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POLICY

The Federal Reserve has made an unprecedented policy change: the Fed is now directly intervening to support corporate credit markets. To do so, it has established two facilities: the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF). The SMCCF has been actively purchasing corporate issued bonds, loans, and exchange-traded funds (ETFs).

Why?

Overall, the corporate bond market has seen rapid growth since 2008, going from $5 trillion to about $9.6 trillion in 2019. The balance sheets of many larger corporations are debt heavy and the revenues to service that debt have shrunk since the onset of the COVID. In turn, bond ratings have plummeted, many to junk status, and that forces rates higher. The Fed is stepping in to provide much needed liquidity which they propose will keep operations and employment at pre-COVID levels. Over a six-week period, the SMCCF purchased bonds from 500 large companies.

A disproportionate quantity of those bond purchases have been directed at oil and gas conglomerates: about 10% of the Fed’s corporate bond portfolio. In fact, this industry has issued a record amount of new bonds, $129 billion this year alone, according to Bloomberg, most of it issued since the Fed’s purchase program was initiated. 19 of the largest oil and gas companies have been recipients. Outside this industry, a total of $455 billion in corporate debt has been issued.

This includes household giants such as Procter & Gamble who issued $5 billion worth; Coca-Cola added $6.5 billion in bond debt; Apple raised another $8.5 billion while Oracle had a $20 billion debt offering. While the Fed has stated its intervention is intended to stabilize employment, there are no such requirements to prevent layoffs. One analysis showed that a third of companies with the largest bond debt participation have announced sizable worker layoffs.

In June, Fed Chair Jerome Powell testified to Congress that “the intended beneficiaries of all of our programs are workers.”

The petroleum industry has been dramatically impacted by the drop in consumer gasoline demand. The resulting “price collapse” at the pump has left many oil firms unable to service existing debt – much of it used pre-COVID to purchase smaller firms. Bankruptcy looms over many in the industry: 30 percent of the shale sector is “technically insolvent.” Smaller firms financed with private equity are teetering.

As finances for the industry began to unravel, lobbying efforts went into high gear. U.S. Sen. Ted Cruz, R-Texas alongside 10 Republican colleagues issued an influential plea to Mnuchin and Powell in the form of an April 22 letter. Citing the recent downgrading of debt to junk bond status, the letter said, “We face a real and present danger of seeing hundreds, if not thousands of oil producers shuttering, an event that will profoundly and negatively impact the industry, its financial partners and consumers for years to come.”

Then there are the “inside lobbyists” like Interior Secretary David Bernhardt who had represented Big Oil for years. We have Energy Secretary Dan Brouillette whose career included senior posts with Ford Motor Co. and who had served on the Board of a Louisiana agency that oversees leasing of state lands to energy companies.

In spite of the new policy and rescue efforts by the Fed, industry layoffs followed suit. “We have to be simpler, more streamlined,” remarked Shell’s chief executive, Ben van Beurden, in response to another round of layoffs. “We need to be a more competitive organization, more nimble and able to respond to customers.” In a similar vein, Marathon Petroleum issued pink slips to 1000 employees which were intended to “strengthen Marathon Petroleum for short-term and long-term success.” Royal Dutch Shell, another bond purchase recipient, plans to trim its headcount by 9,000.

ANALYSIS

A number of factors have contributed to the financial stress amongst oil corporations. Prior to plummeting demand, Russia and Saudi Arabia were engaged in a price war and this was followed by a brief glut due to the U.S. fracking boom. Many firms, including those non-oil beneficiaries like Boeing corporation, turned down federal CARES Act funding and chose to increase liquidity through bond issuance. Of note, CARES Act funding came with strings attached: executive compensation was restricted.

Furthermore, a recent report revealed that 383 large firms whose bonds were purchased by the Fed paid dividends to their shareholders. Sysco Corporation is a typical example: they laid off a third of its workforce while paying out shareholder dividends. Other bond purchase beneficiaries, like Tyson Foods, were found guilty of labor and environmental violations. The fact that 15% of the Fed’s corporate bond holdings are issued from large banks raises questions similar to the bailout terms during the 2008 financial meltdown.

The administration’s leanings are summed up in this Trump tweet: “We will never let the great U.S. Oil & Gas Industry down.”

Vocal critics include Alan Zibel, research director of Public Citizen’s Corporate Presidency Project who points out that “when consumers take on too much credit card debt, they can be forced into bankruptcy and face financial ruin. But when the oil and gas industry accumulate too much debt, it gets a bailout on the backs of taxpayers.” The administration is accused of issuing bailouts for industry friends and loyalists, and to those who are harming rather than helping our environment.

While this bond buying program is favorable to the Fortune 500 – municipalities, small businesses, and individuals are offered more restrictive loans at higher rates. Sarah Bloom Raskin, a former top Fed and Treasury official, wrote that this program effectively protects wealthy bond holders from losses, offering them “all the upside that comes with a junk bond, but none of the risk that, before now, made it, well, junk.”

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