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On April 9, 2020, the Federal Reserve took additional actions to provide up to $2.3 trillion of loans to support the economy. Among the actions taken, the Fed announced the creation of a new Municipal Liquidity Facility (the “Facility”), which is intended to help state and local governments manage cash flow pressures arising from the COVID-19 pandemic. The Facility is expected to support lending to states, including the District of Columbia, counties and cities, through the creation of a special purpose vehicle (the “SPV”) that will have the ability to purchase up to $500 billion of Eligible Notes (as defined below).
The Federal Reserve released a term sheet for the Facility that includes the following key terms:
Eligible Notes. Eligible Notes include tax anticipation notes, tax and revenue anticipation notes, bond anticipation notes and other similar short-term notes with a maturity of no more than 24 months from the date of issuance. In particular, the term sheet notes that eligibility is subject to review by the Federal Reserve and that “relevant legal opinions and disclosures” will be required as determined by the Federal Reserve prior to purchase.
Eligible Issuers. The SPV will purchase Eligible Notes directly from (i) states (including the District of Columbia), (ii) counties with a population of at least two million residents at the time of issuance, (iii) cities with a population of at least one million residents at the time of issuance, and (iv) instrumentalities that issue on behalf of an eligible state, city or county for the purpose of managing its cash flow (each, an “Eligible Issuer” and collectively, the “Eligible Issuers”). Only one issuer per state, city or county is eligible.
Limit Per State, City and County. The SPV may purchase Eligible Notes 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 issuer for fiscal year 2017.1 States may also request that the SPV purchase Eligible Notes in excess of this limit to assist ineligible political subdivisions and instrumentalities. (No further guidance has yet been issued on limits for otherwise ineligible entities).
Use of Proceeds. Proceeds of the Eligible Notes purchased by the SPV may be used to help manage the cash flow impact of income tax deferrals resulting from an extension of an income tax filing deadline, potential reductions in tax and other revenues or increases in expenses related to or resulting from the COVID-19 pandemic, as well as the payment of principal and interest on the Eligible Issuer’s outstanding debt obligations. Eligible Note proceeds may also be used to purchase similar notes issued by, or otherwise to assist, “political subdivisions and instrumentalities of the relevant state, city or county” for the purposes set forth in the immediately preceding sentence.
Fees. Each Eligible Issuer that participates in the Facility must pay an origination fee, which may be paid from note proceeds, equal to 10 basis points of the principal amount of the notes purchased by the SPV. Pricing will be based on the Eligible Issuer’s rating at the time of purchase “with details to be provided later.”
Call Rights. Eligible Notes purchased by the SPV are callable at any time at par.
Termination Date. Unless extended by the Board of Governors of the Federal Reserve System and the Secretary of the Treasury, the SPV will cease purchasing Eligible Notes on September 30, 2020.
A link to the term sheet for the Facility is as follows:
As noted above, certain terms of any borrowing, particularly the interest rate to be payable or yield on the notes, remain undefined as of this date. We intend to provide updates as appropriate.
Your regular Locke Lord contact and the authors of this article would be happy to help you navigate the provisions of the Municipal Liquidity Facility as it relates to your state or local government.
Visit our COVID-19 Resource Center often for up-to-date information to help stay informed of the legal issues related to COVID-19.
1 It appears that 2017 was chosen due to the availability of U.S. Census Bureau data on municipal revenues.