The U.S. central bank expects to begin purchasing shares of eligible exchange-traded funds early this month as part of its coronavirus emergency-lending programs, according to the Federal Reserve Bank of New York.
Lending through the Fed’s secondary-market corporate credit facility and primary-market corporate credit facility via purchases of corporate bonds will begin soon thereafter, the New York Fed announced Monday on its website. ETFs are included in the secondary facility and the program’s announcement in March had a major impact on that market.
“Additional details on timing will be made available as those dates approach,” the New York Fed said.
The corporate credit facilities are among nine emergency lending programs announced by the Fed to help shelter the U.S. economy from the pandemic and keep credit flowing. The move was a dramatic escalation of the central bank’s intervention, stepping into the corporate debt markets for the first time since the 1950s and including some sub-investment grade debt in the ETF purchases.
The corporate credit programs are backed by the more than $2 trillion economic relief package passed by Congress. Businesses across the nation have shuttered to limit contagion and more than 30 million people have claimed unemployment benefits in the last six weeks. So far, only four programs are up and running.
Fed officials first announced the creation of the corporate credit facilities on March 23. Though they’ve not yet been launched, the announcement has had an important stabilizing effect in financial markets.
“Many companies that would’ve had to come to the Fed have now been able to finance themselves privately since we announced the initial term sheet on these facilities,” Fed Chair Jerome Powell said during an April 29 press conference. “The ultimate demand for the facilities is quite difficult to predict because there is this ‘announcement effect’ that really gets the market functioning again. Of course, we have to follow through, though. And we will follow through to validate that announcement effect.”
Investors have piled into bond ETFs in anticipation of the Fed’s purchases. BlackRock Inc.’s $20 billion iShares iBoxx High Yield Corporate Bond ETF, the largest junk-debt ETF, attracted a record monthly inflow of $3.7 billion in April. Meanwhile, the $46 billion iShares iBoxx $ Investment Grade Corporate Bond ETF has rallied roughly 12% since the Fed’s initial announcement in March.
In the additional details provided Monday, the New York Fed said it “will generally not purchase shares of an ETF that are trading at a premium” of 1% above its net asset value, or if the NAV premium diverged from the trend of the previous year.
“These limits will serve the dual purpose of avoiding overpayment for an ETF relative to the cost of purchasing its underlying assets, and avoiding contributing to elevated demand that an ETF may already be experiencing, while affording operational flexibility,” the New York Fed said.
It also clarified that companies will have to provide written certifications that they were not able to obtain financing through traditional channels if they wish to place debt directly with the Fed through the primary-market corporate credit facility. Those provisions may limit usage given the extent to which financing conditions in corporate credit markets have improved in recent weeks.
“In certifying whether the issuer is unable to secure adequate credit accommodations from other banking institutions or the capital markets, issuers may consider economic or market conditions in the market intended to be addressed by the PMCCF as compared to normal conditions,” the New York Fed said. “Lack of adequate credit does not mean that no credit is available. Credit may be available, but at prices or on conditions that are inconsistent with a normal, well-functioning market.”
Subsidiaries of foreign companies may use the facilities if they have “significant operations” -- meaning “greater than 50%” of assets, income, operating revenues, or operating expenses -- in the U.S., and a majority of employees based there.
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