The Federal Reserve today issued an amended term sheet establishing pricing criteria for its Municipal Liquidity Facility (MLF) last described in our April 29, 2020, Client Alert Federal Reserve Announces Changes to Its Municipal Lending Facility. The revised term sheet is attached as Attachment I. Attachment II highlights the differences between the new term sheet and the previous term sheet. The Federal Reserve Bank of New York (FRBNY) also issued today a revised FAQs for the MLF, which is attached as Attachment III and provides further information on pricing and procedures for issuers to express interest in using the MLF. Attachment IV highlights differences between the new FAQs and the previous FAQs.
The revised term sheet contains a pricing annex with a grid establishing a spread above the OIS (i.e., overnight index swap) rate for a maturity comparable to the Eligible Note to be sold by an Eligible Issuer under the MLF. Thus, a municipal issuer selling a 3 year note (the maximum maturity for an Eligible Note under the MLF) would pay the fixed rate for a three year OIS rate swap plus a spread of between 150 bps (for a AAA rate Eligible Note) and 590 bps (for a non‑investment grade rated Eligible Note).
This pricing is for tax-exempt Eligible Notes. Any Eligible Notes that are not tax exempt would have their interest rate “grossed‑up” by dividing the above determined interest rate by 0.65 to account for a tax rate of 35%.
The revised FAQs explains “OIS rate quotes are widely available from bond market service providers and vendors. Additional information regarding OIS is available at https://www.cftc.gov/MarketReports/SwapsReports/DataDictionary/index.htm.”
The revised FAQs also explains: “If an Eligible Issuer selects a maturity for which no direct OIS quote is available, the OIS rate for the Eligible Notes will be calculated using a straight line interpolation of the direct OIS quotes for the nearest maturity that is shorter than the Eligible Notes and the nearest maturity that is longer than the Eligible Notes. The calculation will be conducted by the SPV on the pricing date of the Eligible Notes.”
For split ratings Eligible Notes, the FAQs further explains: “To account for split ratings across different credit rating agencies, an average rating will be calculated by assigning a numerical value to each outstanding rating of the credit for the Eligible Notes from a major NRSRO and rounding the average of such numerical values to the nearest numerical value that corresponds to a rating. If an average rating is equidistant between the numerical value corresponding to one rating and the numerical value corresponding to another rating, then the Eligible Issuer will be treated as having the lower rating. However, if a credit has only two ratings from major NRSROs and one of the ratings is two or more gradations higher than the other rating, then the Eligible Issuer will have the option to either (1) obtain a third rating from a major NRSRO and price the Eligible Notes based on the average of its three ratings or (2) price the Eligible Notes based solely on the lower of the two existing ratings.”
In describing the required Eligible Issuer ratings, the revised FAQs states that the rating to be used can be an “issuer credit rating or a general obligation rating,” but in answering “how will the Federal Reserve determine pricing under the MLF?”, the Federal Reserve explains that the relevant rating is the rating “for the specific credit of the Eligible Notes at the time of pricing of the Eligible Notes.”
To sell notes under the MLF, the FAQs explains that issuers must file a “notice of interest” (NOI) in a form to be posted by the FRBNY. As previously announced, PFM Financial Advisors LLC will act as administrative agent for the MLF.
In explaining when to file an NOI to notify the Federal Reserve that an issuer has interest in using the MLF, the revised FAQs explains: “The MLF is not a “first come, first served” program. An Eligible Issuer should not submit an NOI until it has determined its financial needs and schedule. Each Eligible Issuer has been allocated a certain maximum amount of available MLF Funds (see Appendix A). There is no preference given to early filers.”
The revised FAQs also describes in detail how competitive bid sales will be handled. In general, the SPV will not submit a competitive bid, but simply purchase the remaining Eligible Notes that were not “awarded to bidders in the competitive sale.” If, however, applicable law does not permit an issuer to directly sell any notes otherwise than through competitive bidding (i.e., the unallocated offered notes cannot be directly placed with a buyer that did not submit a bid), the SPV will submit a bid. Such bid, of course, would be established under the pricing grid described above.
For now, the revised FAQs states that the Federal Reserve has no preference whether notes are sold under a competitive bid or direct sale procedure nor whether competitive bidding is a traditional “all or none” or “modified Dutch auction” procedure, but the Federal Reserve reserves the right to indicate a preference in the future.
The revised FAQs also specifies pre-sale and ongoing disclosure requirements for issuers using the MLF.
