The Board of Governors of the Federal Reserve System (the “Federal Reserve”), through the Federal Reserve Bank of New York (the “Reserve Bank”), continues to roll out its new CARES Act lending program, known as the Municipal Liquidity Facility (the “MLF”), for state and local governments affected by COVID-19.  On May 15^th, the Federal Reserve released its form Notice of Interest (“NOI”), which enables Eligible Issuers[1] to express their interest in selling Eligible Notes[2] through the MLF, and also identified both the special purpose vehicle (“SPV”) that will commit to purchase the Eligible Notes and the administrative agent for the MLF.

For a discussion of the MLF and earlier guidance from the Federal Reserve, please see our previous blogs entitled “CARES Act Support for State and Local Governments – Municipal Liquidity Facility” (“MLF Blog 1”), “Federal Reserve Releases Updated Guidance on Municipal Liquidity Facility” (“MLF Blog 2”) and “Federal Reserve Releases Updated  FAQs for Municipal Liquidity Facility” (“MLF Blog 3”). Readers should review the following summary in conjunction with MLF Blog 1, MLF Blog 2 and MLF Blog 3.[3]

On May 18^th, the Federal Reserve released its sample application and form documents and certifications for the MLF.  We will discuss the details of these documents in a separate blog.

Identity of the SPV and Administrative Agent

The Federal Reserve identified Municipal Liquidity Facility LLC, a Delaware limited liability company (the “LLC”) as the SPV for the MLF and designated BLX Group LLC (“BLX”) as the administrative agent for the execution phase of the MLF.  In serving as administrative agent, BLX will: (i) receive the NOIs and applications from Eligible Issuers; (ii) review the NOIs and applications based on criteria established by the Reserve Bank; (iii) be available to respond to questions; and (iv) have sole discretion in deciding whether or not to purchase Eligible Notes.

Designated Issuers

As noted in MLF Blog 2, an entity that issues securities on behalf of a state or a qualifying city or county for purposes of managing its cash flows may qualify as an Eligible Issuer if: (i) such entity can commit the credit of, or pledge revenues of, the applicable state, city or county, or (ii) the applicable state, city or county guarantees the Eligible Notes issued by such entity.  For purposes of the NOI, the Federal Reserve refers to these entities as “Designated Issuers,” and requires that the applicable state, city or county, rather than the Designated Issuer, complete and submit the NOI.

Requirements of the NOI 

The NOI consists of the following documents:

1. The completed NOI form, which contains a list of questions pertaining to the Eligible Issuer and the Eligible Notes, including, but not limited to:
   • the Eligible Issuer’s eligibility to participate in the MLF (e.g., the Eligible Issuer’s general obligation credit or issuer credit ratings, CUSIP number and, if applicable, Designated Issuer);
   • the intended uses for the Eligible Note proceeds;
   • the structure of and security for the Eligible Notes;
   • the type of sale (competitive or direct); and
   • a certification from the Eligible Issuer that: (1) it has reviewed the MLF term sheet and frequently asked questions; (2) it has determined that it meets the eligibility requirements for, and the proposed transaction meets the requirements of, the MLF; and (3) the information provided in the NOI is true and correct; and
2. The following attachments referenced in the NOI form:
   • copies of the most recent ratings reports of each NRSRO rating the Eligible Issuer;
   • copies of the most recent ratings reports of each NRSRO providing long-term ratings on the proposed credit for the Eligible Notes;
   • memorandum/memoranda of counsel (as further described below), if applicable; and
   • any other source documents cited by the Eligible Issuer in its responses to the questioned presented in the NOI.[4]

The Federal Reserve cautions Eligible Issuers to only submit an NOI once they have determined their financial needs and schedule.[5]  Once submitted, Eligible Issuers will receive an email confirming receipt of the NOI and, if the NOI is approved, a confirmation email confirming approval of the NOI and inviting the Eligible Issuer or its Designated Issuer to submit an application.  Upon approval of the application and in advance of pricing the Eligible Notes, the LLC will distribute a Note Purchase Agreement or other documentation evidencing its commitment to purchase the Eligible Notes and setting forth the conditions for funding.  As noted above, the Federal Reserve released its sample application and form documents and certifications, including the form Note Purchase Agreement, for the MLF on May 18^th.

