April 24, 2020 – Based on BuyMuni’s broker-dealer sources, the Federal Reserve is believed to be publishing its Frequently Asked Questions for the Muncipal Liquidity Facility (MLF) program as early as this afternoon.
Over the past two weeks, there have been tremendous pressure for the Fed to address Congressional and issuer concerns that the MLF was too limiting in scope, particularly on seemingly arbitrary eligibility criteria such as issuers’ population.
One dealer noted San Francisco (pop. 880K) and Boston (pop. 800K) would not be eligible under current criteria. Many states including California also have Constitutional constraints that may complicate conduit issuance (on behalf of smaller cities and counties).
There has been a lot of back-and-forth on the cost of the two-year notes the Fed will purchase from the roughly 80 eligible issuers (all 50 states and large counties/cities). While some early reports indicated the borrowing cost would be “below market”, public finance bankers now believe the borrowing cost would be at a slight premium to market yields, on the theory that the Fed sees itself as a lender of last resort.
Several issuers, through their Congressional reps, have lobbied for long-term funding, arguing that the two-year horizon may not be sufficient for state and local revenues to recover. While the FAQ is not expected to address this issue, Fed officials continue to see the MLF as a “first salvo” and have indicated that a new program or a refinement of the MLF program may be rolled out, depending on the trajectory of economic declines, any additional state/local aid that might be enacted under a 4th federal stimulus and issuers’ market access.
Finally, with the Fed’s announcement yesterday that it will be posting monthly reports on Fed program beneficiaries and details of the support provided (including interest rate), issuers have expressed the importance of a streamlined pricing system so issuers will have pricing transparency and not be unduly disadvantaged relative to other similarly-rated issuers.
Contact Jumanne Johnson at JJohnson@buymuni.com.
