Of all the problems 2020 has given the world, perhaps one of the greatest has been granted by the Fed to a handful of CEOs across the country, that is, if their corporation has a credit rating of junk bond or higher.
On Monday the Fed announced the opening of its much-anticipated Primary Market Corporate Credit Facility (PMCCF), the $500 billion program whereby the Fed will create money out of thin air and lend directly to “large employers” in America. The term sheet says the pricing will be “issuer-specific.” But we can assume that it will be below market, otherwise no one would borrow directly from a central bank.
The justification behind this has been provided by the New York Fed. This time it’s:
In general, the availability of credit has contracted for corporations and other issuers of debt while, at the same time, the disruptions to economic activity have heightened the need for companies to obtain financing.
Times may be rough indeed, especially for large employers such as Microsoft, a company currently valued at $1.5 trillion and that has fallen on tough times of late. Just last week it announced the permanent closure of all of its eighty-three retail locations according to CNBC:
Microsoft said the closing of its physical locations will “result in a pre-tax charge of approximately $450 million, or $0.05 per share.”
We won’t know whether or not Microsoft decides to take up the Fed’s offer to buy debt until the end of the month, when the Fed provides its monthly lending facility reports to Congress.
Other than using the money to pay severance packages, a large employer could refinance existing debt. Per the PMCCF term sheet:
Issuers may approach the Facility to refinance outstanding debt, from the period of three months ahead of the maturity date of such outstanding debt.
This would be great, especially since Congress is funding the PMCCF with $50 billion. The taxpayers can help fund interest savings for their employers!
Of course, if refinancing isn’t an issue, share buybacks could be a solution. In 2019, many large employers and some companies on the verge of bankruptcy spent $730 billion on buying back their own shares, while in 2018, that number was $1.1 trillion as reported by Fox News, citing the S&P DOW indices. Maybe this liquidity will help corporations restore their spending habits to match pre-COVID levels?
In a time when physical store locations may prove both undesirable and problematic, and where existing debt levels are through the roof, what can the largest corporations in America do with this money other than restructure, replace old debt with new cheaper debt, or buy back their own shares? Sadly, we live in a time where a few billion dollars can only go so far.
