Federal Reserve Board Establishes Commercial Paper Funding Facility

October 17, 2008 at 4:20 pm Leave a comment

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.

Entry filed under: Client Alerts.

FDIC Temporary Liquidity Guarantee Program Treasury’s Capital Purchase Program

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