THIS ARTICLE WAS UPDATED ON MAY 19, 2020. VIEW THE UPDATED VERSION HERE: https://www.butlersnow.com/2020/05/municipal-liquidity-facility-application-materials-and-updated-term-sheet/
On April 27, 2020, the Federal Reserve Board released a revised term sheet (the “Term Sheet”) for the Municipal Liquidity Facility (the “Facility”) established in connection with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The revisions included in the Term Sheet expanded the eligibility for the Facility, duration of the Facility, and maximum term of debt issued under the Facility. This post summarizes the structure, eligibility, and other terms of the Facility as revised.
Structure and Duration:
Under the Facility, a Federal Reserve Bank (the “Reserve Bank”) commits to lend to a special purpose vehicle (“SPV”) on a recourse basis. The SPV then purchases eligible debt from Eligible Issuers at the time the debt is issued.
The Department of the Treasury (“Treasury”) is providing an initial equity investment of $35 billion in the SPV 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, 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.
States, Cities, and Counties: An Eligible Issuer that is not a Multi-State Entity must have been rated at least BBB-/Baa3 as of April 8, 2020, by two or more major nationally recognized statistical rating organizations (“NRSROs”). An Eligible Issuer that is not a Multi-State Entity and 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 Entities: An Eligible Issuer that is a Multi-State Entity must have been rated at least A-/A3 as of April 8, 2020, by two or more major NRSROs. A Multi-State Entity 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.
Eligible Notes, Term, and Call Provisions:
“Eligible Notes” include 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.
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 Government (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).
The SPV will cease purchasing Eligible Notes on December 31, 2020 unless the Facility is extended by Treasury and the Federal Reserve Board.
In addition to the establishing the Facility, the Board of Governors of the Federal Reserve System announced that it would “continue to closely monitor conditions in the primary and secondary markets for municipal securities and will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments” in its original announcement of the Facility.
In its release on April 27, 2020, the Board of Governors added the following statement to the above: “The Federal Reserve is also considering expanding the [Facility] to allow a limited number of governmental entities that issue bonds backed by their own revenue to participate directly in the [Facility] as eligible issuers. Any decision to include any such additional eligible issuers would be publicly announced at a future date.”
By revising the Term Sheet, the Federal Reserve demonstrated flexibility and responsiveness in administering the Facility and that the Facility’s terms are subject to change. We will continue to closely monitor the Federal Reserve’s actions and keep you updated on any future steps that may provide relief to the municipal securities markets.
Links to Federal Reserve Documents Regarding the Facility:
- The Press Release regarding the Facility dated April 27, 2020 can be found here.
- The Facility Term Sheet effective April 27, 2020 can be found here.
- The Facility FAQ’s effective April 27, 2020 can be found here.
The Facility FAQ Appendix can be found here.