Both the Federal Reserve in the US and the Bank of England in the UK have announced details of the support they will be providing to corporates in light of the COVID-19 pandemic.
In the US, the Federal Reserve Board has announced that it will establish a Commercial Paper Funding Facility (CPFF) to support the flow of credit to businesses and households. Commercial paper markets directly finance a wide range of economic activity, supplying credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies. By ensuring the smooth functioning of this market, particularly in times of strain, the Federal Reserve is providing credit that will support businesses, families, and jobs across the economy. The CPFF is designed to provide a liquidity backstop to US issuers of commercial paper through a special purpose vehicle (SPV) that will purchase unsecured and asset-backed commercial paper rated A1/P1 directly from eligible companies.
The CPFF programme has been established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary. The commercial paper market has been under considerable strain in recent days as businesses and households face greater uncertainty in light of the coronavirus outbreak. By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market. An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak.
The FED announcement says that the US Treasury will provide US$10bn of credit protection to the Federal Reserve in connection with the CPFF from the Treasury’s Exchange Stabilization Fund (ESF). The Federal Reserve will then provide financing to the SPV under the CPFF. Its loans will be secured by all of the assets of the SPV.
Assets of the SPV
The SPV will purchase from eligible issuers three-month US dollar-denominated commercial paper through the New York Fed’s primary dealers. Eligible issuers are US issuers of commercial paper, including US issuers with a foreign parent company.
The SPV will only purchase US dollar-denominated commercial paper (including asset-backed commercial paper (ABCP)) that is rated at least A-1/P-1/F-1 by a major nationally recognised statistical rating organisation (NRSRO) and, if rated by multiple major NRSROs, is rated at least A-1/P-1/F-1 by two or more major NRSROs, in each case subject to review by the Federal Reserve. In addition, the SPV will make one-time purchases of commercial paper (up to the amount outstanding on March 17, 2020) from issuers that met these criteria as of March 17, 2020 and were rated at least A-2/P-2/F-2 as of the purchase date. These purchases will be subject to separate pricing. The Federal Reserve reserves the right to review and make adjustments to the terms and conditions described in this term sheet, including pricing and eligibility requirements.
Limits per issuer
The maximum amount of a single issuer’s commercial paper the SPV may own at any time will be the greatest amount of US dollar-denominated commercial paper the issuer had outstanding on any day between March 16, 2019 and March 16, 2020. The SPV will not purchase additional commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer’s limit.
Pricing will be based on the then-current 3-month overnight index swap (OIS) rate plus 200 basis points. At the time of its registration to use the CPFF, each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.
The SPV will cease purchasing commercial paper on March 17, 2021, unless the Board extends the facility. The New York Fed will continue to fund the SPV after such date until the SPV’s underlying assets mature.
Similar response in the UK
In the UK, HM Treasury has also announced a number of measures designed to support businesses. The Chancellor set out a package of temporary, timely and targeted measures to support public services, people and businesses through this period of disruption caused by COVID-19.
Two major measures have been announced for businesses, one of which is the joint HM Treasury and Bank of England lending facility, named the Covid Corporate Financing Facility (CCFF). The facility is designed to support liquidity among larger firms, helping them to bridge coronavirus disruption to their cash flows through the purchase of short-term debt in the form of commercial paper.
The other key measure announced was with regards to the Coronavirus Business Interruption Loan Scheme. This is being run by the British Business Bank and eligible firms can apply through a participating lender. This scheme is expected to launch this week and is intended for small and medium-sized enterprises.
Accessing the CCFF
In order to access the CCFF, businesses will need to liaise with your bank. It is important to note that not all banks issue commercial paper. UK Finance will provide a list banks that are able to assist.
The facility will purchase sterling-denominated commercial paper, with the following characteristics:
- Maturity of one week to twelve months.
- Where available, a credit rating of A-3 / P-3 / F-3 from at least one of Standard & Poor’s, Moody’s and Fitch as at 1 March 2020.
- Issued directly into Euroclear and/or Clearstream.
Commercial paper with non-standard features such as extendibility or subordination, for example, will not be accepted.
Who can use the CCFF?
Companies - and their finance subsidiaries - that make a material contribution to the UK economy are able to participate in the facility. Companies must do this via a bank. In practice, firms that meet this requirement would normally be: UK incorporated companies, including those with foreign-incorporated parents and with a genuine business in the UK; companies with significant employment in the UK; firms with their headquarters in the UK. The BoE says it will also consider whether the company generates significant revenues in the UK, serves a large number of customers in the UK or has a number of operating sites in the UK.
The facility is open to firms that can demonstrate they were in sound financial health prior to the shock, allowing the BoE to look through temporary impacts on firms’ balance sheets and cash flows from the shock itself. This means companies that had a short or long-term rating of investment grade, as at 1 March 2020, or equivalent.
Commercial paper issued by issued by banks, building societies, insurance companies and other financial sector entities regulated by the Bank of England or the Financial Conduct Authority will not be eligible. CP will also not be eligible if issued by leveraged investment vehicles or from companies within groups which are predominantly active in businesses subject to financial sector regulation.
The facility will offer financing on terms comparable to those prevailing in markets in the period before the Covid-19 economic shock. The BoE says it will operate the facility for at least 12 months and for as long as steps are needed to relieve cash flow pressures on firms that make a material contribution to the UK economy. More information is available on the Bank of England website.
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