Written evidence submitted by the Bank
of England
1. As requested at the Treasury Committee hearing
on 25 November 2010, this note provides additional information
on the Secured Commercial Paper Facility, part of the Bank of
England Asset Purchase Facility (APF).
2. Following the launch of the Commercial Paper
Facility and Corporate Bond Secondary Market Scheme in early 2009,
the Bank launched the Secured Commercial Paper Facility (SCPF)
in August 2009. The objective of the SCPF is to support the flow
of credit to a broader range of UK companies than the other corporate
APF schemes. It was anticipated that it would take some time for
new programmes to be set up that met the eligibility criteria
of the SCPF. The Bank announced the eligibility of an SCP programme
on 15 November 2010.[1]
3. The programme provides finance that enables
the suppliers of large investment-grade companies to receive payment
for their goods and services earlier than otherwise. The suppliers,
which include many small and medium-sized companies, can choose
to have their invoices paid early (at a discount) rather than
waiting for payment from the investment-grade firm under its normal
payment terms. The funding is provided by a commercial bank in
return for the supplier assigning their invoice to that bank.
The commercial bank can retain these trade receivables or sell
an interest in them to other investors, such as the SCP programme.
On the original due date, the investment-grade firm then pays
the commercial bank. A diagram overleaf summarises the transactions.
4. The Bank sets the criteria for the eligibility
of programmes for the SCPF and in principle any programme meeting
those criteria would be accepted. In the currently eligible SCP
programme, who decides which companies can benefit and how do
they get access? A supplier (say, a food producer) can choose
to receive early payment of its invoices if the large firm it
supplies (say, a supermarket) has set up a programme with the
commercial bank. The commercial bank decides whether to retain
the trade receivables or whether to sell an interest in them to
a third party. One possible purchaser is the financing company
eligible to participate in the SCPF. The assets held by the financing
company, which match the commercial paper liabilities purchased
by the APF, must be pre-approved by the Bank. Such assets must
be of high credit quality and must be obligations of companies
that make a material contribution to the UK economy.
5. The SCPF programme is designed to provide
an alternative source of working capital for small and medium-sized
companies. The intention is that the programme will encourage
a private market in this type of commercial paper security to
develop, which would allow more suppliers to benefit from the
option of early payment of invoices. It is very difficult to predict
the size of private issuance under this programme, but the investment
by the APF is not expected to be large scale, although to the
extent that it catalyses a private market, it should help to ease
financing conditions for a wider range of companies. The Bank
believes that this programme will encourage the flow of credit
to a broader range of companies than the other corporate APF schemes,
but it is likely to play only a modest part in tackling the financing
issues facing smaller companies. HM Government is taking forward
a much broader response to those issues - see, for example, the
recent paper "Financing business growth: The Government's
response to Financing a private sector recovery".[2]
1 The Bank of England News Release is available at:
http://www.bankofengland.co.uk/publications/news/2010/088.htm Back
2
Available at: http://www.bis.gov.uk/assets/biscore/corporate/docs/f/10-1242-financing-business-growth-response.pdf. Back
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