Memoranda of Counsel

The Federal Reserve requires Eligible Issuers to include memoranda of counsel with their NOIs under the following circumstances:

Security for Eligible Notes

Eligible Issuers that are states or qualifying cities or counties must indicate whether or not the Eligible Notes will be issued as a general obligation of such Eligible Issuer.  If yes, then the applicable state, city or county must: (i) confirm whether or not it has any other credit that is rated higher than its general obligation credit and (ii) if yes, provide a memorandum of counsel explaining why the higher-rated credit is not otherwise available to secure the Eligible Notes.

Additionally, in cases where the Eligible Notes will not be a general obligation of the applicable state, city or county, or the Eligible Issuer is a Multi-State Entity, the Eligible Issuer must provide a memorandum of counsel explaining how the proposed security for the Eligible Notes is generally consistent with the source of repayment and strongest security typically pledged to repay the Eligible Issuer’s publicly-offered obligations.

Designated Issuers

Eligible Issuers planning to issue Eligible Notes through a Designated Issuer must provide a memorandum of counsel to the effect that: (i) the Designated Issuer is legally authorized to commit the credit of, or pledge the revenues of, the applicable state, city or county; or (ii) the applicable state, city or county is legally authorized to guarantee the Eligible Notes.

Competitive Sales

The MLF allows for sales of Eligible Notes through either a competitive or direct sale process.[6]  The SPV will submit a bid in a competitive sale process only in cases where the Eligible Issuer: (i) is required by law to sell the Eligible Notes competitively and (ii) does not have the authority to sell them directly to the SPV, even following a competitive sale process.  As a result, the NOI requires Eligible Issuers to either: (i) confirm that they have the legal authority, following the competitive sale process, to sell the Eligible Notes directly to the LLC or (ii) provide a memorandum of counsel to that effect that they do not have such authority, including a citation to the legal authority prohibiting such direct sale.

Ratings Documentation as a Component of Pricing

As noted in MLF Blog #3, the long-term ratings on the applicable credit to be used for the Eligible Notes is a factor in determining the interest rate for the Eligible Notes.  In that respect, Eligible Issuers or Designated Issuers must provide: (i) written evidence of the existing long-term ratings as of the pricing date and (ii) rating confirmation letters from the NRSROs as of the closing date.  As such, the NOI requires Eligible Issuers to describe the status of its request for confirmation of the ratings on the proposed credit, including the expected timing for each major NRSRO that currently rates the proposed credit for the Eligible Notes.

The form NOI and other information can be found on the MLF website: https://www.newyorkfed.org/medialibrary/media/markets/mlf-notice-of-interest.  We will continue to provide updates regarding the MLF upon the release of further guidance from the Federal Reserve.  To that end, we will be publishing a separate blog in the near future discussing the recently-released sample application and form documents and certifications for the MLF.  

[1] An “Eligible Issuer” is a state, city or county (or, subject to Federal Reserve approval, an entity that issues securities on behalf of such state, city or county), or a multi-state entity created by a Congressionally-approved compact (a “Multi-State Entity”); provided that cities and counties meet a pre-determined population threshold.

[2] “Eligible Notes” consist of newly-issued tax anticipation notes (“TANs”), tax and revenue anticipation notes (“TRANs”), bond anticipation notes (“BANs”), and other short-term notes.

[3] Capitalized terms not otherwise defined in this blog have the meanings set forth in MLF Blog 1, MLF Blog 2 or MLF Blog 3.

[4]  In citing to source documents, the Eligible Issuer should include the name of the document and the relevant pages or sections.

[5]   Each Eligible Issuer has an allocated amount of note borrowing capacity as detailed in Appendix A of the Frequently Asked Questions posted on the Reserve Bank’s website.

[6] The NOI encourages Eligible Issuers to consult with their bond counsel or issuer counsel as to the permitted method of sale.