In a significant move to provide liquidity to U.S. corporations, the Federal Reserve Board announced today that it will establish a Commercial Paper Funding Facility ("CPFF2020"). The Federal Reserve's action parallels its establishment of a similar facility in 2008 ("CPFF2008") to support the flow of credit to households and businesses. One notable difference between the two facilities is that the Federal Reserve is establishing the credit facility at the front end of the current market turmoil. CPFF2008 was established several weeks after the onset of severe market volatility. Another difference is in pricing—the funding costs for issuers under the new CPFF2020 exceed 2008 levels.
We provide a brief overview of the program below and noticeable differences from the 2008 credit facility. We note limited information regarding the credit facility is available and anticipate that more detailed more detailed program terms and conditions will be announced in the coming days.
Why is the Federal Reserve establishing the CPFF2020?
The commercial paper market has been under considerable strain in recent days as businesses and households face greater uncertainty in light of the volatile markets driven by the coronavirus outbreak. Commercial paper markets directly finance a wide range of economic activity, including the operational needs of many U.S. companies such as payroll expenses. The purpose of CPFF2020 is to enhance the liquidity of the commercial paper market by increasing the availability of term commercial paper funding to issuers and by providing greater assurance to both issuers and investors that firms will be able to roll over their maturing commercial paper. These steps should significantly bolster the credit markets.
As noted above, the Federal Reserve established CPFF2008 during the financial crisis, when the market for commercial paper became severely disrupted. The facility, designed as a specially created limited liability company that used funds to purchase commercial paper directly from eligible issuers, was announced on October 7, 2008. CPFF2008 began purchases of commercial paper on October 27, 2008, and was closed on February 1, 2010. The last of CPFF2008's commercial paper holdings matured on April 26, 2010, and facility was dissolved on August 30, 2010. All loans that were made to CPFF2008 were repaid in full, in accordance with the terms of the facility, and all of the commercial paper that the SPV purchased was repaid in accordance with the stated terms. Issuers who participated in the 2008-09 facility were required to register with the facility and pay a fee for participation.
How will CPFF2020 work?
CPFF2020 will be structured as a credit facility to a special purpose vehicle authorized under Section 13(e) of the Federal Reserve Act. Since the passage of the Dodd-Frank Act in 2010, the Federal Reserve's authority to engage in emergency lending has been limited to programs and facilities with "broad-based eligibility" that have been established with the approval of the Secretary of the Treasury. The Federal Reserve approved a final rule specifying its procedures for emergency lending under Section 13(3) of the Federal Reserve Act in 2015. See Extensions of Credit by Federal Reserve Banks, 80 Fed. Reg. 78959 (Dec. 18, 2015).
This SPV will purchase three-month U.S. dollar-denominated commercial paper from eligible issuers through the New York Fed's primary dealers. Eligible issuers are U.S. issuers of commercial paper, including U.S. issuers with a foreign parent. Issuers must also register with CPFF2020 in order to sell commercial paper to the SPV. There is a 10 basis point facility fee that must be paid upon registration.
The Federal Reserve Bank of New York will commit to lend to the SPV on a recourse basis. The New York Fed will be secured by all the assets of the SPV. The U.S. Treasury Department—using the Exchange Stabilization Fund ("ESF")—will provide $10 billion of credit protection to the New York Fed in connection with the CPFF2020.
What types of commercial paper will be eligible for purchase by the SPV?
The SPV will only purchase U.S. 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 recognized statistical rating organization ("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.
Will there be any limits on the amount of commercial paper that the SPV will purchase from each issuer?
As with the previous facility, the maximum amount of a single issuer's commercial paper the SPV may own at any time will be the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on a single day during a time period preceding the crisis—in this case, any day between March 16, 2019–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.
At what price will the SPV purchase commercial paper?
Pricing will be based on the then-current 3-month overnight index swap (OIS) rate plus 200 basis points. We note that the spread on the Federal Reserve's new CPFF2020 is larger than it was in 2008, when it was 3-month OIS plus 100 basis points.
Is there a termination date?
The SPV will cease purchasing commercial paper on March 17, 2021, unless the Federal Reserve extends the facility. The New York Fed will continue to fund the SPV after such date until the SPV's underlying assets mature.
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