Bank of England Asset Purchase Facility

Bank of England’s consultation on proposals to add programmes targeting supply chain finance to its Asset Purchase Facility (APF)

Press Release

8 June 2009

The Bank of England is considering establishing a Secured Commercial Paper (SCP) Facility to buy appropriate Asset Backed Commercial Paper (ABCP) and establishing a specific Supply Chain Finance Facility.

Gerry Bacon, ACT President commented:

 The Bank’s initiative on working capital is great news - very welcome. Gerry Bacon, ACT President

What has already been done?

Significant amounts of finance have already been provided by the Bank via the existing Commercial Paper (CP) and bond purchase facilities. Liquidity has been improved and the cost of borrowing has fallen. The ACT is encouraged that some companies have, we understand, been talking to credit rating agencies about obtaining ratings to permit participation.

What is now proposed?

The new proposal for the Bank to purchase certain high quality asset backed commercial paper potentially extends the reach of the Bank’s programme. As few existing ABCP programmes will meet the Bank’s criteria it will take time for tailored programmes to be developed. In time, however, additional credit can become available to a wider cross section of companies – including those that of themselves would not warrant an investment grade credit rating. We hope the Bank’s activity will stimulate other investors in this type of paper. Companies will need to take care to ensure compliance with any existing covenants on secured finance and equivalents.

The second proposal, for a Supply Chain Finance Facility could, in a broadly similar fashion, provide finance to companies on the strength of their receivables from a well rated customer. Larger companies may be able to do this directly but smaller companies may need to participate in special purpose vehicles. Again, structures would need to be carefully created for this. In essence, small companies and those without credit ratings should be able to raise finance which may not be otherwise available and this should be at a lower price than the companies’ normal short term funding costs. There are various mechanisms including trade bills and bankers’ acceptances as familiar tools which can be used here.

Stuart Siddall, ACT Chief Executive, said:

 We have been impressed by the Bank’s willingness to extend the availability of cost competitive credit to UK industry within its necessary risk constraints. The Facilities now being considered can be an additional spur for companies to get a credit rating – in this case to improve their supplier terms. The ACT has urged companies to consider seeking a rating to gain access to the capital markets. With bank capital likely to be constrained, companies need to look more widely for funding. Stuart Siddall, ACT Chief Executive

The original Asset Purchase Facility

The Bank has implemented its Bond and CP Facilities. The ACT notes that the Bank has not mentioned any plans to progress with the originally announced inclusion of syndicated loans within its APF. As syndicated loan facilities may be undrawn from time to time they may be less attractive to investors. However, such loans can be structured to be fully drawn and the ACT believes that long term investors would be prepared to invest in such paper. If the Bank were also prepared to buy this paper this would encourage other investors and provide opportunities to improve company liquidity.

Notes

• The Bank of England’s release is available at http://www.bankofengland.co.uk/markets/money/Round2.html
• The Secured Commercial Paper Facility would encourage the creation of new Special Purpose Vehicles (SPVs) which would buy trade receivables from a single company or several companies and issue the CP. The credit worthiness of an SPV and its CP will not depend on the rating of the single company or several companies but on the rating of the ultimate obligors of the receivables.
• The ACT has previously advocated the revival of the bankers’ acceptance market – see bankers' acceptance market

Notes to editors

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