Via Financial Times

By James Politi in Washington

The US Treasury department and the Federal Reserve are facing calls to clarify how companies can access $454bn of government funds set aside to help corporate America access capital during the coronavirus pandemic.

Nearly a quarter of a $2tn stimulus package signed into law by Donald Trump on Friday is aimed at offering companies loans, loan guarantees and debt purchases from the government. But while the financial lifeline from Washington — to be jointly arranged by the Fed and Treasury — has already attracted huge interest from companies in urgent need of tapping the funds, the precise timing, mechanics and conditions attached to the government aid are still hazy, leading to urgent demands for more information and detail. 

Mike Crapo, the Republican chairman of the Senate banking committee, wrote a letter to Steven Mnuchin, the US Treasury secretary, and Jay Powell, the chairman of the Federal Reserve, late on Saturday asking them to “work quickly to issue guidance” on the plan, highlighting uncertainty over its implementation.

Mr Crapo said recipients needed to “understand what programs and facilities are available, the terms and conditions of those programs and facilities, and a point of contact or inquiry portal for them to discuss access and applicable conditions for those programs and facilities”.

Among the key questions are whether companies receiving help from Washington would end up with large government stakes and restrictions on share buybacks and dividend payouts, and the extent of the credit risk the Fed will be willing to take on during this period.

Interest in receiving the government money has soared, according to Washington lobbyists. David Stewart, a principal in the public policy practice at Squire Patton Boggs, said it was not just hotel and restaurant groups who were asking about ways to access federal aid, but a broader range of companies in sectors ranging from energy to manufacturing.

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“All of them are looking at whatever assistance can be available,” Mr Stewart said. “Here’s a situation where there has been a dramatic liquidity crisis in all sectors of the economy.”

“Companies are facing a revenue cliff and they are facing unique challenges,” said Tom Quaadman, executive vice-president at the Center for Capital Markets Competitiveness at the US Chamber of Commerce. “This is about how do you keep your workforce paid, how do you keep the firm open, and have the financial resources to weather the storm so you can start growing as quickly as possible afterwards,” he added.

But the success of the plan will depend on how rapidly and effectively the Treasury and the Fed can get the money flowing to the companies that need it. The legislation passed on Friday says that within 10 days of enactment, the Treasury department has to spell out the application procedures for government help, raising hopes it could soon be up and running.

It also describes how the plan would be structured: Treasury would provide money to facilities set up by the Fed which in turn would make direct loans to companies, offer loan guarantees, and purchase corporate debt in both primary and secondary markets. That structure mirrors existing emergency lending facilities already launched by the Fed and the Treasury last week to provide as much as $300bn in liquidity to the US economy through the banking system.

Trump administration officials say that once the $454bn in Treasury firepower is fully leveraged, it could deliver up to $4tn in liquidity to the economy. “These are temporary support for the American economy that’s very very, very critical,” Mr Mnuchin told Fox News on Sunday, adding that he was in such close contact with Mr Powell that they now “ speak multiple times a day on a regular basis”. Both the Fed and Treasury would have to sign off on every investment.

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 The stimulus funds, however, come with strings attached for companies receiving assistance, which may complicate their discussions with the government. In the case of direct loans through a Fed facility, recipients will have to agree to restrictions on share buybacks, dividend payments, and executive compensation.

But Mr Mnuchin will have the authority to waive those restrictions if it is “necessary to protect the interests of the federal government” — and it is far from clear how widely the Treasury secretary intends to pursue such exemptions. Some midsized businesses, with employees ranging from 500 to 10,000 people, could face further restrictions, according to the bill, including a requirement to be domiciled in the US, and to respect collective bargaining agreements with unions, according to the plan.

The bill does not provide for companies participating in the Fed-Treasury scheme to automatically accept an equity stake on the part of the government, as is the case for separate $50bn aid to airlines and companies deemed essential to national security in the stimulus bill, but it does not rule it out either.

“I don’t think it would be wise to presume that Treasury wouldn’t seek out some kind of equity stakes,” Mr Stewart said. Beyond the conditions likely to be placed by the government on any bailout money, another source of uncertainty is the role of the banks, since they may have to serve as intermediaries for the government aid if it comes in the form of loan guarantees through the Fed facility.

Finally, there is still some doubt as to whether the Fed itself will be willing to sign off on help to more troubled borrowers, especially given the rapidly deteriorating credit profiles of many companies. Even when it has deployed its crisis-fighting tools, the US central bank has always sought safe assets as collateral, a requirement of the Federal Reserve Act which established its existence.

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The stimulus bill says that those rules on “loan collateralisation, taxpayer protection, and borrower solvency” still applied, but if implemented strictly, this could limit participation in the scheme as well as the overall economic impact. “One thing a lot of people are asking is how much of the credit risk is the Fed going to take on,” said Alec Phillips, an economic policy analyst at Goldman Sachs in Washington.