On June 29th, the Federal Reserve issued a term sheet and commenced its program to support issuance of new debt by large employers. The Primary Market Corporate Credit Facility (PMCCF) will give companies access to credit by either (i) purchasing qualifying bonds as the sole investor in a bond issuance, or (ii) purchasing portions of syndicated loans or bonds at issuance. The term sheets details eligibility requirements and pricing. In addition to the PMCCF, the Federal Reserve is also operating the Secondary Market Corporate Credit Facility (SMCCF) (together, the CCFs). The combined size of the CCFs will be up to $750 billion.
On June 25, 2020, the GAO released its report assessing and evaluating the major federal actions in response to the COVID-19 pandemic, including the CARES Act expenditures. The report, critical of the delay in comprehensive reporting of government COVID-19 expenditures permitted by OMB, drew on data directly from agencies.
Among the key findings highlighted by the report:
(1) Appropriations: Approximately $2.6 trillion appropriated across the government: “Six areas—Paycheck Protection Program (PPP); Economic Stabilization and Assistance to Distressed Sectors; unemployment insurance; economic impact payments; Public Health and Social Services Emergency Fund; and Coronavirus Relief Fund—account for 86 percent of the appropriations.”
(2) Testing: Reporting to the CDC on viral testing remains inconsistent and incomplete across the country.
(3) IRS payments to deceased taxpayers: The IRS made stimulus payments totaling $1.4 billion (the $1200 payments) to 1.1 million deceased individuals. Although the IRS has access to Social Security death information, Treasury and its Bureau of the Fiscal Service (involved in disbursing payments) did not.
The report makes a series of recommendations on following topics including: (1) Paycheck Protection Program (PPP) integrity; (2) IRS and Treasury access to Social Security death data; (3) better data tracking in state unemployment programs on benefits claims to coordinate with the PPP (under which businesses are expected to rehire or retain workers to qualify for loan forgiveness); (4) Congressional action to direct the Department of Transportation to develop an aviation preparedness plan; and (5) Congress’ need to use revised Medicaid payment formulas to provide appropriate payments during an economic downturn.
In its assessment, the Board noted that “the stress brought on by the COVID event has been larger than anticipated,
affected sectors of the economy in a highly unusual way, and could result in an unusual relationship between the economic and financial factors and credit losses, in part because of extraordinary government actions.” The stress tests showed that in three downside scenarios, loan losses for the 34 banks ranged from $560 billion to $700 billion. Aggregate capital ratios declined from 12.0 percent in the fourth quarter of 2019 to between 9.5 percent and 7.7 percent in the three scenarios. Given the results, the Board took steps to “ensure large banks remain resilient despite the economic uncertainty from the coronavirus event.” For the third quarter of this year, no share repurchases will be permitted. The Board also capped dividend payments to the amount paid in the second quarter, with additional limits based on recent earnings. Banks are also required to re-evaluate their longer-term capital plans.
Recent policy action on the coronavirus front:
(2) TESTING: Senator Ted Cruz introduced a bill to provide tax incentives to businesses that test workers for Covid-19.
(3) OVERSIGHT: On Monday June 15, 2020, it was revealed that the inspectors general designated by the CARES Act to monitor spending — the Pandemic Response Accountable Committee — wrote to key Congressional committee chairs last week expressing concern that the administration’s recent legal rulings were blocking their ability to provide oversight of the spending programs.
(4) LIABILITY: States explore limiting liability for COVID-19 related claims, including Iowa legislation signed by the governor on June 18 that limits liability retroactive to January 1, 2020 and North Carolina’s limited liability bill that passed the senate.
(5) PRIVACY: The most recent round of proposed federal legislation aimed at protecting privacy in COVID-19 contact tracing apps, follows on the heels of earlier proposals as well as state level action on the privacy front (see e.g. California bill; Minnesota bill). Around the globe, countries have introduced contact tracing apps — including Japan’s introduction today (June 19, 2020) of its national tracing app.
