The Association for Financial Professionals (AFP) is requesting that the Federal Reserve consider expanding new facilities intended to support commercial paper (CP) and money market funds (MMFs) to include Tier 2 CP issuers.
AFP sent letters to the FED and the Department of the Treasury, voicing its support for the establishment of the Commercial Paper Funding Facility (CPFF) and the Money Market Mutual Fund Liquidity Facility (MMLF). However, AFP also requested that the CPFF be extended to Tier 2 CP issuers, and that the MMLF include Tier 2 CP as eligible collateral.
The Tier 2 CP market is approximately US$90bn in size and includes many public utilities and other critical industries. The AFP argues that extending the CPFF and MMLF to Tier 2 companies would not increase risk to the Federal Reserve by any measurable degree, as the historical default rate on 180-day P-2 paper is 0.027%, as compared to 0.018% for P-1 paper.
At present, the Tier 2 CP market is largely frozen, with rates at two to three times their historical average. As a result, high-quality issuers will draw on their credit lines as an alternative source of liquidity, putting increased pressure on banks to find funding. By expanding the CPFF, the demand for bank credit on the part of Tier 2 issuers should decrease. Similarly, expanding the eligible collateral under the MMLF to include Tier 2 CP will help to restore demand and normalise rates on this high-quality paper.
“While some may be dismissive of the impact of higher funding rates on large corporations, it is important to understand the broader impact,” said Jim Kaitz, president and chief executive officer of AFP. “Higher funding costs may lead to headcount reductions, and delays or reductions in capital expenditures. Additionally, there will likely be negative impacts felt by businesses that supply Tier 2 CP issuers, as well as consumers.”
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