Note: This post has been updated with new information as of April 27.
Late on April 27, the Federal Reserve announced some major revisions to its recently announced Municipal Liquidity Facility, most notably, lowering the population thresholds for eligible local governments and allowing for purchase of slightly longer notes. Below is a summary of those changes followed by the overview of the Program which has been updated accordingly (noted in bold):
Extended Scope of the Municipal Liquidity Facility:
Expansion of Eligibility
The new program will now allow counties with a population of at least 500,000 and cities with a population of at least 250,000 to sell short-term notes to the Facility, down from 2 million for counties and 1 million for cities as outlined in the original proposal. The expansion in eligibility also allows participation in the Facility by certain multistate entities, in addition to the states which were previously covered. Also of note, the Fed is considering expanding the Facility to allow a limited number of governmental entities who issue bonds backed by their own revenue to participate as eligible issuers. The Fed notes it will make a public announcement should they decide to expand the program to include additional eligible issuers.
Expansion of Duration
Eligible notes must mature no later than 36 months from the date of issuance, an increase from the previous 24-month cap. The termination date for the facility has also been extended to December 31, 2020 from the original September 30, 2020 purchasing cut off date.
The Federal Reserve announced Thursday, April 9, that it would provide up to $2.3 trillion in loans to further prop up the ailing economy. Among the measures announced were details regarding two new lending programs, the Main Street Lending Program and the Municipal Liquidity Facility, which seek to help businesses of all sizes as well as states and local governments reeling from the Coronavirus pandemic. The announcement of the new programs came just moments after the Labor Department reported another 6.6 million Americans filed for unemployment the week prior. Stakeholders are invited to provide input until April 16, at which point we expect more guidance to be released on the application process. Below is a summary of the new programs and their parameters:
The Main Street Lending Program (Note: As of April 30, 2020, the Federal Reserve has expanded the scope and eligibility for the Main Street Lending Program – read our post here.)
The Main Street Lending Program will enhance support for small and mid-sized businesses by offering 4-year loans to companies with up to 10,000 employees or making up to $2.5 billion in annual revenue. The loans would be for a minimum of $1 million and a maximum of $150 million, with principal and interest payments deferred for one year. The Federal Reserve will purchase up to $600 billion in loans for businesses, made possible in part by a $75 billion equity investment made by the Department of Treasury using funding from the Coronavirus Aid, Relief and Economic Security Act (CARES Act).
How it works
The Program establishes two new loan facilities authorized under section 13(3) of the Federal Reserve Act: (1) the Main Street New Loan Facility (MSNLF), and (2) the Main Street Expanded Loan Facility (MSELF). Under both facilities, the Fed commits to lend to a single purpose vehicle (SPV) on a recourse basis. The loans will be issued by domestic banks who will retain a 5% share, while the Fed purchases the other 95% through the SPV. Treasury, using funds appropriated under the CARES Act, will make a $75 billion equity investment in the SPV, and the two Main Street Facilities will purchase up to $600 billion in loans until September 30, 2020, unless the program is extended. Of note, businesses that take advantage of the Small Business Administration’s Paycheck Protection Program may also take out Main Street loans.
Who are eligible businesses and what must they do?
Businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues;
Businesses created or organized in the U.S. or operating under the laws of the U.S. with “significant operations in and a majority of its employees based in the U.S.”;
Must require financing due to “exigent circumstances presented by the coronavirus”;
Must commit to make reasonable efforts to maintain payroll and retain workers;
Must follow compensation, stock repurchase and capital distribution restrictions that apply under Section 4003(c)(3)(A)(ii) (e.g. no stock buy-backs, no payment of dividends, etc.).;
Must not participate in the Primary Market Corporate Credit Facility; and
Must not seek to cancel or reduce an existing outstanding line of credit with the lender.
Snapshot of the loans
Amortization of principal and interest deferred for one year.
Adjustable interest rate based on the Secured Overnight Financing Rate, +250-400 basis points.
Prepayment permitted without penalty.
Minimum loan size: $1 million.
For MSNLF loans, the maximum loan size is the lesser of
1) $25 million, or
2) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 earnings before interest, taxes, etc.
For MSELF loans, the maximum loan size is the lesser of
1) $150 million,
2) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or
3) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 earnings before interest, taxes, etc.
Municipal Liquidity Facility *items in bold updated as of 4/27/20
The Fed’s new Municipal Liquidity Facility will provide continued support of the municipal bond market, offering up to $500 billion to help state and local governments manage cash flow stresses caused by the Coronavirus pandemic. Authorized under Section 13(3) of the Federal Reserve Act, the Facility will purchase short-term notes directly from states, multi-state entities, counties with a population of at least 500,000 and municipalities with a population of at least 250,000. While the population thresholds remain somewhat limiting, eligible state-level issuers may use proceeds from loans to support some of those counties and cities that are otherwise ineligible. Additionally, the Fed adds that they “will continue to monitor conditions in the primary and secondary markets for municipal securities and will evaluate whether additional measures are needed,” leaving room for subsequent measures. It remains unclear whether this influx of liquidity combined with the $150 billion Congress appropriated to the Coronavirus Relief Fund via the CARES Act will be sufficient to cover the massive shortfalls state and local governments continue to face.
How it works
Similar to the Main Street Lending Program, the Fed commits to lend to a SPV on a recourse basis. The SPV will purchase eligible notes directly from the issuers and the Fed will be secured by all of the assets of the SPV. Eligible notes will include tax anticipation notes (TANs), tax and revenue anticipation notes (TRANs), bond anticipation notes (BANs), and other similar short-term notes issued by eligible state or local governments. The Department of Treasury will make a $35 billion equity investment in the Facility, using funds appropriated under Section 4027 of the CARES Act. The Fed will stop purchasing notes on December 31, 2020, unless Treasury extends the Facility. However, the SPV will continue to be funded after that date until the SPV’s assets mature or are sold.
Any U.S. state
U.S. counties with a population exceeding 500,000
U.S. municipalities with a population exceeding 250,000
Eligible use of proceeds
An eligible state or local government issuer may use the proceeds of eligible notes purchased by the SPV to help manage:
The cash flow impact of income tax deferrals resulting from an extension of an income tax filing deadline;
Reductions of tax and other revenues or increases in expenses related to COVID-19; and
Principal and interest payments on obligations of the relevant state, city, or county.
Terms and limitations
Eligible notes include TANs, TRANs, BANs and other similar notes maturing no later than 36 months from issuance and eligibility of a note is subject to review by the Fed.
Legal opinions and disclosures will be required prior to purchase, as determined by the Fed.
Only one issuer per city, county, state, or multi-state entity is eligible; however, states may request that the SPV purchase notes in excess of the applicable limit in order to assist local governments that are otherwise not eligible.
Eligible issuers must have had an investment grade rating as of April 8, 2020, from at least two major nationally recognized rating organizations:
o State, county, city -- at least BBB-/Baa3 as of April 8, 2020, but for those thereafter downgraded, BB-/Ba3 at time Facility purchases.
o Multi-state entity -- at least A-/A3 as of April 8, 2020, but for those thereafter downgraded, BBB-/Baa3 at time Facility purchases
The SPV may purchase notes totaling up to 20% of a local government’s 2017 revenues (the most recent data available), and up to 20% of a multi-state entity's 2019 revenues.
Pricing will be based on the issuer’s rating at the time of purchase.
Each issuer must pay an origination fee equal to 10 basis points of the principal amount, which may be paid from the proceeds of the issuance.
Notes purchased by the SPV are callable by the issuer at any time, and at par.
Additional Resources on the Main Street Loan Program and Municipal Liquidity Facility:
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