such interest amount will be added to, and made part of, the outstanding principal amount of the bond or loan. A borrower that makes this election may not pay dividends or make stock buybacks during the period it is not paying interest.

Fee:  Commitment fee of 1.00%.

Callable:  Bonds and loans under the PMCCF are callable by the eligible issuer at any time at par.

Program termination:  The PMCCF will cease purchasing eligible corporate bonds or extending loans on September 30, 2020, unless the PMCCF is extended by the Board of Governors of the Federal Reserve System. The FRB NY will continue to fund the PMCCF after such date until the PMCCF’s underlying assets mature.

Commercial Paper Funding Facility (“CPFF”)

The Federal Reserve Bank of New York ("FRB NY") will commit to lend to a special purpose vehicle (“SPV”).  The SPV will purchase from eligible issuers three-month U.S. dollar-denominated commercial paper through the FRB NY's primary dealers.

Eligible issuers:  Eligible issuers are U.S. issuers of commercial paper, including U.S. issuers with a foreign parent company.

Eligible commercial paper:  The SPV will only purchase U.S. dollar-denominated commercial paper (including asset-backed commercial paper ("ABCP")) that is rated at least A-1/P-1/F-1 by a major nationally recognized statistical rating organization ("NRSRO") and, if rated by multiple major NRSROs, is rated at least A-1/P-1/F-1 by two or more major NRSROs, in each case subject to review by the Federal Reserve.

• An issuer that, on March 17, 2020, was (1) rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, was rated at least A1/P1/F1 by two or more major NRSROs; and (2) is subsequently downgraded, will be able to make a one-time sale of commercial paper to the SPV so long as the issuer is rated at least A2/P2/F2 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A2/P2/F2 by two or more major NRSROs, in each case subject to review by the Federal Reserve.
• The SPV will not purchase ABCP from issuers that were inactive prior to the creation of the CPFF. An issuer will be deemed inactive if it did not issue ABCP to institutions other than the sponsoring institution for any consecutive period of three-months or longer between March 16, 2019 and March 16, 2020.

Limits per issuer:  The maximum amount of a single issuer's commercial paper the SPV may own at any time will be the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between March 16, 2019 and March 16, 2020.

The SPV will not purchase additional commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer's limit.

For an issuer that, on March 17, 2020, was (1) rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, was rated at least A1/P1/F1 by two or more major NRSROs; and (2) is rated at least A2/P2/F2 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A2/P2/F2 by two or more major NRSROs, the maximum amount of the issuer’s commercial paper that the SPV will purchase is the amount of U.S. dollar-denominated commercial paper the issuer had outstanding the day before it was downgraded.

Pricing:

• For commercial paper rated A1/P1/F1, pricing will be based on the then-current 3-month overnight index swap ("OIS") rate plus 1.10%.
• For commercial paper rated A2/P2/F2, pricing will be based on the then-current 3-month OIS rate plus 2.00%.

Facility fee:  At the time of its registration to use the CPFF, each issuer must pay a facility fee equal to 0.10% of the maximum amount of its commercial paper the SPV may own.

Termination date:  The SPV will cease purchasing commercial paper on March 17, 2021, unless the Board extends the facility. The FRB NY will continue to fund the SPV after such date until the SPV's underlying assets mature.

See https://www.newyorkfed.org/markets/commercial-paper-funding-facility/commercial-paper-funding-facility-faq  for more details.

CARES Act

Treasury Secretary authorized to make loans, loan guarantees, and other investments in support of eligible businesses, States, and municipalities that do not, in the aggregate, exceed $500 billion.

Allocation Among Specific Industries

• Passenger air carriers:  Paragraph (1):  Not more than $25 billion to make loans and loan guarantees for passenger air carriers, eligible businesses that are certified under part 145 of title 14, Code of Federal Regulations, and approved to perform inspection, repair, replace, or overhaul services, and ticket agents (as defined in section 40102 of title 49, United States Code).
• Cargo air carriers:  Paragraph (2):  Not more than $4 billion to make loans and loan guarantees for cargo air carriers.
• Businesses critical to national security:  Paragraph (3):  Not more than $17 billion to make loans and loan guarantees for businesses critical to maintaining national security.

Interest:  Rate determined by Treasury based on the risk plus the current average yield on outstanding marketable obligations of the United States of comparable maturity.

