How the Fed’s 2020 Commercial Paper Facility Differs From 2008’s

(Bloomberg) -- The Federal Reserve announced Tuesday it would use emergency authority to restart the Commercial Paper Funding Facility, a program first used during the global financial crisis, as the central bank seeks to help U.S. companies fund themselves during the coronavirus pandemic.

Here’s how the 2020 version of the facility resembles -- and differs from -- the original version:

Program Size

Treasury Secretary Steven Mnuchin said on Tuesday that the Fed’s ability to purchase eligible debt was limited only by the size of the commercial paper market, which he put at around $1 trillion, though it’s unclear if that much will be needed.

Within a few months of starting the previous program in 2008, the Fed had bought about $350 billion of commercial paper. The holdings declined throughout 2009 and the program was closed in February 2010, with balances paid off two months later.

Who’s Eligible

Generally, any U.S. firm issuing top-rated, dollar-denominated, three-month commercial paper is eligible, even if the company has a foreign parent. That’s similar to the 2008 terms. The Fed said it would make “one-time purchases” of second-tier commercial paper under different terms.

Who’s Borrowing

In the original facility, borrowers included titans of corporate America such as General Electric Co. and Caterpillar Inc., along with big banks such as Citigroup Inc. and Bank of America Corp. This time around, issuers such as Exxon Mobil Corp. and PepsiCo Inc. have already brought long-term bond offerings to pay down commercial paper holdings.

The Price

For unsecured commercial paper, the Fed said it’s charging companies 200 basis points above the overnight indexed swap rate. That’s not too different from the 100 basis-point premium plus 100 basis-point surcharge in the original facility, though the surcharge could be waived. But asset-backed commercial paper also will get the 200 basis-point premium this time, compared with 300 basis points in 2008. Purchases of lower-rated commercial paper will be subject to “separate pricing,” which the Fed didn’t elaborate on.

Bloomberg macro strategist Cameron Crise wrote that the terms were “a little disappointing relative to expectations.”

Treasury Support

The Treasury Department is providing $10 billion of credit protection for the new program, coming from the Exchange Stabilization Fund. In 2008, the Treasury made a “special deposit” of $50 billion with the Fed to support the facility.

Fed’s Authority

The Fed this time around obtained the explicit approval of the Treasury secretary, which was required under the Dodd-Frank Act. Mnuchin issued a statement saying the program “will help American businesses manage their finances through this challenging period.” While explicit approval wasn’t required in 2008, the Treasury Department endorsed the Fed’s plan.

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