The CBO has updated its economic projections through the end of 2021 to account for the 2020 coronavirus pandemic. The CBO estimates that the real (inflation-adjusted) GDP will contract by 11 percent in the second quarter of 2020, which is equivalent to a decline of 38 percent at an annual rate. Furthermore, the number of people employed in the second quarter of 2020 will be almost 26 million lower than the number in the fourth quarter of 2019. The CBO also considers the effects of recent legislation, noting that “greater federal spending and lower revenues will cause real GDP and employment to be higher over the next few years than they would be otherwise.” However, in CBO’s assessment, “as long as some degree of social distancing remains in place, the economic boost that might be expected from recent legislation will be smaller than it would be during a period of economic weakness without social distancing.”
The report — “Questions About the CARES Act’s $500 Billion Emergency Economic Stabilization Funds” — focuses on the CARES Act’s provision of $500 billion to the Treasury Department for lending to businesses and to state and local governments. Notably, it finds that “Treasury has not disbursed any of the $46 billion it can use to provide loans and loan guarantees to the airline industry and businesses critical to maintaining national security.” Furthermore, “the Treasury has only disbursed $37.5 billion of CARES Act funds, which were invested in the Fed’s Secondary Market Corporate Credit Facility.” The report sets forth a list of “general and specific questions” for the Commission’s future work.
Late on Friday May 15, 2020, the most recent round of COVID-19 funding legislation, H.R. 6800, The Health and Economic Recovery Omnibus Emergency Solutions Act (“HEROES Act), passed the House by a mostly partisan vote of 208-199. The bill, which was introduced in the House earlier this week on May 12, 2020, includes approximately $3 trillion in relief for state and local governments, individuals, and the healthcare system.
The next major round of COVID-19 legislation, H.R. 6800, The Health and Economic Recovery Omnibus Emergency Solutions Act (“HEROES Act), was introduced in the house today, May 12, 2020. The package includes approximately $3 trillion in relief for state and local governments, individuals, and the healthcare system.
According to the Democratic staff of the House Committee on Appropriations summary , the bill includes, just in its funding for governments and financial services:
State Fiscal Relief – $500 billion in funding to assist state governments with the fiscal impacts from the public health emergency caused by the coronavirus.
Local Fiscal Relief – $375 billion in funding to assist local governments with the fiscal impacts from the public health emergency caused by the coronavirus.
Tribal Fiscal Relief – $20 billion in funding to assist Tribal governments with the fiscal impacts from the public health emergency caused by the coronavirus.
Fiscal Relief for Territories – $20 billion in funding to assist governments of the Territories with the fiscal impacts from the public health emergency caused by the coronavirus.
CARES Act Coronavirus Relief Fund Repayment to DC – Provides an additional $755 million for the District of Columbia to assist with the fiscal impacts from the public health emergency caused by the coronavirus
Treasury Inspector Generals – $35 million for the Treasury Inspector General for oversight of Coronavirus Fiscal Relief Fund payments to state and local governments, and $2.5 million for the Treasury Inspector General for Tax Administration for oversight of IRS payments.
Community Development Financial Institutions (CDFI) – $1 billion for economic support and recovery in distressed communities by providing financial and technical assistance to CDFIs.
Tax Credit Implementation – $599 million for implementation of additional payments to individuals.
Assistance to Homeowners–$75 billion to states, territories, and tribes to address the ongoing needs of homeowners struggling to afford their housing due directly or indirectly to the impacts of the pandemic by providing direct assistance with mortgage payments, property taxes, property insurance, utilities, and other housing related costs.
Elections – $3.6 billion for grants to States for contingency planning, preparation, and resilience of elections for Federal office.
Broadband – $1.5 billion to close the homework gap by providing funding for Wi-Fi hotspots and connected devices for students and library patrons, and $4 billion for emergency home connectivity needs.
Assisting Small Businesses – $10 billion in grants to small businesses that have suffered financial losses as a result of the coronavirus outbreak. Office of Personnel Management Inspector General Office (OPM IG) – $1 million for the OPM IG to combat healthcare fraud associated with COVID-19.
General Services Administration Technology Modernization Fund – $1 billion in funding for technology-related modernization activities to prevent, prepare for, and respond to coronavirus.
Postal Service – $25 billion for revenue forgone due to the coronavirus pandemic, plus language providing additional protections to Postal workers. An additional $15 million is provided for the Postal Service Inspector General for oversight of this funding.
