Vol 6 (2009) - Issue 4

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Latest Bank of England Proposal Hopes to Facilitate Short-Term Working Capital for UK-Based Companies

The Bank of England (the ‘Bank’) announced on 8 June 2009 that it is considering expanding its Asset Purchase Facility (the ‘Asset Purchase Facility’) by establishing a Secured Commercial Paper Facility (the ‘SCP Facility’) that would cover a broader range of instruments in a way that would facilitate greater working capital for UK-based companies. UK-based companies facing short-term liquidity strains in the current volatile market would greatly benefit from this programme – when implemented, participants with eligible short-term debt programmes could obtain Bank market support for a period of 15 months or more.

Background

Since the start of the credit crisis in 2007, a number of governments across the globe have implemented market stimulus programmes intended to improve credit and to stimulate liquidity in their respective domestic markets. On 19 January 2009, the Bank established one of the UK government’s principal liquidity stimulus programmes, the Asset Purchase Facility, to encourage trading in specified securities, including commercial paper and corporate bonds, in the primary and secondary markets. Although the scope of the Asset Purchase Facility was somewhat limited at inception, the Bank has been considering extending the Asset Purchase Facility for several months with the aim of improving liquidity in the domestic UK markets and supporting the Bank’s role in maintaining UK monetary and financial stability.

The Bank’s newly announced facilities, the SCP Facility and the Supply Chain Finance Facility, are expected to supplement the Commercial Paper Facility and the Corporate Bond Secondary Market Scheme that are already a part of the Asset Purchase Facility. (Because the Supply Chain Finance Facility is still very much under development by the Bank, it is not covered in this article.)

The SCP Facility

The SCP Facility is being developed to improve UK businesses’ and customers’ access to short-term working capital. Under the SCP Facility, the Bank, through the Bank of England Asset Purchase Facility Fund (the ‘Fund’), will now be able to purchase specific types of asset-backed commercial paper (‘ABCP’) from qualifying commercial paper programmes at designated periods each business day. This represents a significant expansion of the Asset Purchase Facility because the Fund is currently unable to purchase ABCP under the Commercial Paper Facility.

Qualifying ABCP would have to satisfy the following criteria to be eligible for purchase by the Fund:

- have a maturity of one week to nine months, if sold to the Fund via a dealer, or have an original maturity of nine months or less, if sold to the Fund by a secondary market holder;
- have a minimum initial short-term credit rating of ‘A-1’, ‘P-1’ or ‘F-1’, from at least two of Standard & Poor’s, Moody’s or Fitch, respectively. Programmes with split ratings where one rating is below the minimum rating would not be eligible;
- be issued directly into Crest, Euroclear or Clearstream and be denominated in Sterling (with no restriction on the currency of the assets supporting the ABCP);
- be backed by either direct short-term credit extended to companies, such as trade receivables and equipment leases, or to customers, such as for credit cards and/or short-term loans;
- not be backed by asset-backed securities or synthetic exposures or otherwise exhibit ‘non-standard’ features such as extendibility or subordination; and
- not be backed by longer-term assets (given the maturity mismatch involved in funding in the short-term markets).