On May 6, 2009, the FDIC provided updated opt-out lists for the Debt Guarantee Program and Transaction Account Guarantee Program. The decision to opt-out of either program was a binding decision as of December 5, 2008, and the FDIC has not given any explanation for why the opt-out lists have been updated, other than a generic statement that “entities may be added as we finalize the election submissions.”
As of December 12, 2008, 863 banks had elected to opt-out of the Transaction Account Guarantee, but that number is 1,110 banks as of May 6, 2009. Similarly, 3,116 entities (which includes affiliated bank holding companies) had elected to opt-out of the Debt Guarantee as of December 12, 2008, but that number is 6,501 entities as of May 6, 2009 (a 109% increase). In Georgia, 25 banks have opted out of the Transaction Account Guarantee, while 165 entities have opted out of the Debt Guarantee.
The continued updates of the opt-out lists serves as a strong reminder to review these lists before (a) presuming that noninterest bearing deposit accounts have an unlimited guarantee; or (b) accepting any senior unsecured debt as being guaranteed by the FDIC.
Over the last several weeks, we have had further conversations with clients and the FDIC regarding the details of the Debt Guarantee Program under the FDIC’s Temporary Liquidity Guarantee Program. In the course of these conversations, we have noticed a misunderstanding of several key components of the program.
- Lines of Credit are not Senior Unsecured Debt. Under the regulations, senior unsecured debt must have “a specified and fixed principal amount.” (12 CFR 370.2(e)(1).) As a result, lines of credit are not eligible for an FDIC guarantee, and should not be included in calculating the amount of senior unsecured debt outstanding at September 30, 2008.
- 2% of Liabilities Test is Only Available for Depository Institutions. If a bank holding company had no “senior unsecured debt” outstanding at September 30, 2008 (and remember that lines of credit are not included), then its maximum amount of guaranteed debt that can be issued is zero. Only depository institutions themselves (and not their parent entities) can take advantage of the alternative cap of 2% of the total liabilities outstanding as of September 30, 2008.
- Approvals to Establish or Increase a Debt Guarantee Cap will be “Very Rare.” The regulations provide a process for entities to establish or increase a debt guarantee cap. However, we understand that all applications go to the highest levels of the FDIC in Washington DC, and there face high levels of scrutiny. No timeframe has been provided, but given the level of scrutiny and DC review, bottlenecks are virtually guaranteed to develop. We understand that the FDIC has lots of applications currently in the system, but the FDIC believes that approvals will be “very rare.”
We have previously posted on the possibility of bank holding companies using the TLGP Debt Guarantee to provide capital to subsidiary banks. In that post, we commented on the odds of success and noted that the FDIC had not taken a formal position. Today, the FDIC updated its TLGP FAQ and confirmed that the odds of success are in fact very low.
The FDIC’s revised answer states:
Can guaranteed debt issued by the parent company be put in a subsidiary bank as capital?
The FDIC envisions few if any circumstances under which it would approve holding company applications to establish a cap or to increase a cap where the proceeds from the resulting guaranteed debt issuance would be injected as capital into a subsidiary bank. The Temporary Liquidity Guarantee Program was not intended to be a capital enhancement program. The Treasury Department’s TARP program has been set up for that purpose. The purpose of the Temporary Liquidity Guarantee Program is to restore liquidity to the intermediate term debt market.
As a reminder, the TLGP’s alternative guarantee cap of 2% of liabilities only applies to depository institutions. Bank holding companies are not entitled to use the 2% of liabilities test and are only eligible to issue 125% of the amount of senior unsecured debt that was outstanding as of September 30, 2008. As a result, we believe most community bank holding companies will be required to seek FDIC approval to establish a cap or to increase a cap in order to issue FDIC guaranteed debt. Based on the FDIC’s updated analysis, this approval seems highly unlikely.
On December 10, 2008, the FDIC published preliminary lists of financial institutions that have elected to opt-out of either the Debt or Transaction Account Guarantees under the Temporary Liquidity Guarantee Program. As noted by the FDIC, the decision to opt-out should not be read as a signal, either positive or negative, about the financial health of the entity. The FDIC recommends that depositors and investors with questions ask the entities on either of these lists for a further explanation concerning the entity’s decision to opt-out of the TLGP.
As of December 12, 2008, 863 banks elected to opt-out of the Transaction Account Guarantee, while 3,116 entities (which includes affiliated bank holding companies) elected to opt-out of the Debt Guarantee. Looking specifically at Georgia, 16 banks elected to opt-out of the Transaction Account Guarantee, while 54 entities elected to opt-out of the Debt Guarantee.
We are having discussions with clients regarding the possibility of issuing FDIC-guaranteed debt under the TLGP’s Debt Guarantee Program at the holding company level and using the proceeds of that debt to increase the capital of the bank subsidiary. This is particularly attractive for banks that are eligible to report their risk-based capital positions on a bank-only basis. (The Federal Reserve’s risk-based capital measures are generally applied on a bank-only basis for bank holding companies with consolidated assets of less than $500 million.)
Permissible Use for BHC FDIC-Guaranteed Debt
The FDIC’s Frequently Asked Questions (FAQ) explicitly permits a bank holding company to use the proceeds from a guaranteed debt issuance to purchase additional shares of bank stock.
Need to Apply to FDIC for Approval
In our experience, however, most bank holding companies for community banks had no, or very limited amounts of, senior unsecured debt outstanding as of September 30, 2008. As a result, the bank holding company will have to file a letter application with the FDIC and, if different, the federal banking regulator for its largest subsidiary bank to establish an FDIC-guaranteed debt limit. The letter application must describe the details of the request, provide a summary of the applicant’s strategic operating plan, and describe the proposed use of the debt proceeds.
