LONDON (Reuters) - The Bank of England plans to help big companies in Britain survive the huge hit to their business from the coronavirus outbreak by buying short-term debt from them.
The move represents the return of a weapon in its arsenal to fight economic downturns that it used during the global financial crisis, alongside lower interest rates and massive purchases of government bonds.
Here are details of the BoE’s COVID Commercial Financing Facility (CCFF), which is being rushed out for launch next week.
The BoE has said it will buy commercial paper - short-dated debt issued by companies usually to help finance their everyday operations - from non-financial companies, with maturities of up to one year. In exchange, companies will receive money.
While Britain’s sterling commercial paper market is small, with monthly gross issuance of only around 3 billion pounds ($3.53 billion), businesses that have never issued commercial paper before will be able to issue some to sell to the BoE.
The BoE says it will buy as much as needed.
The BoE will publish applications forms and procedures on Monday, when the facility starts operating.
Businesses that employ a lot of people in Britain, or are headquartered there, will usually be considered eligible. The BoE has said eligible companies need to be “genuine business” in Britain.
It can also take into account revenues generated in Britain, or whether the company has a lot of sites there.
The short-term debt issued by companies needs to be of investment grade, meaning it must have a high credit rating. If a short-term credit rating is not available, the BoE will look at long-term ratings, or it will assess the financial health of the company itself.
The BoE has said it will ignore the temporary damage inflicted on company accounts since the coronavirus crisis took hold.
On Wednesday, new BoE Governor Andrew Bailey said the central bank was also open to widening its finance schemes further, looking at asset-backed commercial paper and the credit quality that non-financial firms need to access its facilities.
The BoE will create new money to pay the for the scheme, similar to its purchases of government and longer-term corporate bonds in previous attempts to stimulate Britain’s economy.
The BoE bought commercial paper during the 2008/09 financial crisis. Although the scheme was small, the BoE judged that it helped to calm the wider market for corporate finance, giving big companies easier access to funding.
The U.S. Federal Reserve relaunched its own commercial paper facility on Tuesday. [nL1N2BA0PK]
No. The BoE has said they will not be disclosed publicly.
The scheme will run for an initial 12 months to help businesses get through the coronavirus crisis. The BoE said it will provide six months’ notice before closing the CCFF.
Reporting by Andy Bruce; Editing by William Schomberg and Nick Macfie