As part of a comprehensive effort to alleviate strain on the commercial paper markets due to the COVID-19 pandemic, on March 17, 2020 the Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced the creation of the Commercial Paper Funding Facility (“CPFF”). Similar to the CPFF program implemented in 2008, which was established as one of the Federal Reserve’s measures to stabilize the US economy during the 2008 financial crisis, the new CPFF will assist commercial paper issuers by providing liquidity in short-term funding markets.
Like the Term Asset-Backed Securities Loan Facility, the CPFF will lend to a special purpose vehicle (“SPV”) on a recourse basis and the Treasury Department will make a $10 billion equity investment in the SPV. The SPV will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers. Eligible issuers are U.S. issuers of commercial paper, including municipal issuers and U.S. issuers with a foreign parent company.
The SPV will purchase from eligible issuers three-month unsecured commercial paper and asset-backed commercial paper, up to the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between March 16, 2019 and March 16, 2020. The SPV will not, however, purchase asset-backed commercial paper from issuers that were inactive prior to the creation of the CPFF. An issuer is considered inactive if it did not issue asset-backed commercial paper to institutions other than the sponsoring institution for any consecutive period of three-months or longer between March 16, 2019 and March 16, 2020. Further, the SPV will not purchase commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer’s limit.
Eligible commercial paper must be rated at least A1/P1/F1 by a major nationally recognized statistical rating organization (“NRSRO”) or, if rated by multiple major NRSROs, is rated at least A1/P1/F1 by two or more major NRSROs.
Issuers that were previously rated at least A1/P1/F1 as of March 17, 2020 and were subsequently downgraded will be able to make a one-time sale of commercial paper to the SPV so long as the issuer is rated at least A2/P2/F2 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A2/P2/F2 by two or more major NRSROs. The maximum amount of such downgraded issuer’s commercial paper that the SPV will purchase is the amount of U.S. dollar-denominated commercial paper the issuer had outstanding the day before it was downgraded.
Pricing will vary based on credit rating. Commercial paper rated A1/P1/F1 will be based on the then-current 3-month overnight index swap (“OIS”) rate plus 110 basis points. For commercial paper rated A2/P2/F2, pricing will be based on the then-current 3-month OIS rate plus 200 basis points. Additionally, issuers 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 date is extended by the Federal Reserve.
For more information, issuers should refer to the CPFF terms and conditions and Frequently Asked Questions published by the Federal Reserve Bank of New York. Municipal issuers should refer to Norton Rose Fulbright’s recent client update analyzing the CPFF’s impact on municipal short-term funding markets. We will continue to provide updates as additional information becomes available.
In addition, Norton Rose Fulbright has established a site focused on the COVID-19 pandemic, offering a wide variety of information and training resources.