On May 18, 2020, the Federal Reserve Bank of New York (the "Reserve Bank") released application materials for the Municipal Liquidity Facility (the "Facility") established in connection with the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Additionally, on May 11, 2020, the Federal Reserve released a revised term sheet (the "Term Sheet") for the Facility. This post summarizes the current structure, eligibility, application process and terms of the Facility.
Under the Facility, the Reserve Bank will lend to Municipal Liquidity Facility, LLC, Delaware limited liability company (the "SPV") on a recourse basis where the loan is secured by the assets of the SPV. The SPV was created by the Reserve Bank as a special purpose vehicle to purchase eligible debt from Eligible Issuers at the time the debt is issued. The SPV will receive an initial equity investment of $35 billion from the Department of the Treasury ("Treasury") from funds appropriated to the Exchange Stabilization Fund under the CARES Act as a form of credit protection to the Reserve Bank.
Pursuant to the Term Sheet (available here), the SPV will purchase up to $500 billion of short-term notes from "Eligible Issuers," which are defined in the Term Sheet to include:
- U.S. States and the District of Columbia ("States");
- U.S. cities with a population exceeding 250,000 residents ("Cities");
- U.S. counties with a population exceeding 500,000 residents ("Counties"); and
- An entity that was created by a compact between two or more states, which compact has been approved by the United States Congress, acting pursuant to its power under the Compact Clause of the United States Constitution ("Multi-State Entities").
Only one issuer per State, City, County, or Multi-State Entity is eligible for the program, which may include an instrumentality that issues debt on behalf of a state, county, or city.
The Federal Reserve may approve one or more additional issuers per State, City, or County to facilitate the provision of assistance to political subdivisions and other governmental entities of the relevant State, City, or County.
Eligible Notes, Term, and Call Provisions:
"Eligible Notes" are Tax Anticipation Notes, Tax and Revenue Anticipation Notes, Bond Anticipation Notes, and other similar short-term notes issued by eligible issuers with a term not exceeding thirty-six (36) months from issuance. Eligible Notes may be called at par at any time by the Eligible Issuer.
A Pricing Index was released on May 11, 2020. Eligible Notes will bear a fixed interest rate that is based on the overnight indexed swap rate for a comparable maturity plus a fixed spread that corresponds with the rating of the Eligible Notes and their tax status. Further information on pricing can be found here.
The Reserve Bank noted that the interest rate offered on the Eligible Notes is "a rate that is a premium to the market rate in normal circumstances, affords liquidity in unusual and exigent circumstances, and encourages repayment of the Eligible Notes and discourages use of the Facility as the unusual and exigent circumstances that motivated the program recede and economic conditions normalize."
States, Cities, and Counties:
- State, City, or County applicants must have been rated at least BBB-/Baa3 as of April 8, 2020, by two or more major nationally recognized statistical rating organizations ("NRSROs").
- NRSROs are defined as S&P Global Ratings, Moody's Investor Service, Inc., Fitch Ratings Inc. and Kroll Bond Rating Agency, Inc.
- A State, City, or County applicant that was rated at least BBB-/Baa3 as of April 8, 2020, but is subsequently downgraded, must be rated at least BB-/Ba3 by two or more major NRSROs at the time the Facility makes a purchase.
- Multi-State Entity applicants must have been rated at least A-/A3 as of April 8, 2020, by two or more major NRSROs.
- A Multi-State Entity applicant that was rated at least A-/A3 as of April 8, 2020, but is subsequently downgraded, must be rated at least BBB-/Baa3 by two or more major NRSROs at the time the Facility makes a purchase.
Eligibility with Single NRSRO Rating:
- On May 11, the Term Sheet was revised to allow Eligible Issuers
to apply for the Facility with a single NRSRO Rating if:
- (i) the rating was at least BBB-/Baa3 (for a State, City, or County) or A-/A3 (for a Multi-State Entity);
- (ii) the State, City, County, or Multi-State Entity is rated by at least two major NRSROs at the time the Facility makes a purchase; and
- (iii) such ratings are at least BB-/Ba3 (for a State, City, or County) or BBB-/Baa3 (for a Multi-State Entity).
