The Federal Reserve starts making loans to American corporations Monday, a historic step meant to calm nerves in the short-term debt markets and to ensure companies have access to cash even if markets freeze again.
Dozens of companies signed up last week to sell short-term IOUs called commercial paper to the Fed, which will purchase three-month debt that has high credit ratings. Most of the firms that plan to participate have large financial businesses that rely heavily on short-term funding for their day-to-day cash needs. They include banks such as Morgan Stanley and a U.S. unit of Swiss bank UBS AG, as well as the finance arm of General Electric Co., Ford Motor Credit and GMAC LLC.
The interest charged by the Fed on the loans will in most cases range from 2% to 4%, rates that many banks and financial companies will be willing to pay in the absence of investor demand. That would be lower than recent overnight borrowing rates of more than 5% for many issuers during the worst days of the credit crunch.
These Fed-backed rates, however, would be considered high in normal times and also exceed current yields on similar debt issued by strong industrial corporations.
By offering to buy up to $1.3 trillion worth of commercial paper from companies if no one else wants to buy it, the Fed is trying to encourage investors to invest their cash in debt that matures in more than a few days.
The Fed's commercial paper facility, first announced Oct. 7, was part of a series of unprecedented government measures that started in mid-September to help alleviate severe strains in the credit markets and bring down interest rates. The collapse of Lehman Brothers Holdings Inc. spooked investors all over the world, who sold off the shares and debt of many financial companies for fear they might collapse.
The Fed and Treasury stepped in repeatedly to support the markets, by extending a huge loan to insurer American International Group, backstopping asset-backed commercial paper, pumping cash into the credit markets, establishing programs to take stakes in financial institutions and guarantee the debt of U.S. banks, and cutting the federal-funds target rate.
Over the past six weeks, turmoil in the financial sector caused many money-market mutual funds to limit most of their investments to overnight commercial paper. That made it difficult or impossible for many companies to roll over their debt, and also caused the overall commercial paper market to shrink. Since the start of September, the volume of U.S. commercial paper outstanding has declined by about $350 billion, or 20%, to $1.45 trillion.
With an investment vehicle set up by the Fed now effectively acting as a commercial-paper buyer of last resort, companies will have more breathing room to manage their finances.
The Fed's program should 'relieve a fair amount of the pressure on the commercial paper market,' says Ajay Rajadhyaksha, head of fixed-income research at Barclays Capital.
He notes, however, that some banks may rely temporarily on the facility while they prepare to issue longer-term debt that stands to benefit from government guarantees until 2012. The commercial-paper facility is currently scheduled to remain in place until April 2009.
Issuers that want to sell asset-backed commercial paper to the Fed facility, which is being overseen by Allianz SE's Pacific Investment Management Co., or Pimco, will have to pay three percentage points above an interest-rate benchmark called the three-month overnight indexed swap rate, which was 0.89% on Friday.
Companies selling unsecured commercial paper will have to pay an effective rate of two percentage points above this OIS benchmark. Issuers must sign up at least two days before using the facility, and can only sell commercial paper to it through primary dealers of the New York Fed.
数十家美国公司上周签署协议,向Fed发售属于短期债性质的商业票据。而Fed将购买高信贷评级的3个月期债券。参加该计划的这些公司大多拥有大规模金融业务,日常现金需求严重依赖短期融资。申请的机构中包括摩根士丹利(Morgan Stanley)、瑞士银行(UBS AG)一家美国子公司,以及通用电气(General Electric Co.)信贷子公司、福特旗下Ford Motor Credit及通用汽车金融服务公司(GMAC LLC.)。