Archive for October 17, 2008
Federal Reserve Board Establishes Commercial Paper Funding Facility
The contraction of credit has extended in dramatic fashion to the commercial paper market. Issuers are having to refinance their commercial paper daily unless they are willing to offer significantly higher interest rates, and the volume of outstanding paper continues to shrink. To reinvigorate this market, pursuant to its authority under Section 13(3) of the Federal Reserve Act, the Federal Reserve Board has created the Commercial Paper Funding Facility (CPFF) as a credit facility to a special purpose vehicle formed to purchase three-month U.S. dollar-denominated commercial paper from eligible issuers. An eligible issuer must be an U.S. issuer (including an U.S. subsidiary of a foreign parent) and register with the CPFF. Commercial paper must be non-interest bearing and rated at least A-1/P-1/F1 by a major nationally recognized statistical rating organization. No issuer may sell commercial paper through the program if such amount, together with outstanding commercial paper, would exceed the greatest amount of its U.S. dollar-denominated commercial paper outstanding on any day between January 1 and August 31, 2008. The commercial paper will be purchased at a discount based upon the three-month overnight index swap rate plus a spread which depends upon whether the paper is asset-backed or unsecured. Issuer registration begins on Monday, October 20, 2008, and purchases under the CPFF will begin on October 27, 2008. Further details about this program are outlined below. For more information from the Federal Reserve Bank of New York website, click here.
Commercial Paper Funding Facility
Recently, the commercial paper market has buckled as money market mutual funds and other investors have hesitated to buy commercial paper, especially commercial paper carrying a longer-dated maturity. As a result, an increasingly high percentage of outstanding commercial paper must be refinanced daily, interest rates on longer-term commercial paper have increased significantly, and the volume of outstanding commercial paper has dramatically declined. To counteract this decline and thaw the market for short-term commercial paper, the Federal Reserve Board (FRB) has authorized a Commercial Paper Funding Facility (CPFF) pursuant to its authority under Section 13(3) of the Federal Reserve Act.
Structure
The CPFF will be structured as a credit facility to a special purpose vehicle (SPV) that will purchase term commercial paper from eligible issuers. Under this program, the Federal Reserve Bank of New York will lend to the SPV on a recourse basis secured by all the SPV’s assets. The SPV will use the facility to purchase commercial paper from eligible issuers through the New York Fed’s primary dealers. An eligible issuer is an entity organized under the laws of the U.S. or a political subdivision or territory thereof (including a U.S. issuer having a foreign parent) which is registered with the CPFF. If a parent and a subsidiary have separate commercial paper programs, they are considered separate issuers. Currently, municipal commercial paper issuers may not participate, and the New York Fed reserves the right to limit or prohibit participation in the CPFF based upon other factors.
Commercial Paper Being Purchased
The SPV will purchase only U.S. dollar-denominated commercial paper which is non-interest bearing, has a three-month maturity (not extendable) and is rated at least A-1/P-1/F1 by a major nationally recognized statistical rating organization (NRSRO). If rated by multiple major NRSROs, the paper must be rated at least A-1/P-1/F1 by two or more of them. The pricing is different for asset-backed commercial paper (ABCP) and other commercial paper.
Limits per Issuer
The maximum amount of commercial paper that any single issuer may sell to the SPV will be limited to the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding (regardless of the maturity or other terms of the paper) on any day between January 1 and August 31, 2008. 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. In connection with registration, the issuer must certify the maximum amount of commercial paper that it could sell to the SPV (and may not certify a lesser amount) and pay a facility fee equal to 10 basis points of such maximum amount. The minimum transaction size accepted over the BLOOMBERG PROFESSIONAL BOOM® platform is $250,000.
Pricing of Commercial Paper Purchased by the SPV
The commercial paper purchased by the SPV will be discounted based on a rate equal to an applicable spread over the three-month overnight index swap (OIS) rate on the day of purchase. The spread for unsecured commercial paper will be 100 basis points per annum, and the spread for ABCP will be 300 basis points per annum. For unsecured commercial paper, the issuer must also pay a 100 basis points per annum unsecured credit surcharge which will be deducted by the SPV from the proceeds of the issuance on the trade execution date. An issuer may avoid the unsecured credit surcharge if the issuer provides a collateral arrangement for the commercial paper that is acceptable to the New York Fed or obtains an endorsement or guarantee of its obligations on the commercial paper that is acceptable to the New York Fed. The daily CPFF rates will be posted by 8:00 ET on the New York Fed’s website and published on the CPFF page of BLOOMBERG PROFESSIONAL® service.
