A new term sheet offering up to $500 billion for its lending facility to shore up state and municipal governments was published Monday by the Federal Reserve, which the agency said was intended to help cash flow stresses caused by the coronavirus crisis.
The Municipal Liquidity Facility (MLF) is designed to support lending to states (and the District of Columbia), cities with populations of more than 250,000, counties with more than 500,000 residents and multi-state entities, the Fed said.
The way it works is through the Federal Reserve Bank of New York, which commits to lend to a special purpose vehicle (“SPV”) on a recourse basis. According to the Fed, the SPV will purchase eligible notes directly from eligible issuers at the time of issuance. The reserve bank will be secured by all the assets of the SPV. The Treasury, using congressional appropriated funds under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), will make an initial equity investment of $35 billion in the SPV in connection with the facility. The SPV will have the ability to purchase up to $500 billion of eligible notes.
The MLF is aimed at ensuring a “smooth functioning of the municipal securities market,” according to the Fed, during the strenuous times presented by the coronavirus pandemic. The facility is also designed to restore confidence in the municipal securities market, the Fed said.
The Fed said it is working “expeditiously” to operationalize the MLF. The agency said it would “keep market participants apprised and announce in advance when the SPV will commence operations and begin purchasing Eligible Notes. The SPV will cease purchasing Eligible Notes on Dec. 31, 2020, unless the Board and the Treasury Department extend the term of the facility.