Key Takeaways
- • Americans for Financial Reform warns that private equity-owned portfolio companies could draw substantial benefits from the Federal Reserve's CARES Act-backed lending facilities, which have few limits on company size or type.
- • Unlike the Paycheck Protection Program, where PE-owned businesses were largely excluded under the SBA's affiliation rule (500-employee threshold), the Fed's Corporate Credit Facilities and Main Street facilities have looser eligibility criteria that could admit highly indebted PE-backed firms.
- • BlackRock's Financial Markets Advisory group, which the Fed has outsourced bond purchases to, could buy loans and bonds rated as low as BB-/Ba3 under the PMCCF and SMCCF, and ETF purchases could indirectly expose the facilities to PE-backed borrowers rated B- to BB+.
- • The Primary Dealer Credit Facility and TALF could lower CLO financing costs, which the report argues would make it cheaper for PE firms to fund leveraged buyouts and dividend recapitalizations.
- • The Main Street facilities target companies with fewer than 15,000 employees and revenues under $5 billion, criteria the report says remain loose enough for larger firms to qualify.
Summary
An analysis published by Americans for Financial Reform argues that the private equity industry is positioned to benefit from the Federal Reserve's lending programs created in response to the coronavirus downturn under the CARES Act. The report describes the PE business model of acquiring companies, adding debt, paying dividends, and shielding the parent fund from portfolio company liabilities, and warns that government aid could be used to support that model rather than struggling firms harmed by the crisis.
The report notes that PE-owned businesses were mostly ineligible for the Paycheck Protection Program because of the SBA's affiliation rule, which excludes parent firms controlling companies with more than 500 employees in aggregate. By contrast, the authors contend that unless rules change substantially, PE firms will be able to draw significant benefits from most or all of the Fed's facilities, which are much larger than the PPP. The authors state that the facilities have few limits on company size or type and that some programs were expanded in ways that would admit more highly indebted firms. The report also says the programs impose vanishingly few conditions, such as requirements to retain workers or maintain safety standards.
On the corporate credit side, the report says the PMCCF and SMCCF could purchase bonds and loans rated BBB-/Baa3 as of March 22, 2020, and that bonds downgraded later could still be purchased if rated above speculative grade (BB-/Ba3). Under the SMCCF, purchases can extend to lower-rated borrowers. The Fed has outsourced bond purchases to BlackRock's Financial Markets Advisory group. The report argues that BlackRock's ETF purchases could indirectly support PE-backed issuers rated B- to BB+, and names Albertsons-Safeway (owned by Cerberus, rated B+), PetSmart (owned by BC Partners, rated B-), and Thomson Reuters, renamed Refinitiv after its sale to a Blackstone-led consortium (rated B), as examples of PE-backed firms that could indirectly benefit. The report notes that iShares, which hosts some of the referenced ETFs, is also owned by BlackRock.
The report further argues that the Primary Dealer Credit Facility and Term Asset-Backed Securities Loan Facility would lower the cost of issuing collateralized loan obligations, about two-thirds of whose underlying debt finances PE leveraged buyouts, according to the authors. By purchasing AAA-rated CLO tranches, the Fed would reduce financing costs, which the report says could make dividend recapitalizations cheaper for PE owners. As an example, the report cites Sycamore Partners' $5.4 billion debt issuance in April 2019 after its September 2017 acquisition of Staples for $7 billion, which included a $1 billion dividend to the firm.
The Main Street facilities, consisting of the New Loan, Expanded Loan, and Priority Loan programs, were designed for companies with fewer than 15,000 employees and revenues under $5 billion that did not qualify for the PPP or the corporate facilities. The report argues these criteria remain loose enough for larger firms to qualify, and the Priority Loan program, added later, gives more leveraged companies access to loans. The analysis is an advocacy piece from a policy group, and its conclusions reflect the authors' assessment of how the facilities could be used.
The report notes that PE-owned businesses were mostly ineligible for the Paycheck Protection Program because of the SBA's affiliation rule, which excludes parent firms controlling companies with more than 500 employees in aggregate. By contrast, the authors contend that unless rules change substantially, PE firms will be able to draw significant benefits from most or all of the Fed's facilities, which are much larger than the PPP. The authors state that the facilities have few limits on company size or type and that some programs were expanded in ways that would admit more highly indebted firms. The report also says the programs impose vanishingly few conditions, such as requirements to retain workers or maintain safety standards.
On the corporate credit side, the report says the PMCCF and SMCCF could purchase bonds and loans rated BBB-/Baa3 as of March 22, 2020, and that bonds downgraded later could still be purchased if rated above speculative grade (BB-/Ba3). Under the SMCCF, purchases can extend to lower-rated borrowers. The Fed has outsourced bond purchases to BlackRock's Financial Markets Advisory group. The report argues that BlackRock's ETF purchases could indirectly support PE-backed issuers rated B- to BB+, and names Albertsons-Safeway (owned by Cerberus, rated B+), PetSmart (owned by BC Partners, rated B-), and Thomson Reuters, renamed Refinitiv after its sale to a Blackstone-led consortium (rated B), as examples of PE-backed firms that could indirectly benefit. The report notes that iShares, which hosts some of the referenced ETFs, is also owned by BlackRock.
The report further argues that the Primary Dealer Credit Facility and Term Asset-Backed Securities Loan Facility would lower the cost of issuing collateralized loan obligations, about two-thirds of whose underlying debt finances PE leveraged buyouts, according to the authors. By purchasing AAA-rated CLO tranches, the Fed would reduce financing costs, which the report says could make dividend recapitalizations cheaper for PE owners. As an example, the report cites Sycamore Partners' $5.4 billion debt issuance in April 2019 after its September 2017 acquisition of Staples for $7 billion, which included a $1 billion dividend to the firm.
The Main Street facilities, consisting of the New Loan, Expanded Loan, and Priority Loan programs, were designed for companies with fewer than 15,000 employees and revenues under $5 billion that did not qualify for the PPP or the corporate facilities. The report argues these criteria remain loose enough for larger firms to qualify, and the Priority Loan program, added later, gives more leveraged companies access to loans. The analysis is an advocacy piece from a policy group, and its conclusions reflect the authors' assessment of how the facilities could be used.
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