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Fed to Lend Directly to Large Corporations

June 30, 2020 By Mircea Vasiu

Starting yesterday, the Federal Reserve of the United States (Fed) began the Primary Market Corporate Credit Facility (PMCCF), through which it will directly lend to large corporations. 

The facility, an emergency one, comes shortly after the Fed announced two weeks ago that it is buying the debt of individual companies on the open market.

Again, the announcement was made on a Monday, right at the start of the trading week. With this move, the Fed is likely to receive critics as voices already doubt the legality of such a program.

Controversies About the Fed’s PMCCF Program

A few weeks ago, the Fed began buying debt of individual companies, and the move raised many eyebrows.

For instance, how can investors assess the impact of the Fed’s actions on the company’s stock prices? Suddenly, valuations need a different metric to compare them to similarly-situated stocks.

The Federal Reserve Act allows the Fed to loan to nonbanks, but only if the program is broad-based. Moreover, the companies must be solvent to meet the eligibility criteria, and the Treasury secretary has to sign off too. Basically, this is a financial emergency facility the Fed is using to alleviate the impact of the economic recession on large corporations.

Once again, the Fed is using a Special Purpose Vehicle (SPV) for the announced facility. In contrast with the Secondary Market Corporate Credit Facility (SMCCF) that the Fed uses to buy individual companies’ debt, the PMCCF is designed as a backstop for corporate debt so that the large corporations’ business activities will better cope with the dislocation caused by the pandemic.

Some other limitations, besides the solvency issue, do exist. For instance, both programs, SMCCF and PMCCF, forbid the buying of debt of issuers that are majority-owned by a foreign government. Moreover, the issuers must be incorporated and domiciled in the United States.

This is yet another move displaying the full flexibility of the Fed’s measures and how far it is willing to go. Since the start of the coronavirus pandemic, the Fed released a number of facilities designed to make it easier for households, financial firms, municipalities, and businesses, to borrow.

It started with the basic move of lowering the federal funds rate close to zero and by pumping USD liquidity into the financial system. Now that things are somehow calmer in the markets, the Fed shows its readiness to deploy tailor-made solutions for other economic players. This time, it was a large corporations’ turn.

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