“The total proportion of debt that is below investment grade and the riskiest and least directly supported by the Fed is $ 5 trillion,” said Matt Mish, head of credit strategy at Swiss bank UBS. These debts, which include risky loans of over $ 1 trillion to already heavily indebted companies, could increase by up to $ 350-450 billion in the coming months due to downgrades, he added.
Lobbyists are working to formulate the $ 454 billion loan program for large and medium-sized companies that is mandated by the law and supported by the Fed, which Treasury Secretary Steven Mnuchin must publish within a week.
The rules determine which companies can apply for loans. Companies with mediocre, bad, or no credit, including those whose bond ratings have been downgraded in the past few weeks because the coronavirus has devastated the economy, are concerned about being excluded.
Russ Sullivan, another Brownstein Hyatt lobbyist, said he and his colleagues tried to “convince the Treasury Department and the Fed, which have tremendous flexibility in managing this program, to implement it broadly.”
Retailers who have been ordered to close in some states because they are not considered to be essential companies are among those who are concerned about not making the cut.
“In cases where the eligibility criteria are too narrow for some of the best-known American companies, we ask your respective agencies to make these programs available at their discretion,” said Matthew Shay, president and chief executive officer of the National Retail Federation. wrote on Friday to Fed chairmen Jerome Powell and Mnuchin in a letter.
A spokesman for the gap declined to comment.
But there would also be a compromise if the Fed and the Treasury decided to extend emergency credit programs to companies with less than ideal loans.
The Treasury plans to stretch the $ 454 billion that Congress has earmarked for lending to large and medium-sized businesses by working with the Fed, which will bring much more. Senator Pat Toomey (R-Pa.) Told reporters last week that he hoped the Treasury Department and the Fed could lend $ 2 trillion to $ 3 trillion together to keep the American company going for a few more months.
Because the Fed is not set to take on the risk of corporate default, the Treasury has to raise money the worse the creditworthiness of the companies that are allowed to apply for credit.
And it’s not just the government that has to work out the difference between companies that are experiencing a monetary crisis due to circumstances beyond their control and that were ill-prepared for a downturn, e.g. B. if they have charged too much guilt.
Companies responsible for valuing corporate debt – including Standard & Poor’s, Moody’s, and Fitch – also need to quickly decide whether to downgrade companies due to circumstances that may prove to be temporary.
Downgrading a company to junk bond status would initially make it ineligible for Fed loans. However, if a company needs funding from the central bank to refinance its debt, “by definition it is already an investment-grade company,” said UBS Mish.