A Review of the Commercial Paper Funding Facility

As many recipients of our monthly newsletter are aware, Capital Advisors Group serves a wide range of clients, from private to public companies with small to large cash balances and institutions of all stages in between. Before you read further I’d like to stress that, given the current state of the credit markets, we’re stressing conservative, government-backed securities for the vast majority of our clients. However, risk appetites among cash investors do vary and some with large cash balances may be considering pursing yield for a portion of their cash holdings.

For those more aggressive cash investors, this month we’d like to review some of the potential advantages and drawbacks of the Government’s Commercial Paper Funding Facility (CPFF). One of the many government programs enacted to free up liquidity in the credit markets over the past year, the CPFF became operational in October 2008 and was designed to produce a government backstop for investors interested in purchasing commercial paper (CP) from qualified issuers. For reasons that are explained in depth in this month’s Research Whitepaper, you’ll want to take note of the word “qualified” in the previous sentence.

Just briefly, investors should be aware that this program is only available to what may be considered the most credit worthy issuers – only those with a short-term credit rating of A1/P1 or higher. The government created a special purpose vehicle that would purchase eligible three-month unsecured and asset-backed CP from those “qualified” issuers, thus assuring both issuers and investors that firms would be able to roll over their maturing CP. We feel it’s a strong program in theory, but there may be one significant obstacle for investors – that the A1/P1 rating for qualified issuers hinges solely on the whims of the ratings agencies.

An unintended consequence of this program could be a downward credit spiral due to a rating downgrade below A1/P1 – resulting in being “disqualified” from the program. If an issuer loses its rating, it may well also lose the backstop and the liquidity and the investors…all at once. Therefore one must research the potential trajectory of the ratings to anticipate if an issuer may be downgraded and thus “disqualified.” While many recently enacted government programs offer corporate treasurers strong short-term cash investment options, we caution investors to always be aware of how the eligibility requirements of government programs may affect the risk profile.

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Best Regards,

Ben Campbell
President & CEO