The encyclopedia · Finance & Accounting · Operational decision · 2020–2022
The Bank of England bought company paper — if firms pledged to rein in dividends
The CCFF kept large healthy firms' commercial paper market alive during COVID, attaching dividend and pay restraint conditions to every drawing.
Bank of England
the move
In March 2020 the pandemic froze sterling commercial paper markets, shutting large, otherwise-healthy companies out of short-term funding while banks were needed to lend to small firms. The Bank of England, acting for HM Treasury, launched the Covid Corporate Financing Facility to fill the gap.
The CCFF created central bank reserves to buy commercial paper with maturities between one week and twelve months from eligible firms, priced at a spread over the overnight index swap rate, with individual issuer limits based on credit ratings. Purchases began on 23 March 2020.
The sharp edge was the conditions. Businesses drawing for terms beyond May 2021 had to write to the Treasury committing to restraint on dividends and other capital distributions and on senior pay while their paper was outstanding; early repayment was allowed, and the Bank published borrower names and amounts every week.
By 19 May 2020 more than 230 businesses were eligible, with £18.8 billion lent to 55 businesses and a further £38.8 billion authorised for another 68. Purchases ran until 22 March 2021, with holdings remaining into 2022.
why it works
- Central-bank reserves could buy paper no private buyer would touch.
- Dividend and pay conditions protected taxpayers and directed the benefit.
- Transparency — names and amounts — made the facility self-policing.
- Issuer limits by rating kept support to firms that were healthy before the shock.
what transfers
Emergency liquidity need not be unconditional: attach covenants — no dividends while the taxpayer-backed facility is outstanding — and publish who drew, so the facility polices itself.
what came after
The CCFF supported £18.8 billion of lending at its peak and wound down as markets reopened, with purchases ending in March 2021 and holdings run off by 2022. Its covenant design — liquidity conditioned on capital-distribution restraint — became a template debated in later crisis facilities.
references
- Update to the Covid Corporate Financing Facility
- United Kingdom: Covid Corporate Financing Facility (Journal of Financial Crises)
spotted an error? The archive wants to know.