On April 7, Neil Chatterjee, Chairman of the Federal Energy Regulatory Commission (FERC) and Brandon Presley, President of the National Association of Regulatory Utility Commissioners (NARUC) sent a letter to the Chairman of the Board of Governors of the Federal Reserve System (Federal Reserve) in support of a March 24, 2020 request by the Edison Electric Institute (EEI), the American Gas Association (AGA) and the National Association of Water Companies (NAWC) that the Federal Reserve extend purchasing under the Commercial Paper Funding Facility (CPFF) to commercial paper programs that are rated at A2/P2/F2 Tier 2 by at least two of the major credit rating agencies.
On March 17, in response to the COVID-19 national emergency, the Federal Reserve established a CPFF to provide a “liquidity backstop” to U.S. issuers of commercial paper through a special purpose vehicle (SPV) authorized under section 13(3) of the Federal Reserve Act. The U.S. Treasury will provide $10 billion of credit protection to the Federal Reserve in connection with the CPFF from the Treasury’s Exchange Stabilization Fund (ESF), and the Federal Reserve Bank of New York will commit to lend to the SPV on a recourse basis, secured by all of the assets of the SPV. The SPV will purchase three-month unsecured commercial paper and asset-backed commercial paper from eligible issuers using the financing from the Federal Reserve Bank of New York.
(For additional information about the CPFF and other federal market and supervisory actions adopted to address the COVID-19 emergency, see The Fed Repurposes the Financial Crisis Playbook for Pandemic Response, and a chart, Federal Reserve Facilities: CARES Act and Beyond, which summarizes the Federal Reserve’s facilities, including the CPFF.)
According to the Federal Reserve, by eliminating much of the risk that eligible issuers will not be able to repay investors by “rolling over” their maturing commercial paper obligations, the CPFF should encourage investors to engage in term lending in the commercial paper market which, in turn, would help businesses to maintain employment and investment during the COVID-19 emergency.
Eligible issuers under the CPFF, as established, are companies that, as of March 17, were rated at least A-1/P-1/F1 by a major nationally recognized statistical rating organization—considered as “Tier 1” issuers of commercial paper—or, if rated by multiple major nationally recognized statistical rating organizations, were rated at least A1/P1/F1 by two or more major nationally recognized statistical rating organizations and subsequently downgraded.
The registration process for the CPFF began on April 6, and the SPV will begin making purchases on April 14.
In supporting the request by the EEI, AGA and NAWC, FERC and NARUC argued that “Tier 2 companies are active in sectors that represent essential infrastructure, and include electric, natural gas and water utilities that are providing important contributions to the country,” and that the continued financial stability of such utilities is “supported by ready access to short-term debt.”
The letter from FERC and NARUC follows a March 20 letter to the Federal Reserve from the Association for Financial Professionals (AFP), in which the AFP explained that “[t]he Tier 2 [commercial paper] market is approximately $90 billion in size and includes many public utilities and other critical industries.” The AFP further explained that the market for Tier 2 commercial paper “is largely frozen at present, with rates at two or three times their historical average—if an issuer can even find any investors.” The AFP argued that expanding the CPFF to include Tier 2 commercial paper issuers “will help alleviate constrained credit access for these Tier 2 issuers.”
On April 2, 81 members of Congress sent a letter asking the Federal Reserve to extend the CPFF to commercial paper issuers that are rated at A2/P2/F2 by at least two of the major credit rating agencies and are in sectors designated as critical infrastructure under the Presidential Policy Directive on Critical Infrastructure Security and Resilience (PPD-21). In making this request, the members of Congress observed that, while “[u]tilities have committed to prohibiting utility shut-offs for customers who may have been impacted by job loss or financial distress or any reason they are unable to pay their utility bills” during the COVID-19 emergency, “linem[e]n and power plant operators are on the front lines to ensure safe and reliable electric service throughout this crisis.” The members of Congress argued that, in order to continue providing service, “utilities need reliable access to short term liquidity provided through the commercial paper markets.”