Back in March 2020, the Fed had announced a plan to engage in the purchase of corporate bonds as part of its pandemic response to help stabilize credit markets. On May 11, 2020, the Federal Reserve Bank of New York announced that “the Secondary Market Corporate Credit Facility (SMCCF) [would] begin purchases of exchange-traded funds (ETFs) on May 12.”
Per its April 9, 2020 term sheet, the “SMCCF may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.” (See N.Y. Fed Statement). The Primary Corporate Credit Facility is expected to become operational in the “near future.”
The new guidance clarifies the terms of the $500 billion lending program for state and local governments. The Municipal Liquidity Facility will be available to U.S. states and the District of Columbia, U.S. cities with a population exceeding 250,000 residents, U.S. counties with a population exceeding 500,000 residents, and certain multi-state entities. The new guidance sets forth revised eligibility criteria, including the requirement that eligible issuers that are not multi-state entities must have been rated at least BBB-/Baa3 as of April 8, 2020 by two or more major nationally recognized statistical rating organizations. The term sheet also sets out pricing details. Pricing will be at a fixed interest rate based on a comparable maturity overnight index swap rate plus the applicable spread (ranging from 150 to 590 basis points) based on the long-term rating of the security for the eligible notes.
The Small Business Administration released a statement Sunday providing details on Round 2 of the Paycheck Protection Program (the loan/grant program for small businesses initially enacted in the CARES Act and then refunded through supplemental legislation, H.R. 266, a few weeks later). The joint statement from the SBA and Secretary of the Treasury Steven Mnuchin noted that in this second round of loans which began on April 27, 2020, over $175 billion has been disbursed through 2.2 million loans. The average loan size is now $79,000.
Responding to concerns that smaller lending institutions were closed out of the loan process in Round 1, the statement offers data on the lenders in this Round: “Nearly 500,000 of the loans were made by lenders with less than $1 billion in assets and non-banks. These lenders include Community Development Financial Institutions, Certified Development Companies, Microlenders, Farm Credit lending institutions, and FinTechs. Over 850,000 loans—about one third of the 2.2 million loans—were made by lenders with $10 billion of assets or less.”
Important questions remains, however, about exactly how these small businesses can ensure that the loans they are receiving through the Paycheck Protection Program qualify for loan forgiveness. These businesses and their advisors continue to await further guidance from the goverment. On Friday, the AICPA issued a statement urging immediate guidance on these time sensitive questions for businesseses.
On April 30, 2020, Christine Lagarde, President of the European Central Bank (ECB), announced new monetary policy measures in response to the economic crisis triggered by the COVID-19 pandemic. At an ECB press conference, Largarde first set the stage for further action, observing (at 8:30 minutes in): “The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime. Measures to contain the spread of the coronavirus (COVID-19) have largely halted economic activity in all the countries of the euro area and across the globe.”
After reviewing prior ECB action, Lagarde outlined (at 10:30 minutes in) new ECB steps including new incentives for bank lending: “Specifically, we decided to reduce the interest rate on TLTRO III [targeted longer-term refinancing] operations during the period from June 2020 to June 2021 to 50 basis points below the average interest rate on the Eurosystem’s main refinancing operations prevailing over the same period. Moreover, for counterparties whose eligible net lending reaches the lending performance threshold, the interest rate over the period from June 2020 to June 2021 will now be 50 basis points below the average deposit facility rate prevailing over the same period.” (See also Largarde’s written statement).
This afternoon, H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act, became law. The new legislation adds $310 billion of new funding to the Payroll Protection Protection Program (the small business loan/grant program) introduced in the CARES Act, which ran out of funds in under two weeks. In addition, the new legislation allocates $75 billion for health care related costs, and $25 billion for testing.
The guidance seeks to address borrower and lender questions concerning the implementation of the Paycheck Protection Program (PPP), established by section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act). The additional guidance as of April 23rd seeks to clarify whether “businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan.”
The Joint Committee on Taxation released its explanation of the CARES Act on Wednesday April 22, 2020, and includes an appendix with the estimated revenue effects originally prepared on March 26, 2020.