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Municipal Liquidity Facility - Federal Reserve amended and additional guidelines

BY , Travis Gibbs

The Federal Reserve Municipal Liquidity Facility (the “Facility”) is a tool state and local governments could use to manage the fiscal impacts of the COVID-19 economic slowdown. We discussed the details surrounding the Facility based on the initial Federal Reserve term sheet dated April 9, 2020 (the “Original Term Sheet”). On April 27, 2020, the Federal Reserve released amended and additional details with respect to the Facility (the “Amended Term Sheet,” and together with the Original Term Sheet, the “Term Sheets”).

Under the updated guidance, the special purpose vehicle (“SPV”) will be authorized to purchase short-term notes such as tax anticipation notes (“TANs”), tax and revenue anticipation notes (“TRANs”), bond anticipation notes (“BANs”), and other similar short-term notes (collectively, the “Eligible Notes”), directly from (i) states, including the District of Columbia (“States”), (ii) counties with more than 500,000 residents (“Counties”), (iii) cities with more than 250,000 residents (“Cities,”) and (iv) multi-state entities[1] (“Multi-State Entities,” collectively with States, Counties, and Cities, “Eligible Issuers”). The Original Term Sheet generally limited Eligible Issuers to cities with more than one million residents and counties with more than two million residents, and did not include multi-state entities, [2] a much smaller universe of potential borrowers under the Facility.

The Amended Term Sheet provides that in addition to the resident population requirements, a State, City, or County must have also received minimum ratings from two or more major nationally recognized statistical rating organizations (“NRSROs”) of BBB-/Baa3 as of April 8, 2020, to be eligible for the Facility.[3] If the State, City, or County’s ratings met the minimum ratings requirements on April 8, 2020, but were subsequently downgraded, the respective State, City, or County must be rated at least BB-/Ba3 by two or more NRSROs at the time the Facility purchases the issuer’s notes.

Similarly, Multi-State Entities have ratings requirements to qualify for the Facility. Multi-State Entities must have received ratings from two or more NRSROs of A-/A3 as of April 8, 2020, to be eligible for the Facility. If a Multi-State Entity’s ratings met the minimum ratings requirements on April 8, 2020, but were subsequently downgraded, the Multi-State Entity must be rated at least BBB-/Baa3 by two or more NRSROs at the time the Facility purchases the Multi-State Entity’s notes.

Eligible Issuers may use the proceeds from Eligible Notes for a variety of purposes, including, but not limited to, managing the cash flow impact of delayed income taxes due to the extension of the income tax filing deadline or payment of principal and interest on existing obligations. Eligible Issuers other than Multi-State Entities may also use proceeds to purchase similar notes of solvent political subdivisions or other governmental entities within their jurisdiction that are ineligible to borrow under the Facility.

The Amended Term Sheet extended the deadline for the SPV to purchase Eligible Notes from September 30, 2020, to December 31, 2020, and also increased maturity limits on Eligible Notes to 36 months from 24 months. The December 31 deadline for purchase of Eligible Notes may be extended by the Board of Governors of the Federal Reserve and the Department of the Treasury.

The Nixon Peabody Public Finance team is monitoring the Federal Reserve for developments and additional considerations for issuers under the Facility.

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[1]   As defined in the Amended Term Sheet, Multi-State Entities are entities that were created by a compact between two or more States. The compact between the States must have been approved by the United States Congress, acting pursuant to its power under the Compact Clause of the United States Constitution.

[2]   Multi-State Entities were not expressly included as Eligible Issuers in the Original Term Sheet, although under Section 4002 of Subtitle A of Section IV of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), State is defined to include “any bi-State or multi-State entity.” See CARES Act, Section IV, Subtitle A, § 4002(10)(D). The Amended Term Sheet expressly adds multi-state entities to the definition of Eligible Issuers.

[3]   S&P Global Ratings, Moody’s Investor Service, Inc., and Fitch Ratings, Inc. are the NRSROs from which ratings will be accepted, however the Federal Reserve is considering including other NRSROs for the Facility. See FAQs: Municipal Liquidity Facility, April 27, 2020 (

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David J. Song


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Travis Gibbs


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