FEDERAL RESERVE ANNOUNCES MUNICIPAL LIQUIDITY FACILITY PROGRAM

On Thursday, April 9, the Federal Reserve took actions to provide up to $2.3 trillion in loans to support the economy. This funding will assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus pandemic.

One of the actions that the Federal Reserve is taking is geared toward helping state and local governments manage cash flow stresses caused by the coronavirus pandemic by establishing a Municipal Liquidity Facility (the “Facility”).  Pursuant to the Facility, a Federal Reserve Bank will commit to lend up to $500 billion to special purpose vehicle (“SPV”) on a recourse basis.  The SPV will in turn purchase “Eligible Notes” directly from Eligible Issuers.  The SPV will have the ability to purchase up to $500 billion of Eligible Notes.  States, the District of Columbia, counties with a population of at least two million residents, and cities with a population of at least one million residents are all “Eligible Issuers,”  however, only one issuer per state, city, or county is eligible.  States may also use the proceeds from the Eligible Notes to support additional counties and cities (i.e., counties with populations under two million and cities with populations under one million).

The following is a summary of the Program:

• “Eligible Notes,” include tax anticipation notes (TANs), tax and revenue anticipation notes (TRANs), bond anticipation notes (BANs), and other similar short-term notes issued by Eligible Issuers, provided that such notes mature no later than 24 months from the date of issuance.
• The SPV may purchase Eligible Notes issued by or on behalf of a state, city, or county in one or more issuances of up to an aggregate amount of 20% of the general revenue from own sources and utility revenue of the applicable state, city, or county government for fiscal year 2017.
• States may request that the SPV purchase Eligible Notes in excess of the applicable limit in order to assist political subdivisions and instrumentalities that are not eligible for the Facility (i.e., smaller cities and counties).
• Eligible Issuers may use the proceeds of Eligible Note to help manage the cash flow impact of (1) income tax deferrals resulting from an extension of an income tax filing deadline; (2) potential reductions of tax and other revenues or increases in expenses related to or resulting from the COVID-19 pandemic; and (3) requirements for the payment of principal and interest on obligations of the relevant state, city, or county. Eligible Issuers may also use the proceeds of the Eligible Notes to purchase similar notes issued by, or otherwise to assist, political subdivisions and instrumentalities of the relevant state, city, or county for the forgoing purposes.
• The Department of the Treasury, using funds appropriated under the CARES Act will make an initial equity investment of $35 billion in the SPV in connection with the Facility.
• Pricing will be based on an Eligible Issuer’s rating at the time of purchase with details to be provided by the Federal Reserve Bank later.
• Each Eligible Issuer that participates in the Facility must pay an origination fee equal to 10 basis points of the principal amount of the Eligible Issuer’s notes purchased by the SPV. The origination fee may be paid from the proceeds of the Eligible Notes.
• Eligible Notes purchased by the SPV are callable by the Eligible Issuer at any time at par.
• The SPV will cease purchasing Eligible Notes on September 30, 2020, unless the Board and the Treasury Department extend the Facility. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.

If you have questions about this program, please contact us.