We knew previously that the Fed may help out BBB-rated corporate bonds, as this class represents around 40% of total US corporate debt markets with an outstanding amount of USD 3 trillion.
Considering the importance of BBB bonds, if they are downgraded to junk ratings, the Fed could no longer support them with previous facilities. As a result, the Fed announced yesterday (April 09, 2020) that it will expand the bond purchase to fallen angels, as long as they were rated investment grade (at least BBB-/Baa3) as of March 22, 2020 and downgraded to above BB-/Ba3. The US Treasury will insure against up to 10% of potential credit loss with an equity injection of USD 75 billion, implying that the Fed could purchase up to USD 750 billion of corporate bonds. Note that the initial size of corporate bond purchase announced by the Fed on March 23 was only USD 200 billion with USD 20 billion of equity to cover potential credit loss. The measure will further calm down the market concerns about potential corporate defaults and widening BBB spreads.
Source: St. Louis Federal Reserve Bank
The Fed has also introduced other measures to support SMEs. Briefly speaking, the Fed announced an additional USD 2.3 trillion in loans to support the economy. Among the measures, it is important to note that the Fed announced the Main Street Loan Facility to support SMEs, with a size up to USD 600 billion and only USD 75 billion equity to cover potential credit losses. The all-in interest rate (unsecured) is almost minimal at 4.5-6% compared to normal business loans. Eligible borrowers could be businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues, which is quite a large group. The size of a single loan ranges from USD 1 million to USD 25 million, capped at 4x EV/EBITDA. The Fed will purchase 95% of the loan portfolio. How many non-performing loans could there be in the future? Anyway, this would be covered by Fed, which means further money creation.
As a result, the size of the Fed’s balance sheet expands to USD 6.1 trillion on April 9, and will continue to climb in the near future.
Source: Thomson Reuters
OPEC+ teleconference also reached a production cut agreement, albeit below market expectations, which further reinforced the recent stabilization of global liquidity. If you read through our previous articles, you can tell that we consistently believe in more liquidity support will ultimately bolster Bitcoin and the world of crypto on the whole.