THE BANK of England yesterday unveiled the first details of its plans to help unblock frozen credit markets through its £50 billion asset-purchase facility.
However, it was clear that it has much more work to do before the system is fully running.
In a market notice yesterday, the bank outlined a plan that will allow it to purchase commercial paper – used by companies to borrow money for up to 90 days – as soon as February 13th. However for longer-term corporate borrowings in the form of bonds or loans, the bank is still consulting the markets on key elements of its plan,
Mervyn King, the bank’s governor, and ministers have said that the inability of companies to borrow money, not only for longer-term investment but for everyday cash needs, posed the single biggest threat to the economy.
In a letter last week to chancellor Alistair Darling, setting out the role of the asset purchase facility, Mr King said he hoped it would “stimulate further issuance of some credit instruments” and encourage normal credit market conditions to return.
However, the actual launch of that exercise is some weeks away. The bank hints that it wishes its new facilities to be available to as wide a group of borrowers as possible.
For commercial paper, the bank is willing to undertake direct purchases from banks for all companies, including their finance subsidiaries, that make a “material contribution” to UK economic activity.
The bank made clear this applied to companies with a parent overseas so long as the UK-based subsidiary was big enough to support a commercial paper programme in the UK and operated a genuine business in Britain.
Companies that do not currently issue commercial paper – only a minority of FTSE 350 companies even have credit ratings – may also be able to use the facility under some circumstances.
Initially the bank is minded to purchase only sterling-denominated paper but may consider extending to other currencies.
Paper must carry an investment-grade rating and the bank will purchase it at a spread above interest rate swap contracts with a similar maturity.
Top-rated paper will be priced at three-quarters of a percentage point above these contracts, less than the current market price of a full percentage point but more than a more normal price of about 0.55 percentage points above those contracts.
The lowest-ranked investment-grade paper will be purchased at three percentage points above the reference rate, a level that implies a steep discount to face value.
The bank is consulting on similar rules for both corporate bonds and loans, and has made the outlines of a programme clear, proposing similar broad limits for the purchase of longer-term borrowings as it has proposed for commercial paper. – (Financial Times service)
