Buyer Beware: Four Tips on Navigating the Government’s Commercial Paper Funding Facility (CPFF)

Executive Summary

Tip No. 1: In a market that lacks liquidity, CPFF means liquidity.
Tip No. 2: When a firm can no longer access CPFF, liquidity may deteriorate rather rapidly.
Tip No. 3: Despite the appearance to the contrary, not all CPFF-eligible issuers are the same.
Tip No. 4: CPFF eligibility and credit ratings are derived from an issuer’s fundamental credit quality, not the other way around. Fundamental credit research remains the key.

Embrace the CPFF

But Beware of the American Express Blues
Of the several government programs introduced since the collapse of Lehman Brothers last fall, the Commercial Paper Funding Facility (CPFF) has played a very important role in restoring money market liquidity and lowering short-term credit rates. Since October 27 of last year, when the program was introduced, until January 14, 2009, the three-month commercial paper (CP) rate declined from 2.83% to 1.02%, the lowest level in the current cycle, according to Bloomberg data. The rate currently stands at 1.27%. The program’s success is also evidenced by more private investors’ interest in the CP market. For example, about 85% of the U.S. CP volume was purchased by the CPFF at the onset of the program but the program’s $83 million CP purchase represented just 0.13% of the $62.50 billion new purchases for that week ending January 14th, 2009.
Tip No. 1: In a market that lacks liquidity, CPFF means liquidity.
Although we remain wary of unsecured corporate CP issuers, we understand that some more adventurous cash investors are interested in programs supported by the CPFF because of the Fed liquidity backstop. This brings up the topic of the American Express “Blues.”
The criteria for CP issuers to participate in the CPFF is rather broad: all U.S. based issuers with top-tier short-term credit ratings, namely A-1 from S&P, P-1 from Moody’s, or F1 from Fitch, may issue three-month CP to the program. An obvious question from our perspective would be: what happens to a name that is downgraded below this threshold and thus is no longer eligible for the CPFF liquidity? As far as we can tell no one has the answer; but if recent history offers any guidance, the prognosis is not good! American Express is one such issuer facing that predicament right now.
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