The Fed approached this crisis with the intent of keeping credit flowing everywhere, from municipalities to small businesses to big corporations to households. Powell said the programs are about lending, not spending -- in other words, they aim to ease a financing pinch rather than stimulate the demand companies need to keep workers on the payroll.
Weird Hybrid
“For the Fed to second-guess a corporate survival strategy would be a step too far for them,” said Adam Tooze, a Columbia University history professor and author of “Crashed: How a Decade of Financial Crises Changed the World.” Putting explicit conditions on program beneficiaries would make the central bank “a weird hybrid of the Federal Reserve, Treasury, BlackRock and an activist stockholder.” BlackRock Inc. is the world’s biggest money manager and was hired by the central bank to assist with bond programs.
Through the Main Street facilities, which are scheduled to begin operations any day, the Fed will buy as much as $600 billion in four-year loans made to companies by commercial banks with principal and interest deferred for one year. The program is aimed at midsize businesses, with 15,000 or fewer employees or annual revenue of $5 billion or less in 2019.
The central bank’s credit backstop for larger companies is split in two. The $500 billion primary program is designed to buy slices of syndicated loans or new bonds from companies with investment-grade credit scores or one notch below. It’s available to corporations that can prove they can’t borrow elsewhere. The $250 billion secondary facility buys individual corporate bonds already on the market and exchange-traded funds that include investment-grade and junk bonds. The Fed kicked off the program last month; its balance sheet as of June 2 listed ETF holdings valued at $4.3 billion.
European Differences
European countries are charting a different policy course by paying workers directly. The U.K., for example, is offering 80% of salaries up to 2,600 pounds ($3,207) a month. The Netherlands and Denmark have effectively nationalized private payrolls.
The U.S. government paid adults who make less than $75,000 a year a one-time sum of $1,200, with $500 for every dependent child. The cost was $239 billion.
The S&P 500 has jumped 38% since March 23, the day the Fed intervened. Observers of the stock market wonder how it could be so bullish at the same time as the country faces an avalanche of joblessness unsurpassed in its history. The choices companies are making provide an answer.
Since selling $4 billion in debt on March 30, Sysco has amassed $6 billion of cash and available liquidity, enabling it to gobble up market share, while cutting $500 million of expenses, according to Chief Executive Officer Kevin Hourican. Sysco, which is based in Houston, will continue to pay dividends to shareholders, Chief Financial Officer Joel Grade said on a May 5 earnings call.
Junk Bond
Movie theaters were one of the first businesses to close during the pandemic. Cinemark, which owns 554 of them, shut its U.S. locations on March 17. Three days later, the company paid a previously announced dividend. It has since said it will discontinue such distributions. Cinemark borrowed $250 million from the junk-bond market on April 13, the same day it announced the firing of 17,500 hourly workers. Managerial staff were kept on at reduced pay, according to company filings. Cinemark, which is based in Plano, Texas, said it plans to open its theaters in phases starting June 19.
The theater chain opted to go to the bond market over seeking funding from the government because “it didn’t come with any of the strings attached that government-backed facilities can include,” CEO Mark Zoradi said on the April 15 earnings call. It “was really no more complicated than that.”