On December 11, 2008, the FDIC updated its Frequently Asked Questions (FAQ) on the Temporary Liquidity Guarantee Program. The updated questions address both the Transaction Account and Debt Guarantee portions of the TLGP, but this post focuses on the Debt Guarantee.
Further Clarification on Brokered Interbank CDs
The FAQ clarifies that if an issuing bank owes a CD to a broker, the CD does not meet the definition of senior unsecured debt (and will not be guaranteed) even where an insured depository institution or credit union is the beneficiary of the CD. If, on the other hand, the broker merely arranges placement of a CD and the bank or thrift owes the CD directly to another insured depository institution or credit union, then the CD meets the definition of senior unsecured debt (and will be guaranteed), provided that the debt is owed to the insured depository institution or credit union in its own capacity and not as agent for someone else.
On December 8, 2008, the FDIC published a Financial Institution Letter that clarifies the reporting requirements for newly issued guaranteed senior unsecured debt.
Beginning on December 6, 2008, all newly issued guaranteed debt must be reported to the FDIC via FDICconnect within five (5) calendar days of the date of issuance. Guaranteed debt that was issued between October 14, 2008 through December 5, 2008 and was still outstanding on December 5, 2008 must be reported to the FDIC via FDICconnect by December 19, 2008.
The FDIC will generate the first TLGP assessment invoices for guaranteed debt on December 17, 2008, with settlement of the invoices on December 19, 2008. Thereafter, new invoices will run each Wednesday for debt issuances reported the prior week, with settlement each Friday.
These reporting requirements are in addition to the monthly reports to the FDIC of aggregated guaranteed debt outstanding pursuant to the Master Agreement. The FDIC promises to issue information on these ongoing reporting requirements shortly.
The Master Agreement, which the FDIC has created for use with the Debt Guarantee portion of the Temporary Liquidity Guarantee Program, provides an outline for how the guarantee program operates if the FDIC is called upon to honor the Guarantee. The operative provisions are found in Articles II, III, IV and V.
Article II describes how payments would be made in the event the Guarantee is called upon. The Section also contains language typically found in a letter of credit reimbursement agreement whereby the Issuer agrees to reimburse the FDIC immediately for any payments made by the FDIC. The “Reimbursement Payment” will bear interest, if not paid immediately, at a rate equal to the non-default rate of interest on the Senior Unsecured Debt plus 1%. As a practical matter, this is advantageous for the Issuer since a failure to reimburse would normally trigger a higher rate of interest in similar reimbursement agreements.
Article II also provides that the Issuer waives any defenses to the enforcement of the Senior Unsecured Debt once the FDIC has paid out under its guarantee. The FDIC is subrogated to the rights of the holder of the Senior Unsecured Debt and does not want the Issuer to raise lender liability defenses to the enforcement of the Debt which might likewise provide a defense to collection of the Reimbursement Payment. One of the documents found in the Annex to the Agreement is an Assignment by which the lender seeking payment from the FDIC assigns the promissory note or other evidence of indebtedness to the FDIC.
On the evening of Thursday, December 4, 2008, the FDIC circulated an updated notice regarding the definition of “senior unsecured debt” as it applies to interbank CDs. A complete copy of that notice is included at the end of this post.
The notice may cause some confusion, as we believe most banks are unlikely to have any relevant interbank CDs, insured or otherwise. Only the amount of certificates of deposits owed to non-affiliated banks in excess of $250,000 should be included in the amount of senior unsecured debt outstanding as of September 30, 2008.
The definition of “senior unsecured debt” contained in the final regulations does include “U.S. dollar denominated certificates of deposit owed to an insured depository institution.” However, there are a number of exceptions that effectively swallow this rule.
First, debt “owed to an insured depository institution” includes only debt owed to the institution “solely in its own capacity and not as agent.” As a result, brokered deposits or deposits placed through the CDARS network do not meet the definition of senior unsecured debt and should neither be included in the amount of senior unsecured debt outstanding as of September 30, 2008 nor be eligible for the FDIC guarantee.
Second, debt to “affiliates, including parents and subsidiaries, and institution-affiliated parties” are excluded from the definition of senior unsecured debt. As a result, any CDs between affiliated banks should be excluded from the amount of senior unsecured debt outstanding as of September 30, 2008, regardless of the amount of such CDs.
Third, as noted in the FDIC notice, certificates of deposits owed to non-affiliated banks should only be included to the extent the CDs exceeded FDIC insurance limits as of September 30, 2008.
How does the Debt Guarantee Program Work?
The FDIC will guarantee, through June 30, 2012, newly issued senior unsecured debt with a stated maturity of more than 30 days that is issued prior to June 30, 2009.
What is the Dollar Limit on the Debt Guarantee Program?
The FDIC will guarantee, for each eligible entity, up to 125% of the amount of senior unsecured debt outstanding that entity had at September 30, 2008 that was scheduled to mature on or before June 30, 2009.
However, for depository institutions that had either (i) no senior unsecured debt outstanding at September 30, 2008, or (ii) only had Federal funds purchased outstanding at September 30, 2008, the FDIC will guarantee up to 2% of the depository institution’s total liabilities as of September 30, 2008.
What are the fees for the Debt Guarantee Program?
Generally, the fees are as follows, and will be paid as guaranteed debt is issued in a single payment to the FDIC via ACH, and is equal to the amount of the guaranteed debt times the term of the debt (expressed in years) times the following annualized assessment rates:
- If the debt has a maturity of 31 to 180 days, the annualized assessment rate will be 50 basis points.
- If the debt has a maturity of 181 to 364 days, the annualized assessment rate will be 75 basis points.
- If the debt has a maturity of 365 days or more, the annualized assessment rate will be 100 basis points.
If the debt matures after June 30, 2012, then June 30, 2012 will be used as the maturity date for purposes of determining the fee.