Bank of England to buy up short-term company debt

The Bank of England will start buying short-term company debt as early as next week as a first move in its £50bn plan to unfreeze the markets for corporate credit.

The central bank said yesterday that it would be ready to buy commercial paper, debt issued by companies for up to 90 days, from Friday. But it said it was still working on a more important proposal to buy longer-term corporate bonds and was consulting market participants so that it could launch as soon as possible.

Companies had hoped that the plan would be fully up and running this week after the Bank’s Governor, Mervyn King, exchanged letters with the Chancellor last week agreeing terms for the radical operation. In his letter to Alistair Darling, Mr King said that commercial paper was not a particularly important form of company debt in Britain compared with the US.

Mr King and the Government have focused their recent plans on freeing the supply of credit to cash-starved businesses to prevent viable companies folding.

For commercial paper, the Bank is willing to buy investment grade sterling debt issued by UK corporates, either at issuance or in the secondary market.

It is also consulting on buying debt issued under the Government’s credit guarantee scheme and aims to extend the scheme to asset-backed securities and syndicated loans.

The Bank stressed that yesterday’s announcement did not involve purchases for monetary policy operations. The Governor has said the Bank will keep under review whether to buy securities without the Government issuing matching debt, which would increase the supply of money in the economy.