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UPDATE 1-BoE widens QE scheme to lift firms' working capital

Published 06/08/2009, 08:24 AM
Updated 06/08/2009, 08:32 AM

By David Milliken and Fiona Shaikh

LONDON, June 8 (Reuters) - The Bank of England outlined plans to broaden its 125 billion pound quantitative easing programme to make it easier for firms to raise working capital, saying on Monday it hoped to launch two new schemes shortly.

The central bank has identified a lack of credit reaching firms as a key barrier stopping Britain's economy recovering from its deepest recession in decades.

But so far there has been little evidence that almost 80 billion pounds of existing purchases of financial assets -- mostly gilts, but also commercial paper and corporate bonds -- have significantly boosted the flow of credit to firms.

The BoE said it had always been ready to widen the scope of the scheme, and was now looking at ways to buy tradable securities backed by assets such as trade receivables, equipment leases and consumer credit card debt.

The first new scheme outlined by the BoE is the Secured Commercial Paper Facility (SCP), and is modelled on the BoE's existing Commercial Paper Facility, which so far has bought just over 2 billion pounds ($3.18 billion) of investment-grade short-term company debt.

The second scheme aims to boost supply chain finance.

Francis Diamond, gilts strategist for JP Morgan, doubted that either scheme would get sufficient take-up to eat into the volume of gilts, currently 6.5 billion pounds a week, that the BoE was buying under its quantitative easing policy.

"I'm not sure it will lead to a substantial reduction in gilt purchases. They don't commit to this being a QE funded facility, it could be that it is funded via T-bill issuance. In the short term, in terms of QE purchases, it's likely to be negligible," he said.

While the Commercial Paper facility is based on unsecured paper issued by a single company, under the Secured Commercial Paper scheme the BoE would be able to buy debt from several companies packaged together into a single investment-grade asset-backed security.

"The Bank's intention is for the Facility to operate for as long as the abnormal conditions in corporate credit markets persist and materially impair the financing of real economic activity," the BoE said, adding the scheme would run for a minimum of 15 months.

The scheme could be funded by either newly minted central bank money from its quantitative easing programme, or advances from the UK Debt Management Office, enabling the scheme to last beyond the length of time that QE's boost to the money supply is needed, the BoE said.

The BoE added that there were few packages of short-term asset-backed debt currently on the market that would meet its purchase criteria, and hoped that its scheme would stimulate the creation of more of this type of asset, which had to have a maturity of nine months or less.

Like the CP scheme, the SCP scheme aimed to boost market liquidity rather than be a primary funding channel for firms, the BoE continued.

The second scheme mooted by the BoE is a Supply Chain Finance Facility (SCF), under which the BoE would invest in securities to provide working capital finance to the suppliers of investment-grade companies.

The BoE said it wanted the market to suggest the details of how such a security should be structured.

Currently small companies are finding it much costlier to insure against the risk of default from corporate customers.

The BoE said companies wishing to comment on the two schemes should contact it by June 19.

* For the BoE's detailed proposals, see http://www.bankofengland.co.uk/markets/apf/consultation090608.pdf ($1=.6300 Pound)

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