See the Prohibitive Investments BlackRock Can’t Invest in for the SMCCF

Posted on 05/13/2020


In an investment management agreement between BlackRock and FRBNY, signed on May 11, 2020, the Secondary Market Corporate Credit Facility (SMCCF) cannot invest in:”

i. Any bond that (a) is by its terms convertible into or exchangeable for an equity security, (b) has equity securities attached as part of a “unit,” or (c) includes or attaches an equity warrant.

ii. Any bond that is equity-linked, currency-linked, commodity-linked, derivative-linked or otherwise “contingent” (i.e., payments of principal and interest must be unconditional and not subject to reduction as a result of the effluxion of time or the occurrence or non-occurrence of an event or circumstance (but may be subject to triggers that will cause the deferral or capitalization of interest payments).

iii. Any bond that carries a structured finance or structured security rating from an NRSRO.

iv. Any bond that is issued by a special purpose entity or a special purpose vehicle, other than (A) bonds issued by a finance subsidiary that are wholly and unconditionally guaranteed by an Eligible Issuer and (B) bonds issued by a finance subsidiary that is wholly-owned by an Eligible Issuer issuing a single class of senior debt instrument.

v. Any bond that is a bearer instrument.

vi. Any bond that does not clear through The Depository Trust Company or Euroclear/Clearstream International, including any bond in physical form.

vii. Any catastrophe (or “CAT”) bond.

viii. Any non-U.S. dollar denominated bond.

ix. Any subordinated bond.”

BlackRock and FRBNY have an understanding that they will work together to resolve any uncertainties and agree on whether a bond issued by an Eligible Issuer is an Eligible Bond. SMCCF was established to support credit to large employers by providing liquidity for outstanding corporate bonds. The SMCCF may purchase in the secondary market eligible corporate bonds as well as U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds.

The IM agreement details what is an “eligible investments.”

According to the agreement, “The Manager may purchase individual corporate bonds that are, at the time of purchase, eligible for purchase by the Facility in accordance with the Term Sheet (“Eligible Bonds”). Eligible Bonds (a) must be issued by issuers that satisfy the eligibility conditions set forth in the Term Sheet and who have certified to the FRBNY that they satisfy certain of such conditions (“Eligible Issuers”) and (b) must be sold to the Company by institutions that satisfy the requirements for eligible sellers set forth in the Term Sheet, who have certified to the FRBNY that they satisfy such requirements, and who have been identified as an Eligible Seller on Exhibit C to the Agreement (“Eligible Sellers”). For the purposes of the Investment Guidelines, Eligible Bonds that meet the investment grade credit rating requirements in the Term Sheet (based on ratings published by NRSROs designated in the Term Sheet or the FAQs from time to time) are “Eligible IG Bonds” and Eligible Bonds that are not Eligible IG Bonds but meet the noninvestment grade credit rating requirements in the Term Sheet are “Eligible HY Bonds.”

Subject to the limitations described in this paragraph, the Manager may purchase, from Eligible Sellers, ETFs that are, at the time of purchase, eligible for purchase by the Facility in accordance with the Term Sheet (“Eligible ETFs”). For the purposes of the Investment Guidelines, Eligible ETFs that are considered under the Term Sheet as having a primary investment objective of exposure to investment grade bonds are “Eligible IG ETFs” and Eligible ETFs that are considered under the Term Sheet as having a primary investment objective of exposure to high yield bonds are “Eligible HY ETFs.” Eligible HY ETFs shall also include a subset of ETFs that have a stated investment objective of providing exposure to non-investment grade bonds that were rated investment grade at the time of issuance (“Fallen Angel ETFs”). The preponderance of Eligible ETF purchases by the Facility shall be of Eligible IG ETFs, and the remainder of Eligible ETF purchases shall be of Eligible HY ETFs, as directed by the Company to the Manager from time to time. Periodically, but no less frequently than monthly, the Manager shall provide a list of Eligible ETFs to the Company, which will be based on these Investment Guidelines and any other criteria that the Company may apply, including, but not limited to, the size of the ETF and the composition of its holdings. The Manager shall obtain approval from the Company prior to including any ETF on the list of Eligible ETFs with more than 1% of par value of their holdings, based on the most recent disclosure of holdings, allocated to bonds of issuers that to the Manager’s actual knowledge based on publicly available information are in bankruptcy or in payment default. The Company may direct the Manager to remove any ETF from the list of Eligible ETFs if such ETF appears on the ETF Default Report defined in Exhibit A-2. As used herein, default means an issuer has failed to make a payment in excess of $1 million when due (after applicable grace periods, if any, have expired) on borrowings under a syndicated loan facility or on publicly issued debt.

In connection with providing the Cash Management Services, the Manager may invest cash held in the SMCCF Cash Reinvestment Sub-Account in short-term, highly liquid, and low-risk assets that mature within 6 months, or as otherwise directed by the Company, (“Eligible Short-Term Assets” and, together with Eligible Bonds and Eligible ETFs, “Eligible Investments”) that are dollar-denominated and in one of the following categories:

i. U.S. Treasury and Agency Securities (excluding mortgage-backed securities): (A) securities issued by the United States government and its agencies and (B) securities issued by a United States government sponsored enterprises (an “Agency Security”), other than mortgage-backed securities. Agency Securities include debentures.

ii. 2a-7 Government Money Market Funds: Money market mutual funds that are compliant with Rule 2a-7 under the Investment Company Act of 1940, as amended, and that invest only in U.S. Treasury and Agency Securities.

Late day funds shall be invested by the Custodian in a 2a-7 Government Money Market Fund as directed by the Company.”

Leverage

The investment agreement details the BlackRock cannot buy any eligible bonds or eligible ETFs if the SMCCF Equity usage exceeds the total U.S. Treasury equity allocated to the Secondary Market Corporate Credit Facility.