BlackRock Inc.’s management of government coronavirus-relief assets won’t produce a financial windfall. But it will boost the stature of the world’s largest investment manager.
The firm stands to bring in as much as $40 million a year in fees to purchase and oversee corporate debt as part of a U.S. program to juice capital markets and counter the economic calamity of the pandemic, according to an analysis of the firm’s contract for the deal.
Generating those tens of millions of dollars won’t be easy. That’s in part because BlackRock’s management agreement with the Federal Reserve Bank of New York bars the firm, the world’s largest issuer of exchange-traded funds, from collecting fees on any ETFs in the portfolio it assembles. ETFs could make up a big share of the program’s purchases, especially initially.
Whatever BlackRock’s cut turns out to be, it will be modest for the New York-based firm, which oversees about $6.5 trillion in assets and recorded a 2019 profit of $4.5 billion. (The firm is also managing a Fed program to support mortgage-backed securities, from which it could collect about $8 million.)
The assignment confers other benefits, including the U.S. government’s endorsement of BlackRock as its go-to adviser. “They’re still getting a lot of clout,” said William Birdthistle, a professor at the Chicago-Kent College of Law.
The Federal Reserve enlisted BlackRock to manage the purchases in its $750 billion program to buy up both corporate debt and exchange-traded funds tracking corporate debt.
According to BlackRock’s 66-page contract with the New York Fed, the firm will receive no commissions for executing trades. Instead, it will take an administration fee that starts at $2 million for the second quarter this year and declines to $750,000 by the fourth quarter. It will also collect a sliding-scale rate for the corporate debt under management excluding ETFs. It will charge 2.5 basis points -- $2.50 per $10,000 -- on the first $10 billion under management, stepping down to 50 cents per $10,000 as assets approached $350 billion. For assets above $350 billion, the firm will collect no fees.
But that scale is academic, at least for now. The first phase of the federal program, which started Tuesday, calls for the purchase of corporate debt ETFs -- on which BlackRock can’t charge fees, in order to avoid any appearance of self-dealing. Management fees won’t kick in until the New York Fed directs the firm to begin adding debt of individual corporations.
Virus Portfolio
The Fed is turning to BlackRock more than a decade after they worked together to shore up debt markets hammered by the 2008 global financial crisis.
As the biggest money manager in global markets, BlackRock’s moves have the power to sway prices. When the Fed announced its plan to support corporate bond issues, including those that dropped below investment grade during the crisis, debt markets rallied, including ETFs focusing on high yield bonds. Among the gainers was BlackRock’s own iShares iBoxx $ High Yield Corporate Bond ETF.