Alert October 14, 2008

FRB Announces Lending Program to Aid Commercial Paper Market

The FRB announced that it was creating a new program (the “Program”) under Section 13(3) of the Federal Reserve Act to aid the commercial paper (“CP”) market.  CP is unsecured, short-term debt issued by certain (generally large) business organizations (including both financial and non-financial companies).

Under the Program, which will be administered by The Federal Reserve Bank of New York (the “FRB‑NY”), the FRB will establish a special purpose vehicle (“SPV”), and the FRB‑NY will commit to lend to the SPV at a target federal funds rate.  The SPV will draw down on the FRB‑NY lending facility on an overnight basis with recourse to the SPV.  The lending will be secured by all SPV assets as well as other security.

The SPV will purchase three-month unsecured and asset-based CP from eligible issuers through the FRB‑NY’s primary dealers.  Eligible issuers will include U.S. issuers of CP, including U.S. issuers with foreign parents.  The SPV will finance “only highly rated U.S. dollar-denominated three-month” CP.  With respect to non-asset-backed CP, the SPV will receive as additional security unspecified up‑front fees or other inducements from the CP issuer, or guaranties, collateral or other forms of security acceptable to the FRB.  The maximum amount of CP that an issuer may sell to the SPV is the greatest amount of U.S. dollar-denominated CP the issuer had outstanding on any day between January 1, 2008 and August 31, 2008.  The SPV will not purchase additional CP from an issuer whose total CP outstanding to all investors (including the SPV) equals or exceeds the foregoing maximum amount.  The FRB stated that pricing will be based on the then current three-month overnight index swap rate plus fixed spreads.  The SPV will cease to purchase CP under the Program on April 30, 2009.  The FRB, however, will continue to fund the SPV until the SPV’s underlying assets mature.  The SPV will begin purchases of CP on October 27, 2008.