UK buys short-term debt from large corporations hit by coronavirus
LONDON (Reuters) – Britain on Tuesday launched a new loan program to provide short-term bridging financing to large companies affected by the spread of the coronavirus, which will be managed and funded by the Bank of England.
The Covid Corporate Finance Facility, announced by Chancellor of the Exchequer Rishi Sunak, will buy a type of debt called commercial paper with a maturity of up to 12 months from companies that had a higher credit rating or similar before the crisis.
“This will help businesses (…) overcome the economic disruptions that may be associated with Covid-19, helping them pay salaries, rents and suppliers, even in the event of a severe disruption in cash flow.” said BoE Governor Andrew Bailey.
Separately, Sunak said the finance ministry would provide £ 330 billion in business loan guarantees and an additional £ 20 billion in direct aid.
British Prime Minister Boris Johnson on Monday told people to avoid pubs, clubs, restaurants, cinemas and theaters, leaving many businesses in those sectors with the prospect of collapse. The virus crisis has also taken a heavy toll on airlines.
The BoE bought limited amounts of commercial paper in 2009 during the financial crisis, and earlier Tuesday the United States – where the commercial paper market is much larger – relaunched its own crisis program.
The BoE’s commercial paper purchases will be funded through the creation of new central bank money, much like it bought government bonds as part of its quantitative easing program.
“This will serve as a vehicle to support companies that would normally seek market-based financing for their working capital, but find themselves unable to access financial markets in this uncertain operating environment,” Sunak said.
But while the BoE bought £ 435bn of UK government bonds between 2009 and 2016, the UK pound commercial paper market is much smaller, with monthly gross issues of just around £ 3bn.
Last week, the BoE lowered its main interest rate to a common record low of 0.25% and launched a program to ensure banks pass the rate cut on to small businesses.
The maximum size of CCFF’s new program is unclear, as it is open to companies that have never issued commercial paper before and do not have a credit rating – although they should still show some health. financial as that required for quality investments.
Only non-financial companies that make a significant contribution to the UK economy would be eligible, the BoE said.
The interest rate that companies will have to pay will be similar to what they would have paid before the crisis.
The UK Ministry of Finance has said it will compensate the BoE for any loss in the event of business failure.
Additional reporting by Andy Bruce, editing by William Maclean