An issuer whose commercial paper is protected by the FDIC’s Temporary Liquidity Guarantee Program will be considered guaranteed to the satisfaction of the New York Fed under the terms and conditions of the CPFF. However, during the FDIC program’s first 30 days, any such issuer that sells commercial paper to the SPV will still be required to pay the 100 basis point unsecured credit surcharge. If the issuer does not opt out of the FDIC’s Temporary Liquidity Guarantee Program at the end of the FDIC program’s first 30 days, the issuer (1) will be entitled to a reimbursement of the unsecured credit surcharge previously paid and (2) will not be subject to the unsecured credit surcharge for commercial paper subsequently sold to the SPV.
Timing
The CPFF will begin operating on October 27, 2008. Issuer registration begins on Monday, October 20, 2008; registration materials, including wire instructions and a registration form, will be available on this date at http://www.newyorkfed.org/markets/cpff.html. To access the facility on October 27, 2008, an issuer must register no later than Thursday, October 23, 2008. Thereafter, an issuer that has not previously registered with the CPFF must register at least two business days in advance of its intended use of the CPFF. The SPV will stop purchasing commercial paper on April 30, 2009, unless the FRB elects to extend it. The CPFF facility will terminate when the last of the SPV’s assets mature.
FDIC Temporary Liquidity Guarantee Program
Earlier this week, Treasury Secretary Paulson triggered the systemic risk exception to the “least cost resolution” requirements of Section 13 of the FDIC Act. Based upon this authority, the FDIC Board of Directors approved the Temporary Liquidity Guarantee Program. Under the program, FDIC will guarantee newly issued senior unsecured debt of eligible institutions and provide full deposit insurance coverage for non-interest bearing deposit transaction accounts (i.e., non-interest bearing demand deposit accounts) at FDIC-insured institutions, regardless of dollar amount.
General Considerations
- Institutions eligible to participate consist of FDIC-insured institutions and bank holding companies, financial holding companies, and savings and loan holding companies that engage only in activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act. FDIC, in consultation with an institution’s primary regulator, will determine eligibility.
- Coverage for all eligible institutions is automatic for the first 30 days of the program at no cost.
- Institutions may opt out of either or both components of the program, but must do so before the end of the initial 30-day period.
- Participating institutions will be subject to enhanced supervisory oversight to prevent rapid growth or excessive risk-taking.
- A special assessment will be collected to cover any losses not covered by fees imposed in connection with the program. This assessment will apply to all insured institutions, whether or not they choose to remain in the program. The assessment will be computed based upon the amount of an institution’s average total assets during the period, minus the sum of (A) the amount of the institution’s average total tangible equity, plus (B) the amount of the institution’s average total subordinated debt.
- FDIC and the primary regulators will issue additional guidance regarding the program.
Senior Unsecured Debt Guarantee
- Applies to senior unsecured debt newly issued between October 14, 2008 and June 30, 2009. Applicable debt will include promissory notes, commercial paper, inter-bank funding and any unsecured portion of secured debt. Deposits and non-contractual obligations are not included.
- Guarantee generally will be limited to 125% of an institution’s eligible debt outstanding as of September 30, 2008, determined on an aggregated basis (as opposed to type). For institutions with no eligible debt outstanding as of September 30, 2008, FDIC and the institution’s primary regulator will consider eligibility and limits on a case-by-case basis. Interested institutions should contact their primary regulator to begin discussions. Because most community bank holding companies will not have outstanding eligible debt, it will be necessary for these institutions to negotiate the availability and extent of the guarantee with FDIC and their primary regulator.
- Prepayment of term debt instruments expiring between October 14, 2008 and June 30, 2009 will not be permitted in connection with this program.
- Coverage under this program will be provided only until June 30, 2012, even if the underlying obligation matures at a later date.
- As noted above, there are no fees in connection with the program for the first 30 days. After this time, FDIC will collect an annualized guarantee fee in an amount equal to 75 basis points (0.75%) multiplied by the amount of debt guaranteed under the program.
- FDIC recommends that instruments guaranteed under this program are eligible to be delivered as collateral for other borrowings and will coordinate with primary regulators on this point.
Deposit Account Insurance
- Applies to all funds held by FDIC-insured institutions in all non-interest bearing transaction deposit (i.e., demand deposit) accounts until December 31, 2009.
- As noted above, there are no fees in connection with the program for the first 30 days. After this time, FDIC will impose a 10 basis point (0.10%) surcharge on an institution’s current assessment rate. The surcharge will apply to all deposits not otherwise covered by the existing deposit insurance limit of $250,000. Resulting fees will be collected during the normal assessment cycle.
What Does This Mean To You?
If you are an eligible institution, you need to decide whether to remain in either or both components of the program. If you wish to opt out, you must do so before the end of the initial 30-day period of the program. At this point, the only apparent downsides to continued participation are marginally enhanced supervision and payment of the additional guarantee fees. In most cases, these would be outweighed by the direct program benefits as well as the indirect public relations benefits.
If you are, or intend to become, a depositor or unsecured lender to an eligible institution, you need to determine whether the institution will continue to participate in the program.
