Why some of America’s best-known companies won’t qualify for bailout money

Why some of America’s best-known companies won’t qualify for bailout money


Macy’s and Gap Inc. are furloughing most of their workers as their sales collapse — but they might not qualify for the massive backstop for companies that Congress just passed because their finances are so bad that their debt is rated as junk.

The two iconic retailers and other companies running out of cash can’t tap into the new loan program backed by the Federal Reserve because it’s only available to corporations whose debt is considered safe by credit rating firms.

Retailers, casinos and other industries are now lobbying the Treasury Department and the Fed to get access to hundreds of billions of dollars in loans included in the massive relief bill that President Donald Trump signed into law last week. They warn that the central bank will need to cast a wider net to avoid a shockwave of defaults as private funding has begun drying up for all but the most stable companies.

Much of corporate America, “including thousands of household brands that everyone has heard of, will have no ability to get credit,” said Travis Norton, a lobbyist at Brownstein Hyatt Farber Schreck, who represents clients across multiple sectors.

Already, more than half of companies that borrow through corporate bond markets aren’t eligible to get help from the Fed under its current rules because they aren’t classified as “investment-grade.” The central bank’s efforts aren’t designed to bail out companies that might go under, but instead to offer a reassuring backstop to private lending markets.

But there are growing fears that more companies will see their credit ratings cut as the economy slides toward a recession, which would further threaten their ability to get funding. About half of investment-grade debt is only barely above junk status, and plunging oil prices could lead more companies to be downgraded.


“The overall share of debt that is below investment-grade and we would say is most risky and least directly supported by the Fed is $5 trillion,” said Matt Mish, the head of credit strategy at Swiss bank UBS. That debt, which includes over $1 trillion in risky loans to already highly indebted companies, could grow by as much as $350 billion to $450 billion in the coming months from downgrades, he added.

Lobbyists are working to shape the rules governing the $454 billion loan program for big and medium-sized businesses outlined in the law and backed by the Fed, which Treasury Secretary Steven Mnuchin must publish within a week.

The rules will determine which companies will be able to apply for loans. Businesses with mediocre credit, bad credit or no credit at all — including those whose bond ratings have been downgraded in recent weeks as the coronavirus has ravaged the economy — are worried about being excluded.

Russ Sullivan, another Brownstein Hyatt lobbyist, said he and his colleagues are trying “to persuade Treasury and the Fed, who have enormous flexibility in how to administer this program, to do it broadly.”

Retailers, which have been ordered to close in some states because they’re not considered essential businesses, are among those worried about not making the cut.

“In cases where the eligibility criteria is too narrow for some of America’s best-recognized companies, we ask that your respective agencies exercise discretion to make these programs more widely available,” Matthew Shay, the president and chief executive of the National Retail Federation, wrote on Friday in a letter to Fed Chair Jerome Powell and Mnuchin.

A spokesperson for the Gap declined to comment.

But there would also be a tradeoff if the Fed and Treasury decide to expand the emergency lending programs to businesses with less-than-ideal credit.

The Treasury Department is planning to stretch the $454 billion that Congress set aside for loans to big and medium-sized businesses by working with the Fed, which will chip in much more. Sen. Pat Toomey (R-Pa.) told reporters last week he hoped that together the Treasury Department and the Fed together could lend $2 trillion to $3 trillion to keep corporate America going for several more months.

Because the Fed isn’t set up to take on the risk of companies defaulting, though, the worse the credit of the businesses allowed to apply for loans, the more money Treasury will have to kick in.

And it’s not just the government that will have to parse out the difference between companies that are merely experiencing a cash crunch because of circumstances out of their control, and which companies were ill-prepared for a downturn, such as having loaded up on too much debt.

Firms responsible for rating companies’ debt — including Standard & Poor’s, Moody’s and Fitch — also are having to make fast-moving decisions about whether to downgrade companies based on circumstances that could prove temporary.

Downgrading a company to junk bond status would, for now, make it ineligible for Fed loans. But if a company needs funding from the central bank to refinance its debt, “that’s already by definition a non-investment-grade company,” UBS’ Mish said.

“Government support will cushion the blow for some companies, but it is unlikely to prevent distress at businesses with less certain long-term viability,” Moody’s said in a report last week.

For the Fed, it is already entering unprecedented territory by announcing that it will directly purchase debt from large companies under its emergency powers, rather than merely working to make credit more available through banks. Businesses that want to take advantage of that program will have to register and pay a fee.

Now the central bank is bumping into awkward but consequential decisions about its role, which has traditionally been to keep money flowing through the economy rather than intervening to help out specific industries. It also, by law, isn’t supposed to lend to companies that are insolvent, a term the central bank has the power to define.

“What it doesn’t want to be doing is engaging in fiscal stimulus where there’s a value judgment and allocation to this sector vs. that sector, because that’s traditionally seen as Treasury and Congress’ purview,” said Peter Conti-Brown, a professor at The Wharton School of the University of Pennsylvania.

“But then Congress announces, ‘Actually, we want the Fed in the driver’s seat’” on deciding where this money goes, he added. “So, the Fed is finding itself in a brave new world.”

Corporate bond markets have been working a bit more smoothly since the Fed announced its plans to buy debt directly from investment-grade companies, with more stable corporations having little trouble raising funds. Yum! Brands, which owns brands like KFC and Pizza Hut, also on Monday became the first non-investment-grade company since early March to publicly issue new bonds.

Because higher-rated companies aren’t struggling to raise funds, the Fed’s emergency lending “is likely to be more helpful to the lowest end” of the investment-grade spectrum, said Susie Scher, co-head of global financing in Goldman Sachs’ investment bank.

“Non-investment grade companies have also had access to secured loans from banks and to private equity capital,” she said but added that markets for lower-rated debt “have been temporarily shut.”

Ultimately, whether the Fed and Treasury broaden out the programs will depend greatly on how bad things get, Conti-Brown said.

“The Fed’s role is going to grow because they’re making risk determinations that have to evolve,” he said. “It’s not inconsistent for the Fed to change its regulations around the loans it’s comfortable making as the world around it changes so profoundly.”

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