On April 9, 2020, U.S. Treasury Secretary Steven T. Mnuchin approved the establishment of a Municipal Liquidity Facility (MLF) aimed at helping the flow of credit to states, counties and cities impacted by the COVID-19 pandemic.
Under Section 13(3) of the Federal Reserve Act, Treasury will make a $35 billion equity investment in the MLF. Under the MLF, a Federal Reserve Bank will commit to lend to a special purpose vehicle (SPV) on a recourse basis. The SPV will purchase up to $500 billion of short-term notes directly from U.S. states (including the District of Colombia), U.S. counties with a population of at least 2 million residents, and U.S. cities with a population of at least 1 million residents (collectively, the "Eligible Issuers").
The purpose of the MLF is to provide funds to help offset any delay in state and local tax receipts caused by the deferral of the tax filing deadline and to help offset any short-term losses in tax revenues resulting from reduced business and consumer activity due to the COVID-19 pandemic. Eligible state-level issuers may use the process to support additional counties and cities. Each Eligible Issuer and Eligible Note is subject to the review and approval of the Federal Reserve.
Eligible Issuers will be able to sell new municipal notes directly to the SPV to obtain the funds they need quickly and efficiently. The municipal notes authorized are 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 not later than 24 months from the date of issuance (collectively, the "Eligible Notes").
Other important highlights include the following:
- Only one issuer per state, city or county is eligible (or an instrumentality thereof that issues on behalf of the state, city or county for the purpose of managing its cash flows).
- Relevant legal opinions and disclosures will be required as determined by the Federal Reserve prior to purchase of the Eligible Notes.
- The SPV may purchase the Eligible Notes issued by or on behalf of the Eligible Issuers in one or more issuances of up to an aggregate amount of 20 percent of the general revenue from own-sources and utility revenue of the applicable Eligible Issuer 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 MLF.
- Pricing will be based on the Eligible Issuer's rating at the time of purchase with details to be provided at a later date.
- Each Eligible Issuer that participates in the MLF must pay an origination fee equal to 10 basis points of the principal amount of the Eligible Issuer's notes purchased by the SPV. This origination fee may be paid from the proceeds of the issuance.
- 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 Sept. 30, 2020, unless the Board of Governors of the Federal Reserve System and the Treasury Department extend the MLF.
- The Federal Reserve Bank will continue to fund the SPV after Sept. 30, 2020, until the SPV's underlying assets mature or are sold.
The Federal Reserve has indicated that it will continue to 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.
The Federal Reserve has provided additional information in a term sheet for the MLF, which can be accessed on the Federal Reserve's website.
More guidance regarding the MLF is anticipated in the coming days and McGuireWoods is continuing to monitor all new information released from the Department of Treasury and Federal Reserve.
The CARES Act, Municipal Liquidity Facility, Paycheck Payroll Protection and Main Street Business Lending Program teams at McGuireWoods are dedicated to keeping clients advised of new legislative and business developments as they occur. If you have any questions regarding these issues, please feel free to contact any of the following attorneys: for Georgia – Ken Neighbors; Illinois – Kay McNab and Mark A. Kromkowski, Maryland - Alan Cason and Cheryl Guth; New York – John Semeniak; North Carolina – Mary Nash Rusher and Lisa Williams, Virginia - Arthur Anderson, Mike Graff and Doug Lamb, or your primary attorney at McGuireWoods.
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