FED Expands Municipal Lending Program

The Federal Reserve (the “Fed”) announced an expansion of the scope and duration of the Municipal Liquidity Facility (the “MLF”).[1]  The MLF will offer up to $500 billion in short-term direct lending to state and local governments to help manage cash flow stresses caused by the COVID-19 pandemic. Under the new population thresholds, counties with a population of at least 500,000 residents and cities with a population of at least 250,000 residents will be eligible to sell short-term notes directly to the MLF. Eligible notes include taxable or tax-exempt TANs, TRANs, BANs and other similar short-term notes with maturities of 36 months or less. The new population thresholds allow substantially more entities (including many mid-sized cities and counties) to borrow directly from the MLF than the initial plan announced on April 9. The Fed has provided a list of eligible issuers based on their populations.[2]  The initial plan set the county threshold at 2 million residents and the city threshold at 1 million residents. Cities and counties that do not meet the population thresholds may access the facility through their state government.

The COVID-19 pandemic has had a significant impact on state and local governments. The municipal bond market saw a dramatic increase in sales by investors, which has resulted in increased interest rates on municipal bonds. At the same time, state and local governments are facing severe liquidity constraints resulting from increases in pandemic-related expenditures and decreases in tax revenues. The MLF is one of many programs announced by the Fed to limit the economic fallout from the pandemic.

The MLF is not yet operational and application materials are still being assembled. Among other requirements:

• Eligible issuers must have had an investment grade rating as of April 8, 2020, from at least two nationally recognized rating agencies.
• Eligible issuers must provide a written certification that they are unable to secure adequate credit accommodations from other banking institutions. In making this certification, issuers may consider economic or market conditions intended to be addressed by the MLF as compared to normal market conditions, including the availability and price of credit.[3]     
• Eligible issuers must deliver standard legal opinions for the issuance of debt, including, but not limited to, an opinion of nationally recognized bond counsel as to the validity, enforceability and binding nature of the notes.

The Fed has provided few details on how it will price the eligible notes to be purchased under the program. The Fed has announced that it will establish a pricing methodology that will be based on an eligible issuer’s long-term credit rating at the time of purchase of the eligible notes and the maturity of the eligible notes, plus a spread over a publicly available benchmark or index. The termination date for the MLF has been extended to December 31, 2020.

Please feel free to contact us with any questions regarding the Municipal Liquidity Facility.

[1] See Federal Reserve Board announces an expansion of the scope and duration of the Municipal Liquidity Facility

[2] See Federal Reserve Municipal Facility Limit per State

[3] See Federal Reserve Bank of New York FAQs: Municipal Liquidity Facility