On April 27, 2020, the Federal Reserve Board announced updates to its Municipal Liquidity Facility loan program (the Facility) authorized under Section 13(3) of the Federal Reserve Act to provide lending support to states, the District of Columbia, and certain large cities and counties in the United States. For our summary of the Federal Reserve Board’s initial announcement of the Facility, see “The Fed Throws a Cash Flow Lifeline to State and Local Governments.”
Who is an Eligible Issuer?
The population thresholds required for cities and counties to participate as “Eligible Issuers” have been significantly lowered. Cities with populations in excess of 250,000 (originally 1,000,000) and counties with populations in excess of 500,000 (originally 2,000,000) are now eligible to borrower under the Facility. In addition, entities created by a compact between two or more States, which compact has been approved by Congress, may participate as a “Multi-State Entity.”
Eligible Issuers other than Multi-State Entities must have been rated at least BBB-/Baa3 by two or more major nationally recognized statistical rating agencies (NRSROs) as of April 8, 2020. Currently, the only NRSROs acceptable to the Federal Reserve are S&P Global Ratings, Moody’s Investor Service, Inc. and Fitch Ratings, Inc. An Eligible Issuer that has been subsequently downgraded must be rated at least BB-/Ba3 by two or more NRSROs at the time it issues Eligible Notes to the Federal Reserve’s special purpose vehicle entity (SPV). At the time of sale or pricing of Eligible Notes, the Federal Reserve will require confirmation of the Eligible Issuer’s long-term ratings, along with evidence that such NRSROs have been notified of the proposed issuance of Eligible Notes.
What are the Terms of Eligible Notes?
The maximum maturity for Eligible Notes has been increased from 24 months to 36 months; however, this multi-year term may still require amendments to certain state law limitations on the maximum maturity of tax and revenue anticipation notes, which typically are required to be repaid in the fiscal year of incurrence.
The SPV will purchase each Eligible Note at a price based upon the Eligible Issuer’s credit rating at the time of purchase. While the standards for the pricing determinations have yet to be announced, the Federal Reserve clarified that the rates on Eligible Notes will be priced at a premium to the market rate in normal circumstances. Eligible Issuers have the option to redeem their Eligible Notes at par at any time, with the prior approval of the Federal Reserve. The Federal Reserve has not described under what circumstances its approval of an optional prepayment would be granted or withheld.
Eligible Notes may be taxable or tax-exempt and are generally expected to be general obligations of the Eligible Issuer or be backed by tax or other specified revenues. If the Eligible Issuer is a Multi-State Entity, the Eligible Notes must be obligations secured on a parity with the entity’s existing senior lien revenue debt instruments.
What About Smaller Local Governments?
While an Eligible Issuer will be permitted to use the proceeds of its Eligible Notes to purchase similar notes issued by its subordinate political subdivisions and instrumentalities, the Federal Reserve clarified that the Eligible Issuer must assume the credit risk associated with notes it purchases from its subdivisions and instrumentalities. The SPV will only bear the credit of the Eligible Issuer.
When Will the Facility End?
The term of the Facility has been extended to December 31, 2020 (originally September 30, 2020), at which point the SPV will cease purchasing Eligible Notes, unless the Federal Reserve and Treasury Department extend the Facility. The Federal Reserve Banks will, however, continue to fund the SPV after such termination date until the maturity or re-sale of all Eligible Loans purchased by the SPV. The Facility will not refinance any maturing Eligible Notes.
What Opinions and Certifications Will be Required?
In addition to the standard legal opinions for the issuance of debt, each Eligible Issuer must certify that it is unable to secure adequate credit from other banking institutions and that it is not insolvent. This certification does not require evidence that no credit is otherwise available, but that credit is not available at prices or on conditions that are typical in a well-functioning market. The Federal Reserve did not provide further guidance on the basis for this certification (e.g., whether an Eligible Issuer would need to solicit bids from private lenders to determine whether credit is otherwise unavailable).
Will the Amendments Improve the Attractiveness of the Facility?
While the amendments announced by the Federal Reserve expand the pool of Eligible Issuers, it remains unclear if, how, and why an Eligible Entity would choose to incur debt under the terms of the Facility, particularly if the capital markets can offer funding options on similar or better terms including pricing. Additionally, the incurrence of multi-year indebtedness under the Facility may not be permitted under existing state law and, in an election year, there can be no assurances that states will enact laws to allow local governments to incur multi-year indebtedness under the terms of the Facility. Importantly, an Eligible Issuer may easily conclude that it cannot generate increased pledged revenues in future years to service the additional debt represented by Eligible Notes, further reducing the Facility’s utility.
