Credit & Capital

Fed Unveils Plan to Shore up Commercial Paper

The Fed will offer a liquidity backstop to ease funding pressures on large corporations amid the coronavirus outbreak.
Matthew HellerMarch 17, 2020

The U.S. Federal Reserve moved on Tuesday to shore up the commercial paper market to ease funding pressures on companies amid the coronavirus outbreak.

The Fed announced it will revive the Commercial Paper Funding Facility, a program first introduced during the financial crisis, to maintain the flow of short-term debt that companies frequently use to fund everyday expenses such as rent and payroll.

The CPFF will offer a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase unsecured and asset-backed commercial paper rated A1/P1, as of March 17, 2020, directly from eligible companies, with the Treasury providing $10 billion of credit protection.

Fed Chair Jerome Powell

“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,” the Fed said in a news release. By rolling over maturing commercial paper obligations, it said, “the CPFF 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 added.

“While the Fed has already taken several measures in recent days to get liquidity to banks, there are worries banks will be reluctant to pass that cash onto real economy businesses,” Reuters said.

Commercial paper loans generally mature in fewer than 270 days, with borrowers typically pledging future accounts payables or inventories for cash. The Fed’s purchases will last for one year unless the Fed extends the program.

Pricing will be based on the then-current three-month overnight index swap rate plus 200 basis points, and each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.

(Photo by ERIC BARADAT/AFP via Getty Images)