The Association of Financial Professionals issues a press release entitled, "AFP Urges Fed to Expand Commercial Paper Program, which is subtitled, "Tier 2 Companies Would Benefit from New Opportunities to Enhance Liquidity." The release says, "Today, in a letter to the Board of Governors of the Federal Reserve, Association for Financial Professionals President and CEO Jim Kaitz requested that the Federal Reserve extend the Commercial Paper Funding Facility (CPFF) to Tier 2 commercial paper issuers."
AFP explains, "The Tier 2 commercial paper market is approximately $80 billion in size and includes such household names as FedEx, Kraft, Kroger, Safeway, and Time Warner." "Cash and credit continue to be extremely tight while the Fed continues to restrict CPFF credit to Tier 1 companies. The Fed needs to act quickly and extend credit to Tier 2 companies," says Kaitz.
The release adds, "Since the Commercial Paper Funding Facility (CPFF) became operational in October 2008, the program has been successful in enhancing the liquidity of the Tier 1 commercial paper market. By providing a liquidity backstop, the Federal Reserve has provided greater assurance to both issuers and investors that firms will be able to roll over their maturing Tier 1 commercial paper."
Finally, it says, "To the degree the CPFF is opened to Tier 2 issuers, the demand for bank credit on the part of Tier 2 issuers should decrease. This would increase the ability of banks to lend to other companies and individuals because Tier 2 companies will not have to draw as much on bank lines of credit for capital."
The Investment Company Institute recently advised that money funds not be allowed to invest in "Tier 2" securities, recommending in its recent Working Group Report, "Raise the credit quality standards under which money market funds operate. This would be accomplished by requiring a 'new products' or similar committee; encouraging advisers to follow best practices for determining minimal credit risks; requiring advisers to designate the credit rating agencies their funds will follow to encourage competition among the rating agencies to achieve this designation; and prohibiting investments in 'Second Tier Securities.'"