Competitive Sales and Rating Requirement
- On May 11, the Reserve Bank clarified that if there had been no competitive sale process for the Eligible Notes prior to being sold to the SPV, the Federal Reserve will not require ratings on the Eligible Notes sold to the SPV. However, if an Eligible Issuer first offered Eligible Notes through a competitive sale process prior to being sold to the SPV, the Eligible Issuer must obtain ratings for the Eligible Notes.
Proceeds of the Eligible Notes may be used to manage the cash flow from deferred income tax filings, tax revenue reductions resulting from the COVID-19 pandemic, and requirements for the payment of principal and interest on obligations of Eligible Issuer. Eligible Issuers (other than a Multi-State Entity) may use the proceeds of Eligible Notes to assist political subdivisions and other governmental entities of the relevant Eligible Issuer for the same purposes.
Twenty Percent (20%) General Revenue Limit:
The SPV may purchase Eligible Notes in an aggregate amount of twenty percent (20%) of the general revenue from the Eligible Issuers' own sources and utility revenue for fiscal year 2017 for the applicable State, City, or County (as provided by the U.S. Census Bureau) and for fiscal year 2019 for Multi-State Entities (as reported in its audited financial statements for fiscal year 2019).
A table showing the maximum amount available to States, Cities, and Counties eligible for the Facility is available here. Multiple issuances by a single Eligible Issuer, up to the twenty percent (20%) general revenue limit, are allowed under the Facility.
Filing Notice of Interest:
An Eligible Issuer's first step in accessing the Facility is to send a Notice of Interest ("NOI") and supporting materials to the Reserve Bank's Administrative Agent. The NOI form is available here and additional details on the NOI are available here.
The Reserve Bank has stated that the Facility is not a "first come, first served program" and that NOIs are to be submitted only after an Eligible Issuer determines its financial needs and schedule. Multiple issuances by the same Eligible Issuer are allowed under the Facility, though a separate NOI is required for each issuance.
Application and Program Documents
After submitting a Notice of Interest, Eligible Issuers will be notified if they are qualified to submit an application for the Facility. The sample application is available here. The Reserve Bank also released sample form transaction documents (available here), including a Note Purchase Agreement, a Note Purchase Commitment, Continuing Disclosure Undertaking, and certificates of the Eligible Issuers.
On a monthly basis, the Federal Reserve will publicly disclose information regarding the Facility, including names of participants, amounts borrowed, interest rates charged, overall costs, revenues, and other fees.
Each Eligible Issuer will be required to provide continuing disclosure under Rule 15c2-12. Additionally, each Eligible Issuer will be required to:
- On the Eligible Issuer's website, provide a report (1) of quarterly cash flows, which will show actual and projected results, and (2) on the funding of planned set-asides, with an explanation of any negative variances.
- On the Eligible Issuer's website, provide access to quarterly financial reports and/or information in a format regularly provided to any governing body or otherwise made public.
- Provide to the Federal Reserve, at 6 months prior to maturity and at 3 months prior to maturity, a written report explaining how it will repay the Eligible Notes at maturity. For Bond Anticipation Notes, such a report will identify any material credit or other matters relating to issuing the bonds expected to take out any Bond Anticipation Notes.
Additionally, the Federal Reserve may request, and will have the right to receive, other information relating to the ability of the Eligible Issuer to repay the Eligible Notes when payments become due. The Federal Reserve reserves the right to make public any and all information that it receives pursuant to its rights described herein, including to Congress or otherwise.
The SPV will cease purchasing Eligible Notes on December 31, 2020 unless the Facility is extended by Treasury and the Federal Reserve.
Links to Documents Regarding the Facility:
- The Federal Reserve's primary website for the Facility can be found here.
- The Reserve Bank's primary website for the Facility can be found here.
- The Term Sheet (updated and effective May 11, 2020) can be found here.
- The Notice of Interest form can be found here.
- The Facility's sample application form can be found here.
- The Facility's form documents and certifications can be found here.
- The Facility FAQs (updated and effective May 15, 2020) can be found here.
- The list of Eligible States, Counties, and Cities and the maximum amounts of Eligible Notes that each can issue can be found here (Appendix A to FAQs).
- The Facility's pricing terms can be found here (Appendix B to FAQs).
Originally published May 19, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.