June 3, 2020 – The Federal Reserve Board announced an expansion in the number and type of entities eligible to directly use its Municipal Liquidity Facility (MLF). Under the new terms, all U.S. states will be able to have at least two cities or counties eligible to directly issue notes to the MLF regardless of population. Governors of each state will also be able to designate two issuers in their jurisdictions whose revenues are generally derived from operating government activities (such as public transit, airports, toll facilities, and utilities) to be eligible to directly use the facility.
First introduced in April 9, the Fed utilized a $35B allocation from Treasury to establish a $500B direct loan program termed the Municipal Liquidity Facility. The loans were made available to all 50 states, U.S. cities with a population of at least 250,000 residents and U.S. counties with a population of at least 500,000 residents, and have a maximum maturity of three years.
As BuyMuni previously reported on April 17:
There is consternation towards the Fed’s strategy to utilize states as the primary “conduit” borrower. This would, based on some dealers’ interpretation, result in states bearing the ultimate credit risk if locals default.
By allowing States to “designate” issuers, as the Fed did today, highly-indebted issuers like New York’s Metropolitan Transportation Authority (MTA) would be able to tap the MLF for billions in additional liquidity, without jeopardizing New York State’s gilt-edge, Aa1/AA+ rating.
The MTA has about $45 billion in bonds outstanding. Based on recent reports, the transit authority needs as much as $4 – 6 billion to meet its operating and near-term capex needs.
MTA’s Chief Financial Officer Robert Foran said in a recent board meeting:
Based on our current surveillance, we believe public issuance of MTA [transportation revenue bond] notes would result in a premium incurred well in excess of the MLF pricing grid issued on May 11…(thus) the MLF will provide that critical bridge to helping us through the COVID-19 pandemic while we continue to meet our mission now, and for the future.
The MLF was established under Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.
Contact Jumanne Johnson at JJohnson@buymuni.com.
