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BofE plans for ABCP boost get short shrift

The Bank of England revealed details of its scheme to support the sterling asset backed commercial paper market this week but was greeted with a collective shrug of the shoulders from unimpressed structurers and dealers who gave the programme little hope of success.

The central bank already purchases some commercial paper issued directly by companies, but now wants to ensure that bank lenders can finance the working capital needs of their clients. It originally announced proposals for the facility and began a consultation with market participants in early June, when dealers hoped to persuade the Bank to make changes.

"The final program is pretty much the same as the original proposal, although the industry did make comments," said Peter Eisenhardt, chairman of ICMA’s European commercial paper sub-committee. "I think the emphasis is on funding corporates as directly as possible; and it’s less on reviving markets per se," he said. "It won’t revive the market."

The facility will pay a minimum spread over risk-free rates, based on the maturity-matched overnight index swap (OIS) curve, initially 100bp over the OIS rate.

Market participants doubt whether the fund will be attractive in the current market.

"The multi-seller conduits that possibly would be eligible issue mostly one month paper," said one London-based CP dealer. "At the moment we’re doing one month somewhere below 70bp as a borrowing cost for the conduit. And at the Bank of England’s facility it would be just over 140bp. So I’m not sure how this would benefit anybody."

Strict eligibility

The Bank said that the Asset Purchase Facility will purchase ABCP in the primary market via dealers and, after issuance, from other eligible counterparties in the secondary market. The facility will be available from Monday, although transactions will not take place until programmes have been approved as eligible.

It said the purpose of the Secured Commercial Paper Facility is to help improve the function of the private market by standing ready to make primary market purchases and by acting as a backstop for secondary market investors.

The Bank said it would buy securities backed by assets from companies that "make a material contribution to economic activity in the UK", a criterion already required of companies selling paper to the APF.

The maximum proportion of a programme’s outstanding paper considered eligible for the facility would be based on the proportion of the underlying assets in the programme providing credit to borrowers that meet the economic activity criterion.

Though there will not be any restriction on the currency of the underlying assets, the facility will only buy sterling denominated paper, something of a rarity in the CP market.

"It is pleasing to see the Bank of England seeking to support a market — ABCP — which has been of significant value in supporting the short-term funding needs of a number of important sectors in the British economy," said John Woodhall, co-head of the international finance group at Sidley Austin. "However it is important to note that only sterling CP is eligible, and the asset backed sterling CP market in particular has been very badly hit in the last couple of years. Volumes are now very slight and a number of programmes have stopped issuing sterling CP and have even allowed their dealer programmes on the sterling side to lapse."

The types of underlying assets likely to be deemed acceptable are direct short term credit to companies, such as trade receivables and equipment leases; as well as short term credit to consumers, such as for credit cards and short-term loans.

But the inclusion in a programme of term ABS bonds (with average maturities longer than nine months); emerging market transactions; or synthetic assets would likely make that programme ineligible.

Ratings of the underlying assets in the programme must be consistent with an A1/P1/F1 programme rating, and sponsors will be required to provide information sufficient for the Bank to assess the underlying quality of each asset pool.

The weighted average life of the programme’s assets must not exceed nine months, with no underlying asset to have an expected final maturity of more than one and a half years.

Woodhall believes that these criteria may also be too stringent to allow significant use of the programme.

"The other point to note is that the assets must relate to the UK economy and can only be short term and that the Bank has significant discretion in reviewing and determining whether a programme will be acceptable," he said. "Most of the single-seller conduits have now closed down. The only conduits that are really alive now are the multi-seller bank-sponsored conduits. And on the European side those tend to have a range of countries in them, a range of assets, and very often will include some term assets or at least non-short-term assets in their portfolios."

There are therefore few eligible programmes already existing, something borne out during the consultation period.

"In the response to the consultation, the likely conduits said they wouldn’t necessary have significant amounts of eligible assets to finance," said Eisenhardt.

Exhorting issuers

The Bank is encouraging issuers to set up new programmes but Woodhall says that it is unlikely that many issuers would find it worthwhile setting up a new sterling programme when they may have alternative sources of funding.

"The sterling market historically was an alternative to and even competed pretty directly with the US dollar and the euro CP markets," he said. "And the US dollar and even euro CP investor bases, while not as deep as they were two years ago, still very much exist. Why would someone set up a programme issuing only sterling CP to meet the eligibility criteria for a programme designed to act as a backstop to an investor base which is almost non-existent, when they could probably use their existing programme and continue accessing US and euro CP?

"Setting up a new conduit is not an inconsiderable task," he said. "It’s not the kind of thing you can do in a couple of weeks, and it’s not insignificantly expensive either. It’s a fairly major investment for somebody, and they’re going to have to take a view that they’re going to be able to put enough eligible assets into the programme and issue sterling CP at reasonable volumes. And they’ll probably have to take a view that they’ll be able to issue that sterling CP not just to the Bank of England."

Many agree that a flurry of new programmes seems unlikely.

"From our perspective it’s all about the possibility of new conduits, and I don’t think our guys are that keen, from what I’ve heard," said the CP dealer.

Central bank funds buying ABCP have been viewed as fairly successful in the US, but the different market structure means the Bank’s secured CP facility is uncertain of success.

The US has a larger commercial paper market that is more crucial to companies’ funding, and was also important to money market funds that are popular with American savers.

In addition, ABCP constitutes a smaller proportion of the ECP market than of the USCP market, where it makes up over 50% of outstanding issuance.

Outstanding ABCP in the European commercial paper market has fallen from $285bn equivalent at the end of July 2007 to $46.4bn today, according to Dealogic data, though much of that fall is due to the withdrawal of synthetic or structured products, which the Bank does not intend to support.

Its share of the market for the same two periods dropped from 35.2% to 7.4%.

As well as being sterling-denominated, the paper must have a maturity of nine months or less and a minimum initial short-term credit rating of A1/P1/F1 from at least two of Standard & Poor’s, Moody’s and Fitch.

The Bank will provide a year’s notice before withdrawing the facility and it will not serve such notice during the initial three month start-up period because of the lead time to set up programmes.

It said it intends for the Facility to operate for as long as the highly abnormal conditions in corporate credit markets persist and materially impair the financing of real economic activity.

The Bank will make a list of eligible programmes available on its website. n

Brendan Daly

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