Now that the Fed is buying about a $1 billion in corporate bond ETFs weekly, and as of two weeks ago, starting buying individual corporate bonds out of a list which, as we disclosed yesterday bizarrely includes such perfectly solvent and stable foreign corporate titans as Toyota, Volkswagen and Daimler, not to mention such domestic names as Apple and Berkshire, the US central bank has shifted away from the secondary market where its market manipulation only affects asset prices instead of directly providing funding to corporations, and starting today the NY Fed announced that its Primary Market Corporate Credit Facility (PMCCF) has also opened for business Monday, the last of its nine pandemic emergency lending programs to become operational, the one which will directly give money to corporations.
The PMCCF is operational and available for use beginning June 29.
We’ve released the relevant certification forms, other transaction documentation and related materials, and additional FAQs regarding access to this facility.https://t.co/pcvF1aFR0w pic.twitter.com/g0AXpnOJxU
— New York Fed (@NewYorkFed) June 29, 2020
The program was first announced on March 23, the day the S&P hit its post crisis lows and the Fed implemented central planning in the form of Unlimited QE and corporate bond purchases in both the primary and secondary markets.
The Federal Reserve Bank of New York today announced that the Primary Market Corporate Credit Facility (PMCCF) is operational and available for use beginning June 29. The New York Fed also released the relevant certification forms, other transaction documentation and related materials, and additional Frequently Asked Questions regarding access to this facility.
The PMCCF provides a funding backstop for corporate debt to eligible issuers and is available to (i) purchase qualifying bonds as the sole investor in a bond issuance and (ii) purchase portions (up to 25%) of syndicated bonds at issuance (“co-investor” transactions).
Thanks to trillions in Fed interventions, corporate credit spreads have since collapsed back to tall time lows, and companies have been able to borrow a record amount of debt in 2020 to take advantage of cheaper credit costs, while ensuring that the credit bubble that brought us here is even bigger next time around.
As part of the official launch of the PMCCF, the Fed said in its release that pricing will be issuer-specific and informed by market conditions. Prices will also be subject to minimum and maximum spreads over comparable maturity Treasury securities.
What we would like to know – now that we are aware that the Fed is buying corporate names which make up an index of 794 entities in the secondary market, is who at the Fed we need to call to sell $1BN in bonds to the Fed and give the proceeds to our shareholders.
We have $1BN in bonds we’d like to issue to the Fed and give the proceeds to our shareholders. Who do we call please? https://t.co/seAMHqRuS3
— zerohedge (@zerohedge) June 29, 2020
In its statement, the Fed said that “by standing ready to provide credit to qualifying issuers of corporate bonds in periods of stress, the PMCCF serves as a funding backstop, supporting market liquidity and the availability of credit for large employers.”
In other words, if “large employers” – who at this point can sell junk bonds at about 4% yields – need a few hundred million in taxpayer-guaranteed funds, they just need to make a phone call to the NY Fed and the central bank will promptly wire them the funds, with its blessings. And what happens if the company suffers devastating losses and the loans are impaired? Why the Treasury ends up getting wiped out on its investment. And by Treasury we of course mean taxpayers.
In other words, the question for enterprising CFOs now is how companies game the system so they can directly sell bonds to the Fed then use the proceeds to fund stock buybacks, ensuring that the debt bubble is even greater when the next bailout comes but not before shareholders in these zombie companies makes out like bandits.
For those who missed it the first time, here is Fed’s PMCCF term sheet.
TL/DR: printer goes Brrrr
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Cornelius Rupert T.
Cornelius Rupert T.