The macro and market implications of the extraordinary CARES Act
admin | March 27, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The US CARES Act should have a major impact on the US economy, fundamental credit and market function. It provides unprecedented support–$349 billion in loans to small business, $150 billion to state and local governments, expanded unemployment benefits, cash payments to households and $500 billion to larger businesses. The support to larger businesses includes $450 billion that the Fed could leverage into $4.5 trillion of lending. And most of the support will flood the economy before the end of the year. Businesses and their employees, the unemployed and the capital markets should see the impact. An overview of each section, underlying details, and their macro and market implications follow.
- Keeping American Workers Paid and Employed Act: Launches programs that use the Small Business Administration to funnel $349 billion in 100% government-guaranteed, nonrecourse and largely forgivable emergency loans through banks and finance companies to small businesses and nonprofits. The act also adds $100 billion for guarantees on existing SBA-guaranteed borrowers. It should help many of these organizations survive and keep workers employed. And it should strengthen the fundamental credit of securities backed by cash flows from small business and consumers.
- Assistance for American Workers, Families and Businesses. Enhances unemployment benefits, expands eligibility, provides direct payments to most US residents, temporarily drops penalties on IRA withdrawals, encourages charity and provides an employer payroll tax credit. This directly supports households and unemployed workers. It should strengthen the fundamental credit of securities backed by consumer cash flows, including mortgage securities, auto and credit card ABS, student loans and others.
- Supporting America’s Health Care System in the Fight Against the Coronavirus. Strengthens and streamlines the ability of the US health care system to address COVID-19. Improves testing and should reduce mortality. Defers federal student loan payments for six months. Improved testing and treatment should allow more targeted use of social distancing with less drag on economic activity, restoring revenues and creditworthiness to individuals and businesses. Strengthens the credit backing student loans.
- Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy. The main $500B program for lending to large, solvent businesses through the Treasury’s Exchange Stabilization and the Federal Reserve. The Fed should be able to leverage much of the funding up to 10 times, magnifying the impact of this appropriation. Requires borrowers to largely maintain their workforce and limits use of funds for share buybacks or executive compensation. Likely the main program for stabilizing investment grade and highly leveraged corporate borrowers and their workforce.
- Coronavirus Relief Fund. Provides $150B to states for the costs of COVID-19 public health emergencies, allocated by population with a minimum of $1.25B per state. Stabilizes US municipal finance. Should raise valuations on municipal debt securities.
- Miscellaneous Provisions. Provides $10B in support for the US Postal Service, and makes sure these bills do not trigger budget sequester or other budget enforcement actions.
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