Credit Facility: 10-30-09 A Commercial Paper Funding Facility

One of the newest program and just tapped by American Express is a new program to help cash-strapped companies meet their short-term borrowing needs.

What is A Commercial Paper Funding Facility? (CPFF}

Quoting the article which can be found here.

The Fed’s Commercial Paper Funding Facility (CPFF, again, let’s keep adding acronyms – my comment) allows companies that have registered to sell commercial paper, or short-term debt, for day-to-day needs ranging from paying rent to stocking inventory. In exchange, corporate borrowers have to pay a fee in addition to a borrowing rate that is set daily. The aim of the facility, announced Oct. 7, is to thaw the credit freeze, bring down rates and lure investors back into the market. The Fed began buying commercial paper from companies Monday.

Read here to see that Chrysler Financial, which finances Chrysler LLC vehicles has qualified (they have not yet tapped the program); additionally Ford Motor Credit and GMAC, the lending arms of Ford Motor Co. and General Motors Corp., respectively, also have access to the CPFF.

Mike Hammill and Andrew Flowers of the Federal Reserve Bank of Atlanta’s Research Department provide a good description of the CPFF here. The material which Mike and Andrew write about is technically complex, but two items are worthy. There are two types of Commercial Paper – see the material below from FED of Atlanta – traditional commercial paper (CP) and now asset-back commercial paper (ABCP)

1. Traditionally, companies use CP to finance day-to-day operations, borrowing cash they need to meet payroll or buy materials. Borrowing short-term money gives a company more flexibility to meet short-term needs, and is usually cheaper than issuing long-term debt. Companies can, and often do, roll over their CP as it matures, which effectively turns short-term debt into long-term debt, but at short-term interest rates.

In the past few years the commercial-paper market has grown dramatically, increasing by about 56 percent from 2005 until its peak in August 2007. Much of this growth has been in asset-backed commercial paper (ABCP), which jumped 76 percent over the same period.[GRAPH DELETED] In contrast to unsecured CP, which is backed by the name and assets of an entire company, ABCP is backed by a pool of specific assets, such as credit card debt, car loans, and/or mortgages.

Continuing on…

In the CPFF, the New York Fed will lend to a Special Purpose Vehicle (SPV) which will purchase eligible highly-rated (A-1, P-1, F-1) 3-month CP and ABCP from U.S. issuers. According to the New York Fed, the rate charged on unsecured commercial paper will be the three-month overnight index swap (OIS) rate plus 100 basis points per annum, and the rate for ABCP will be three-month OIS plus 300 basis points per annum. Additionally, for unsecured commercial paper, the New York Fed said “a 100 basis points per annum unsecured credit surcharge must be paid on each trade execution date.” Looking back before September, three-month CP rates typically traded very close to three-month OIS rates. The jump in CP rates in September led them to trade much wider than the SPV spread.

Now for the final part of their article. The reason for the development of the program for Commercial Paper.

Short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs. The CPFF is intended to support the issuers of CP by providing liquidity and supporting term lending in the CP markets. On Oct. 21, the Fed announced the creation of the Money Market Investor Funding Facility, which supplements the previously announced Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, to free balance sheets at money market funds and to encourage them to resume their traditional role in securities lending and participation in other financing markets.