The Secondary Market Corporate Credit Facility (SMCCF) was a special purpose vehicle (SPV) launched by the Federal Reserve on March 23, 2020, to support the corporate bond market in the face of the COVID-19 crisis. The SMCCF bought us investment grade corporate bonds and Bond ETFs in the secondary market. The idea was that banks would be more inclined to lend to companies if they knew there was a strong secondary market to which they could sell that debt. The program has been expanded to include the purchase of more bonds and lower credit quality bonds on April 9, 2020.
The SMCCF began buying bond ETFs on May 12, 2020 and said it would begin buying individual bonds to create a “broad and diverse market index” of individual U.S. corporate bonds beginning June 16, 2020. .
A related Fed initiative was the Primary Market Corporate Credit Facility (PMCCF). Between the two initiatives, the Fed bought $750 billion worth of bonds.
On November 19, 2020, Treasury Secretary Steven Mnuchin said he would not authorize the extension of the SMCCF again after December 31, 2020. The SMCCF stopped buying bonds or ETFs after December 31, 2020.
Key points to remember
- The Fed was trying to make sure the banks continued to lend to businesses.
- The Secondary Market Corporate Credit Facility (SMCCF) purchased corporate bonds and bond ETFs.
- It encouraged lending by ensuring demand for corporate bonds in secondary markets.
- The program started buying bond ETFs on May 12, 2020 and started buying individual bonds on June 16, 2020.
- The SMCCF stopped buying bonds or ETFs after December 31, 2020.
SMCFF Details
The Secondary Market Corporate Credit Facility (SMCCF) was an SPV that purchased bonds in the secondary market. The US Treasury Department provided an initial investment in the SMCCF of $25 billion. The bonds held by the SMCCF were the guarantee of the loans that the Fed had granted to it.
The Federal Reserve Bank of New York (FRBNY) managed the SMCCF and lent to it on a basis of appeal. Corporate bonds eligible for purchase by the SMCCF must have been issued by US companies that had significant operations in the United States and were not to receive direct federal financial assistance. The SPV also bought shares of US-listed ETFs whose holdings were primarily high-quality US corporate bonds.
Eligible bonds also had to have a rating of at least BBB- or Baa3 as of March 22, 2020, of a high Nationally Recognized Statistical Rating Organization (NRSRO) or by at least two major NRSROs if rated by more than one. If the bonds had their credit rating downgraded after March 22, then they had to be rated BB-/Ba3 by at least two NRSROs when the facility purchased them. All individual bonds purchased had to have a residual maturity of five years or less.
The SMCCF was also excluded from lending to issuers who received specific support from the CARES Act or any subsequent federal legislation. Companies also had to meet conflict of interest requirements under Section 4019 of the CARES Act. They also could not be a depository institution within the meaning of the Dodd-Frank Act.
The SMCCF held no more than 10% of the bonds issued by a given company or 20% of the assets of an ETF.
The SMCCF bought corporate bonds at fair market value. With ETFs, the SPV has avoided buying shares of those whose market prices “significantly exceed[ed]” their net asset values (NAV).
The SMCCF has stopped buying bonds or ETFs after December 31, 2020. The New York Fed will continue to fund this SPV until its assets mature or are sold.