On Monday, the Federal Reserve Board announced significant expansions of the Municipal Liquidity Facility (“MLF”). The MLF was unveiled on April 9, 2020 as part of the federal initiative to provide trillions in loans to shore up those affected by the coronavirus pandemic. In a nutshell, the MLF is designed to provide a liquidity backstop to issuers of eligible short-term notes. The MLF will now offer up to $500 billion in lending to states and municipalities to help manage cash flow stresses caused by the coronavirus pandemic.
One major criticism of the original MLF was that it was only accessible by larger political subdivisions. For example, no parishes or cities in Louisiana qualified as eligible issuers under the original MLF. Under the revised program, the MLF will purchase short -term notes issued by states and the District of Columbia, counties/parishes with a population of at least 500,000 residents, and cities with a population of at least 250,000 residents. The new population thresholds will obviously allow substantially more public entities to borrow directly from the MLF than the initial plan. New Orleans, which was one of the cities hardest hit by the coronavirus, is now an eligible issuer.
Another criticism was that the maximum term of the notes (24 months) was too short to be useful. Under the revised program, notes must mature no later than 36 months from the date of issuance. In addition, among other rating requirements, eligible issuers must have had an investment grade rating as of April 8, 2020, from at least two major nationally recognized statistical rating organizations. The termination date for the MLF has also been extended to December 31, 2020 in order to provide eligible issuers greater flexibility.
Recognizing that most political subdivisions themselves will not meet the population threshold, the MLF allows states, cities and counties to use the proceeds of their notes to purchase the notes of, or otherwise assist, any of their political subdivisions or other governmental entities. Importantly, if an eligible issuer uses the proceeds of its notes to purchase the notes of one of its political subdivisions, the MLF will not assume the risk of these notes. Regardless of the use of proceeds, the eligible issuer would bear the credit risk associated with any notes it purchases from its political subdivisions or other governmental entities.