On May 11, 2020, the Federal Reserve released pricing information for the Municipal Liquidity Facility (MLF), the emergency lending program for state and local municipalities experiencing economic harm from the COVID-19 pandemic.

Tax-Exempt Eligible Notes
For Tax-Exempt Eligible Notes, meaning the interest on the Eligible Notes is excluded from gross income for federal tax purposes, pricing will be at a fixed interest rate based on a comparable maturity overnight index swap (OIS) rate plus a spread based on the long-term rating of the security for the Eligible Notes. The spread ranges from 150 bps or 1.5 percentage points for AAA/Aaa-rated Eligible Notes to 380 bps or 3.8 percentage points for BBB-/Baa3-rated Eligible Notes, and 590 bps or 5.9 percentage points for Eligible Notes below investment grade.

Taxable Eligible Notes
For Taxable Eligible Notes, if the interest on the Eligible Notes is not excluded from gross income, pricing will be determined by the tax-exempt rate divided by 0.65.

The full MLF pricing appendix is available here.

The interest rates on these Eligible Notes are penalty rates, meaning they are priced at a rate that is a premium to the market rate under normal circumstances. The market’s interest rates are back near their lows, with one-year benchmark debt yielding under 0.5%. As such, the MLF interest rates reflect the Federal Reserve’s position that it is to be viewed as the lender of last resort. It is imperative that any municipality considering MLF financing investigate all other lending opportunities prior to pursuing these federal funds.

What is OIS?
An OIS is an interest rate derivative contract in which parties exchange a payment priced at a fixed rate against a payment priced at an average overnight published reference rate, such as the effective federal funds rate. The MLF will use the fixed OIS rate based on the effective federal funds rate for the maturity that corresponds to the maturity of the Eligible Notes.

How are the ratings determined?
The ratings considered in pricing the Eligible Notes will be all of the eligible issuer’s long-term ratings from major nationally recognized statistical rating organizations (Major NRSROs) for the specific credit of the Eligible Notes at the time of the pricing of the Eligible Notes. If the credit has different ratings, what are called split ratings, the applicable spread will be determined by calculating an average of all the confirmed ratings. Major NRSRO means S&P Global Ratings, Moody’s Investor Service, Inc., Fitch Ratings, Inc., and Kroll Bond Rating Agency, Inc. 

For more detailed information, please see the Municipal Liquidity Facility: Frequently Asked Questions.

For further information, please contact a member of Taft’s CARES Act Title IV Task Force.

Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.