Fed's Commercial Paper Facility Attracting European Conduits

The U.S. Federal Reserve’s commercial paper funding facility (CPFF) may be siphoning off investment from Europe and prolonging the stagnation of the region’s asset-backed commercial paper market, a new report from Standard & Poor’s suggests. However, planned moves by the Bank of England may bring some assistance to the sector.

The U.S. ABCP market continues to be deeper than the European one and we have continued to see more European program sponsors issuing in the U.S. ABCP market,” S&P says in its Report card on Structured Finance.“For example, at the end of April 2009, five European conduits were exclusively tapping the U.S. ABCP market.

With the European ABCP market still in the doldrums, some sponsors are placing most, if not all (apart from a few overnight issues), their paper with the U.S. Federal Reserve’s commercial paper funding facility (CPFF).Although conduit sponsors and the underling finance obligors perceive the fees for using the CPFF as onerous, obligors still value the access to a precious source of liquidity, which we saw especially toward year-end 2008.Some sponsors have indicated to us that they would like to see the European Central Bank (ECB) establish a similar facility to the CPFF since banks can currently only pledge the ECB-eligible paper of certain conduits and there is a still a capital charge attached to it. Sponsors have been making their paper ECB-eligible over the past few months by, among other things, changing their conduit’s jurisdiction and adhering to the short-term European paper (STEP) label.

S&P assesses the Bank of England proposal to purchase ABCP from eligible U.K.-related conduits. The Bank proposes to introduce a secured commercial paper facility to buy ABCP from approved conduit issuers for a limited period of time in the primary and secondary market, thereby promoting liquidity in the secondary market. S&P expects the number of European programs to decrease by 10% by the end of 2009.

We believe that the Bank of England’s proposal is a positive move to support the revival of the ABCP investor market while providing support to U.K. companies. However, as discussed in today’s article, we also foresee certain limitations regarding the proposed scheme.