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Fed expands primary and secondary facilities to boost fallen angels

The Federal Reserve today expanded its program of broad-market liquidity backstops, including now allowing for direct primary- and secondary-market support of corporate issuers that have absorbed fallen-angel downgrades since the initial rollout of the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF) on March 23.

Under the initial PMCCF and SMCCF terms, Fed-backed special purpose vehicles (SPVs) were charged with providing lending and purchasing backstops for eligible investment-grade corporate bonds (those rated BBB–/Baa3 or higher). The new terms now encompass ratings that were at or above that IG threshold as of March 22, but subsequently tumbled on fallen-angel downgrades. Those eligible issuers and bonds must be rated at least BB–/Ba3 by two or more NRSROs as of the date on which the facilities take action, and eligible issuers may not have received any specific support under the federal CARES Act or any subsequent federal legislation.

The facilities sunset on Sept. 30 unless extended. The combined size of the programs ranges up to $750 billion. The primary market facility sets eligible maturities at four years or less, while the secondary facility will buy corporate bonds on the open market with remaining maturities of five years or less.

Those March 23 program announcements followed on the Fed’s rollout, on March 17, of a Primary Dealer Credit Facility (PDCF). Those liquidity backstops are widely credited with providing enough structural support to trigger a dramatic ramp in high-grade corporate issuance. Volume in the IG primary through yesterday totaled nearly $325 billion across 150 separate offerings since March 17 (versus $257 billion printed over the entirety of the second quarter last year), the proceeds of nearly all of which added cash provisionally to the issuers’ balance sheet or addressed immediate refinancing needs amid plunging cash-flow progressions across broad swaths of the economy.

The high-yield primary market was shuttered for nearly all of March, but has shown signs of life since Yum! Brands Inc. broke the fast on March 30. However, premiums remain high, and issuers are favoring five-year structures with relatively short noncall provisions to allow for refinancing at more economic terms down the road.

For reference, the spread for the BB component of the S&P corporate bond indexes was at a coronavirus-era high of 809 basis points on March 23, up from roughly 200 basis points as market risk sentiment darkened on Feb. 20. The level had tightened to 611 basis points as of yesterday’s close, but remained 280 basis points wide of the BBB index spread. That BBB/BB spread differential was 84 basis points on Feb. 20, and just 56 basis points in mid-January.

Notable U.S. fallen-angel issuers since March 22 include Ford Motor Co. (roughly $114 billion of rated debt), Occidental Petroleum Corp. ($44 billion), Apache Corp. ($11 billion), Western Midstream Operating LP ($8.1 billion), Continental Resources Inc. ($5.2 billion), Delta Air Lines ($4.6 billion), and Patterson-UTI Energy Inc. ($875 million). S&P Global Ratings yesterday reported that U.S. fallen-angel debt so far in 2020 totals $237 billion, including pre-facility drops for high-profile issuers including Kraft Heinz Foods Co. (downgraded on Feb. 14, affecting $31.5 billion of debt) and Macy's Inc. (cut on Feb. 18, affecting $7.2 billion of debt).

The agency flagged a further $240 billion of BBB debt, or about 9% of the outstanding total long-term BBB debt at the end of the first quarter, that it views as vulnerable to fallen-angel cuts over the balance of 2020.

The Fed today also expanded other programs, with the goal of providing up to $2.3 trillion in loans to support the economy. Enhancements include supplying liquidity to the Small Business Administration's Paycheck Protection Program; purchasing up to $600 billion in loans through the Main Street Lending Program; expanding the size and scope of the Term Asset-Backed Securities Loan Facility to $850 billion; and establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities.

This article was written by John Atkins, senior editor of investment Grade and high-yield corporate bonds for LCD, a division of S&P Global Market Intelligence.