Managing the Commercial Impact of the Coronavirus: Implications for Commercial Paper Market

20 March 2020 Coronavirus Resource Center Blog
Authors: Steven H. Hilfinger Heidi H. Jeffery

As the Coronavirus outbreak continues to develop and persist, issuers of commercial paper have been challenged to access liquidity markets. Market disruption has led to the inability of issuers to access the commercial paper markets. 

Effective March 17, 2020, the Federal Reserve Board announced that it will establish a Commercial Paper Funding Facility (CPFF) to support the flow of credit to households and businesses. Commercial paper markets directly finance a wide range of economic activity, supplying credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies. 

The CPFF will provide 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.

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 FRBNY in connection with the CPFF.

Clients with commercial paper programs should take the following steps to determine whether it satisfies the requirements of the CPFF: 

  • Rating Requirements. The SPV will purchase from eligible issuers three-month U.S. dollar-denominated commercial paper 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 company. 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.1  
  • Limits per Issuer. 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 any day between March 16, 2019 and 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.
  • Pricing. Pricing will be based on the then-current 3-month overnight index swap (OIS) rate plus 200 basis points. At the time of its registration to use the CPFF, each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.
  • Termination Date.  The SPV will cease purchasing commercial paper on March 17, 2021, unless the Board extends the facility. The New York Fed will continue to fund the SPV after such date until the SPV’s underlying assets mature.

In summary, it is important for clients with commercial paper programs to monitor market disruptions and implications for liquidity. For more information about recommended steps, please contact your Foley relationship partner. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization

Foley has created a multi-disciplinary and multi-jurisdictional team, which has prepared a wealth of topical client resources and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries. Click here for Foley’s Coronavirus Resource Center to stay apprised of relevant developments, insights and resources to support your business during this challenging time. To receive this content directly in your inbox, click here and submit the form. 

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1 In addition, the SPV will make one-time purchases of commercial paper (up to the amount outstanding on March 17, 2020) from issuers that met these criteria as of March 17, 2020 and were rated at least A-2/P-2/F-2 as of the purchase date. These purchases will be subject to separate pricing. The Federal Reserve reserves the right to review and make adjustments to the terms and conditions described in this term sheet, including pricing and eligibility requirements.  

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