Conditions to lending:

• Eligible business:  the applicant is an eligible business for which credit is not reasonably available at the time of the transaction [does this translate into a requirement that other sources of credit have been fully drawn or are unavailable?];
• Prudence:  the intended obligation by the applicant is prudently incurred;
• Pricing reflects risk:  the loan or loan guarantee is sufficiently secured or is made at a rate that— (i) reflects the risk of the loan or loan guarantee; and (ii) is to the extent practicable, not less than an interest rate based on market conditions for comparable obligations prevalent prior to COVID;
• Maximum duration:  the duration of the loan or loan guarantee is as short as practicable and in any case not longer than 5 years;
• Limitation on purchase of equity securities:  until the date 12 months after the date the loan or loan guarantee is no longer outstanding, neither the eligible business nor any affiliate of the eligible business may purchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business, except to the extent required under a contractual obligation in effect as of the date of enactment of the CARES Act;
• Limitation on dividends and other distributions:  until the date 12 months after the date the loan or loan guarantee is no longer outstanding, the eligible business shall not pay dividends or make other capital distributions with respect to the common stock of the eligible business;
• Employment:  until September 30, 2020, the eligible business shall maintain its employment levels as of March 24, 2020, to the extent practicable, and in any case shall not reduce its employment levels by more than 10 percent from the levels on such date;
• Located in United States:  certification by the eligible business that it is created or organized in the United States or under the laws of the United States and has significant operations in and a majority of its employees based in the United States; and
• Continued operation in jeopardy:  the eligible business must have incurred or is expected to incur covered losses such that the continued operations of the business are jeopardized, as determined by Treasury.

Compensation:  During the period beginning on the date on which the loan or loan guarantee agreement is executed and ending on the date that is 1 year after the date on which the loan or loan guarantee is no longer outstanding:

• no officer or employee of the eligible business whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020):
  • will receive from the eligible business total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by the officer or employee from the eligible business in calendar year 2019; or
  • will receive from the eligible business severance pay or other benefits upon termination of employment with the eligible business which exceeds twice the maximum total compensation received by the officer or employee from the eligible business in calendar year 2019; and
• no officer or employee of the eligible business whose total compensation exceeded $3,000,000 in calendar year 2019 may receive during any 12 consecutive months of such period total compensation in excess of the sum of— (A) $3,000,000; and (B) 50 percent of the excess over $3,000,000 of the total compensation received by the officer or employee from the eligible business in calendar year 2019.

"Total compensation" includes salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee of the eligible business.

Consideration to Treasury:  Treasury must receive the following compensation:

• the eligible business has issued securities that are traded on a national securities exchange and Treasury receives a warrant or equity interest in the eligible business; or
•  in the case of any eligible business other than an eligible business described in subparagraph (i), Treasury receives, in the discretion of Treasury— (i) a warrant or equity interest in the eligible business[1]; or (ii) a senior debt instrument issued by the eligible business.

The terms and conditions of any warrant, equity interest, or senior debt instrument so received shall be set by Treasury and shall meet the following requirements:

• Such terms and conditions shall be designed to provide for a reason able participation by Treasury, for the benefit of taxpayers, in equity appreciation in the case of a warrant or other equity interest, or a reasonable interest rate premium, in the case of a debt instrument.
• For the primary benefit of taxpayers, Treasury may sell, exercise, or surrender a warrant or any senior debt instrument received by Treasury. Treasury shall not exercise voting power with respect to any shares of common stock acquired under this provision. 
• If Treasury determines that the eligible business cannot feasibly issue warrants or other equity interests, Treasury may accept a senior debt instrument in an amount and on such terms as Treasury deems appropriate.

No Forgiveness of Principal:  The principal amount of any obligation issued by an eligible business, State, or municipality under a program described herein shall not be reduced through loan forgiveness.   

[1]  Treasury directed to prescribe such regulations or guidance as may be necessary or appropriate to carry out the purposes of this section, including guidance providing that the acquisition of warrants, stock options, common or preferred stock or other equity under this section does not result in an ownership change for purposes of Section 382 of the Internal Revenue Code of 1986 [which limits use of net operating loss carry forwards and other tax assets arising prior to certain changes in ownership].