Government efforts to rescue the commercial paper market kicked into full gear last week, as two Federal Reserve-sponsored programs got a jump-start.
The Commercial Paper Funding Facility (CPFF), which is aimed at offering a liquidity backstop to U.S. commercial paper issuers, was launched on Monday. General Electric Co., the country's largest issuer of commercial paper, GMAC and American Express were all in the news as the first companies to take advantage of the facility.
By the third day of operations, the CPFF hit $144.7 billion. However, the Fed did not reveal the number of firms that were selling their short-term debt to the facility and nor did it disclose their names.
CPFF's commencement was welcomed by ABCP players. Participants have waited for this program to bring back longer-term investors to an asset-backed commercial paper sector that had virtually become an overnight market.
By midweek, observers said that they had seen some extension of maturities by ABCP investors, but not as much as they had initially hoped. They acknowledged, however, that it was too early to tell how investors would react to CPFF.
Meanwhile, another Fed initiative, the Money Market Investor Funding Facility (MMIFF), which was announced the previous week, was also in the news. Fitch Ratings said that it expects to rate five money market investor funding facility-related ABCP programs.
The MMIFF, like the CPFF, is designed to provide and restore liquidity to the short-term debt markets. The assets that the conduits under this program will be financing will be highly-rated, U.S. dollar-denominated commercial paper, and deposits acquired from money market mutual funds.
Observers have indicated that the technology used in the MMIFF could provide a template for funding in other asset classes, specifically in student loans. Sources said that the Department of Education (DOE) could conceivably use its current loan purchase and participation programs to buy auction rate securities, for instance. The only hitch, experts said, is that the DOE doesn't have the specific authority to buy auction rate securities, as it does for student loans.
Sources also said that the private special purpose vehicles created under the MMIFF, which are still not up and running, might be a good alternative for money market funds to promote liquidity in the secondary market. These programs could provide a source of funding in case of redemptions by investors.
There is only limited risk in the technology used in the MMIFF programs, considering that these conduits have but a small group of highly-rated institutions as obligors.
A different program not involving the Federal government could even be created in the future, sources suggested. The Fed's participation, in such case, would be replaced by an institution with a large balance sheet. But this will all depend, market sources said, on how the current vehicles under the MMIFF play out.
New MMIFF Programs
Fitch is expecting to rate five MMIFF programs: Hadrian (around $220 billion), Trajan (around $150 billion), Aurelius (around $135 billion), Antoninus (around $60 billion) and Nerva (around $35 billion). The programs, which Fitch expects to rate 'F1', were all arranged by JPMorgan Securities, and will be administered by Global Securitization Services, according to a release from Fitch. JPMorgan will also serve as a referral agent for each SPV in terms of the assets being bought.
Each asset will be 90% funded by overnight loans from the Federal Reserve Bank of New York (FRBNY), and by 10% in ABCP issuance. Although the structures do not incorporate an external liquidity facility, the ABCP will be maturity-matched against the related assets, according to Fitch.
The programs essentially follow a sequential payment structure as before an event of default: 90% of the collections on the assets will be utilized to repay FRBNY and 10% will be paid to ABCP holders.
"The biggest risk for investors in this program is if one of the underlying obligors defaults within the exposure period," said Michael Dean, head of the ABCP group at the rating agency. The assets, which might either be commercial paper, certificates of deposit or bank notes, should be issued by a permitted obligor and bought from an eligible seller.
Each program will also have an associated unique list of obligors, which would each have a short-term rating of at least 'F1'.
"We are confident that within that list of ten exposures there's a remote risk of default," said Darryl Osojnak, a managing director at Fitch. "Fitch's financial institutions group analyzed the list of all the potential names one by one, and most of the banks involved have a higher short-term rating than the MMIFF programs, as most are rated 'F1+'."
"CPFF may increase liqudity for commercial paper without issuers having to actually access the program by serving as a funding of last resort," said Erik Klingenberg, a partner at Thacher Profitt.
He added that a program like the CPFF promotes the participation of private investors by providing a sense of security for buyers and knowing that issuers can repay them in the event of a redemption, for instance. "It can be used as a marketing tool by issuers. They could say to investors, 'If you buy my paper, I'm registered to access the CPFF. If the worst happens, I have CPFF as a source of liquidity,'" Kligenberg said.
The MMIFF operates on the same principle, he said, although taken from the money market fund side. If a fund is concerned about redemptions, it may not be wiling to buy longer-dated paper. The MMIFF gives them the ability to do so knowing they can access that fund if needed.
Despite the benefits offered by both the CPFF and MMIFF, one hindrance to creating programs or facilities to take advantage of these initiatives is that these backstops are scheduled to go away next year, Klingenberg said. "These could potentially be extended, but it's unlikely parties would create new programs relying on funding from CPFF or MMIFF when these are scheduled to expire in the near-term," he said.
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