Who is an Eligible Issuer?
The population thresholds required for cities and counties to participate as “Eligible Issuers” have been significantly lowered. Cities with populations in excess of 250,000 (originally 1,000,000) and counties with populations in excess of 500,000 (originally 2,000,000) are now eligible to borrower under the Facility. In addition, entities created by a compact between two or more States, which compact has been approved by Congress, may participate as a “Multi-State Entity.”
Eligible Issuers other than Multi-State Entities must have been rated at least BBB-/Baa3 by two or more major nationally recognized statistical rating agencies (NRSROs) as of April 8, 2020. Currently, the only NRSROs acceptable to the Federal Reserve are S&P Global Ratings, Moody’s Investor Service, Inc. and Fitch Ratings, Inc. An Eligible Issuer that has been subsequently downgraded must be rated at least BB-/Ba3 by two or more NRSROs at the time it issues Eligible Notes to the Federal Reserve’s special purpose vehicle entity (SPV). At the time of sale or pricing of Eligible Notes, the Federal Reserve will require confirmation of the Eligible Issuer’s long-term ratings, along with evidence that such NRSROs have been notified of the proposed issuance of Eligible Notes.
What are the Terms of Eligible Notes?
The maximum maturity for Eligible Notes has been increased from 24 months to 36 months; however, this multi-year term may still require amendments to certain state law limitations on the maximum maturity of tax and revenue anticipation notes, which typically are required to be repaid in the fiscal year of incurrence.
The SPV will purchase each Eligible Note at a price based upon the Eligible Issuer’s credit rating at the time of purchase. While the standards for the pricing determinations have yet to be announced, the Federal Reserve clarified that the rates on Eligible Notes will be priced at a premium to the market rate in normal circumstances. Eligible Issuers have the option to redeem their Eligible Notes at par at any time, with the prior approval of the Federal Reserve. The Federal Reserve has not described under what circumstances its approval of an optional prepayment would be granted or withheld.
Eligible Notes may be taxable or tax-exempt and are generally expected to be general obligations of the Eligible Issuer or be backed by tax or other specified revenues. If the Eligible Issuer is a Multi-State Entity, the Eligible Notes must be obligations secured on a parity with the entity’s existing senior lien revenue debt instruments.
What About Smaller Local Governments?
While an Eligible Issuer will be permitted to use the proceeds of its Eligible Notes to purchase similar notes issued by its subordinate political subdivisions and instrumentalities, the Federal Reserve clarified that the Eligible Issuer must assume the credit risk associated with notes it purchases from its subdivisions and instrumentalities. The SPV will only bear the credit of the Eligible Issuer.
When Will the Facility End?
The term of the Facility has been extended to December 31, 2020 (originally September 30, 2020), at which point the SPV will cease purchasing Eligible Notes, unless the Federal Reserve and Treasury Department extend the Facility. The Federal Reserve Banks will, however, continue to fund the SPV after such termination date until the maturity or re-sale of all Eligible Loans purchased by the SPV. The Facility will not refinance any maturing Eligible Notes.
What Opinions and Certifications Will be Required?
In addition to the standard legal opinions for the issuance of debt, each Eligible Issuer must certify that it is unable to secure adequate credit from other banking institutions and that it is not insolvent. This certification does not require evidence that no credit is otherwise available, but that credit is not available at prices or on conditions that are typical in a well-functioning market. The Federal Reserve did not provide further guidance on the basis for this certification (e.g., whether an Eligible Issuer would need to solicit bids from private lenders to determine whether credit is otherwise unavailable).
Will the Amendments Improve the Attractiveness of the Facility?
While the amendments announced by the Federal Reserve expand the pool of Eligible Issuers, it remains unclear if, how, and why an Eligible Entity would choose to incur debt under the terms of the Facility, particularly if the capital markets can offer funding options on similar or better terms including pricing. Additionally, the incurrence of multi-year indebtedness under the Facility may not be permitted under existing state law and, in an election year, there can be no assurances that states will enact laws to allow local governments to incur multi-year indebtedness under the terms of the Facility. Importantly, an Eligible Issuer may easily conclude that it cannot generate increased pledged revenues in future years to service the additional debt represented by Eligible Notes, further reducing the Facility’s utility.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.
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