Davis Polk & Wardwell Newsflash

Federal Reserve Board Announces Creation of Commercial Paper Funding Facility

October 7, 2008

The Federal Reserve Board announced today the creation of a commercial paper funding facility to help provide liquidity to short-term funding markets. The facility enables the Federal Reserve Board to purchase, through a special purpose vehicle, commercial paper directly from U.S. issuers (including U.S. issuers with a foreign parent).

The federal special purpose vehicle will purchase three-month, U.S. dollar-denominated asset-backed and unsecured commercial paper at a spread, determined in consultation with market participants, over the three-month overnight index swap rate.  Commercial paper that is not asset-backed must be secured to the satisfaction of the Federal Reserve Board, including by the retention of up-front fees paid by the issuer or by other forms of security acceptable to the Federal Reserve Board in consultation with market participants.

Commercial paper purchased by the special purpose vehicle must be rated by a nationally recognized statistical rating organization and must be rated at least A1/P1/F1. The Federal Reserve Board’s announcement specified no restriction on the use of proceeds by the issuer. The maximum amount of commercial paper that any issuer may sell to the special purpose vehicle will be the average amount of commercial paper the issuer had outstanding in the month of August 2008, less any amount of the issuer’s outstanding commercial paper held by investors other than the special purpose vehicle. In other words, the facility is intended to fund any shortfall in the issuer’s ability to roll over its commercial paper. Unless the Federal Reserve Board agrees to extend the facility, the special purpose vehicle will stop purchasing commercial paper on April 30, 2009. The Federal Reserve Board will, however, continue to fund the special purpose vehicle after April 30, 2009 until all of the underlying assets mature.

See a copy of the Federal Reserve Board’s press release and its terms and conditions.

If you have any questions regarding this newsflash, please call your Davis Polk contact.

Davis Polk & Wardwell