Commercial Paper Facility (UK)

In order to increase the availability of credit to UK corporate borrowers, in January 2009, the British government authorized the Bank of England to begin purchasing investment-grade sterling commercial paper as part of a new fund called the Asset Purchase Facility (BoE 2009e). The facility aimed to “increase the availability of corporate credit, in order to support the Bank of England’s responsibilities for financial stability and monetary stability in the United Kingdom” (Darling 2009).

One piece of the APF was the Commercial Paper Facility, which allowed the Bank to purchase commercial paper either directly, through dealers in the primary market, or from certain counterparties in the secondary market (BoE 2009e).

The government was to indemnify the Bank of England from any losses arising out of APF. Therefore, to launch the APF, the Bank of England received the Chancellor’s approval because the taxpayers were taking on the risk from all APF facilities (Darling 2009).

CPF was a part of an APF, which had a ceiling initially set at £50 billion. However, for the CPF, rather than setting a specific timeline or target purchase amount, the Bank of England designed the facility to last “for as long as the highly abnormal conditions in corporate credit markets that were impairing finance of real economic activity persisted” (BoE 2009e).

CPF was a part of an APF, which had a ceiling initially set at £50 billion. However, for the CPF, rather than setting a specific timeline or target purchase amount, the Bank of England designed the facility to last “for as long as the highly abnormal conditions in corporate credit markets that were impairing finance of real economic activity persisted” (BoE 2009e).

The CPF was designed to operate as a short-term solution to the corporate credit crisis. The Bank agreed to regularly monitor market liquidity to assess the continued necessity of the facility. The Bank’s intention was always to wind down the facility once the market rebounded, either as assets matured or through sales. As a result, it purchased only commercial paper for which it believed there would be a private market at such a time (King 2009).

Before the operation of the CPF, a market notice announcing the program requested feedback from the industry. The request included invitation for detailed comments from all interested parties—existing and potential new issuers, investors, intermediaries, and infrastructure providers, including issuing and paying agents and ratings agencies (BoE 2009e).

All prospective counterparties were required to apply to the Bank via email to ascertain eligibility. If the Bank was able to confirm eligibility before 4:00 p.m., securities could be sold to the Bank the next business day. Once approved, offers to sell commercial paper to the CPF had to be submitted between the window of 10 a.m. and 12 p.m. Dealers acting as principles in the primary market had to provide details on the issuing entity and the nominal amount offered; counterparties in the secondary market had to provide the ISIN/ticker of the security, the money market yield on an amortized cost basis, the maturity date, and the nominal amount offered. Each individual security had to be at least £1 million, and offers had to be expressed in £0.1 million increments (BoE 2009e).^FFisher 2010 indicates individual counterparty limits existed, but details have not been located.

By allowing both primary issuers and secondary market holders to participate in the facility, the Bank aimed to increase issuer and investor confidence by serving as a ready buyer. The Bank believed that this would give all banks and investors, not just those that participated in the facility, the confidence to resume normal lending, which would help to further restore liquidity to corporate debt markets (Benford et al. 2009).

As discussed below, the CPF was never intended to serve as a long-term corporate credit source. Only commercial paper with three-month maturity (when purchased directly) or with a residual maturity of no more than three months (when purchased from holders in the secondary market) was eligible for participation. Commercial paper was purchased “at spreads which were significantly below those in the market at the time, but which were significantly above those expected to prevail in normal conditions” (Fisher 2010). The spread to the maturity–matched OIS rate was determined based on the issuer’s credit rating, and can be seen in Figure 2 below.

The Bank purchased commercial paper from secondary holders at the lower of the price determined by the above method and the amortized cost from the issue price. In addition, counterparties on the secondary market were charged a 25-basis-point usage fee (BoE 2009e). This pricing mechanism was designed so that the CPF would be “self-liquidating,” or less appealing as corporate credit markets improved (Fisher 2010).

In order to be eligible, commercial paper had to be issued by corporations that made a “material contribution to economic activity in the United Kingdom.” This was defined as a company that was incorporated in the United Kingdom, was capable of issuing bonds, and had genuine business in the United Kingdom. In addition, commercial paper issued by nonbank financial companies was eligible as long as the issuer made significant contributions to corporate financing in the UK. Leveraged investment vehicles were not eligible for participation. The Bank also restricted purchases to sterling-denominated commercial paper (BoE 2009e).

In his letter authorizing the CPF, the Chancellor asked that the Bank, “be satisfied that there will be a viable private market demand for the types of assets that it buys when conditions in financial markets return to normal” (Darling 2009). To ensure this, Her Majesty’s Treasury required that the Bank purchase only investment-grade assets that satisfied the following criteria:

1. A maturity of one week to three months if issued to the bank at issue via a dealer, or a residual maturity of three months or less if sold to the bank by a secondary market holder;
2.  A minimum short-term credit rating of A-3/P-3/F-3 from at least one of S&P, Moody’s, and Fitch; and
3. Issued directly into Crest, Euroclear, or Clearstream (BoE 2009e).

Asset-backed commercial paper was not eligible for sale into the Commercial Paper Facility (BoE 2009e).

If an issuer of the CP was downgraded below the minimum credit ratings, the CP was permitted to mature as normal, but the issuer was unable to access CPF again until it satisfied the required minimum credit ratings again (BoE 2009e).

A wholly owned subsidiary company, called the Bank of England Asset Purchase Facility Fund, was specifically created by the Bank to purchase assets, including commercial paper. The Bank loaned money to BEAPFF to finance these purchases, but the source of funding depended on whether the Asset Purchase Facility, and CPF by extension, operated under the quantitative easing program, which it did between March 2009 and February 2010. In its authorization of the CPF, the Treasury agreed that all losses incurred by BEAPFF would be indemnified by the UK government (Darling 2009). The Bank did not consolidate the fund’s assets and liabilities on its financial statements because, due to the indemnity, it had “no economic interests in its activities (BoE 2009a).

Initially, purchases of commercial paper were funded by Treasury bills issued by the Debt Management Office. Every purchase of private assets, including commercial paper, was financed through the issuance of short-term gilts, which did not affect the monetary supply. This was done to sterilize the operation, that is, to make sure that the purchases did not have an expansive impact on monetary policy. On February 17, 2009, shortly after the program was launched, the Bank’s Monetary Policy Committee revised the scope of the program so that it could also support monetary policy. Starting on March 6, 2009, the Bank financed the CPF through creation of new central bank money as part of a broader quantitative easing program (Benford et al. 2009). Starting on February 4, 2010, the program was again funded by Treasury bills to maintain the level of central bank reserves (BoE 2010).