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The Fed restarts commercial paper facility to help market

The Federal Reserve will restart a financial crisis-era program to help U.S. companies borrow through the commercial paper market after it came under “considerable strain” due to the coronavirus pandemic.

The central bank is using emergency authorities to establish the Commercial Paper Funding Facility with the approval of the Treasury secretary, according to a Fed statement on Tuesday. The Treasury will provide $10 billion of credit protection from its Exchange Stabilization Fund.

“By providing short-term credit, the CPFF will help American businesses manage their finances through this challenging period,” Treasury Secretary Steven Mnuchin said in a separate statement.

The Fed said it will provide financing to a special-purpose vehicle that will purchase A1/P1 rated commercial paper from eligible companies, and purchases will last for one year unless the Fed extends the program.

Pricing will be based on the then current three-month overnight index swap rate plus 200 basis points, and each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.

The step comes as central banks and governments around the world roll out emergency liquidity measures for markets and economic stimulus programs designed to soften the impact of the spreading coronavirus. A number of economists have said virus-triggered closures and national lock-downs are making a global recession increasingly likely.

The Fed on Sunday slashed interest rates to nearly zero, announced enhanced dollar swap lines with other central banks and said it would buy at least $700 billion in Treasuries and mortgage backed securities to ensure market functioning and keep credit flowing.

In financial markets, the rush of investors into cash and other safe havens has threatened to deny companies a crucial source of short-term lending. Firms frequently issue commercial paper—IOUs that generally mature in fewer than 270 days—to fund everyday expenses, like rent and payroll.

The facility reprises a program the Fed rolled out in the depths of the financial crisis in October 2008 as global credit markets seized up. At the time, companies were even more reliant on short-term lending and the crisis left several industrial giants scrambling for cash.

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