US Fed to fund short-term business debt

07 October 2008 18:50  [Source: ICIS news]

WASHINGTON (ICIS news)--The US central bank said on Tuesday it is taking further emergency action to restore credit markets by providing funds for short-term business debt - known as commercial paper - issued by companies to cover operational costs.

 

The Federal Reserve Board (Fed) said it was taking the unprecedented step of funding private-sector debt by non-bank companies “to prevent substantial disruptions to the financial markets and the economy”.

 

In announcing the new measure, the Fed did not say how much money it will put into its newly created Commercial Paper Funding Facility (CPFF), but financial-market sources estimate that the central bank may have to make several billion dollars worth of credit available in order to restore liquidity to commercial-paper markets.

 

Commercial paper typically is a money-market security issued by well-established and credit-worthy companies that want short-term cash to cover payrolls, inventory build-ups or other needs. 

 

The terms of a commercial-paper note may be as brief as a few days or weeks and rarely exceed a calendar quarter. The notes are most often purchased by money-market funds.

 

Manufacturers - including some major chemical producers - other industrial firms and service companies issue commercial paper to maintain cash flow in their businesses.

 

However, due to the global financial crisis and the tightening of credit, the market for commercial paper - seen as the lifeblood of business - has all but dried up, according to the Fed.

 

“The commercial-paper market has been under considerable strain in recent weeks as money-market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper,” the Fed said.

 

By making funds available through its new funding facility, the Fed said it will “provide a liquidity backstop to US issuers of commercial paper” and “encourage investors to once again engage in term lending in the commercial-paper market”.

 

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By: Joe Kamalick
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