Hinshaw & Culbertson LLP

MEMORANDUM

TO: / Hinshaw Clients and Friends
FROM: / Tim Sullivan
Brian Goins
Michael D. Morehead
DATE: / December 2, 2008
RE: / Final Rule on Temporary Liquidity Guarantee Program

On November 21, 2008, the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLGP” or the “Program”). The Program has two primary components:

  • The Debt Guarantee Program pursuant to which the FDIC will temporarily guarantee the payment of newly-issued senior unsecured debt (the “DGP”); and
  • The Transaction Account Guarantee Program pursuant to which the FDIC will temporarily guarantee noninterest-bearing transaction accounts (the “TAGP”).

Executive Summary

Some of the highlights of the final TLGP rule are set forth below:

General

  • Eligible Entities (as defined below) must inform the FDIC no later than 11:59 p.m. EST on December 5, 2008, whether they will opt-out of either or both TLGP programs. If they elect to participate in the Debt Guarantee Program, they must report their debt issuance cap under the DGP (calculated as of September 30, 2008) to the FDIC on or before December 5, 2008.
  • If an Eligible Entity opts out of the TLGP, the FDIC’s guarantee of its newly-issued senior unsecured debt and noninterest-bearing transaction deposit accounts will expire at the earlier of 11:59 pm EST on December 5, 2008, or at the time of the FDIC’s receipt of the Eligible Entity’s opt-out decision.
  • An Eligible Entity’s decision to opt out of either component of the TLGP will be publicly available. The FDIC will post on its website a list of those entities that have opted out of either or both components of the TLGP.
  • The FDIC may impose an emergency systemic risk assessment on insured depository institutions if the fees and assessments collected under the TLGP are insufficient to cover any loss incurred under the TLGP. These fees will be assessed against all entities including those that do not participate in the TLGP.
  • Participating entities availing themselves of the TLGP are subject to the FDIC’s oversight regarding compliance with the terms of the Program.

Transaction Account Guarantee Program

  • The FDIC is providing temporary guarantee for funds held at FDIC insured depository institutions in noninterest-bearing transaction accounts above the existing $250,000 deposit insurance limit. These accounts include (i) lawyer trust accounts where interest does not accrue to the account owner (“IOLTA”); and (ii) NOW accounts with interest rates no higher than 0.50%.
  • Whether an Eligible Entity remains in the TAGP, it must disclose in writing at its main office, at all branches and at its Internet website (if deposits are taken at the website) its decision to participate in or opt-out of the TAGP. The FDIC has adopted model disclosure language.
  • If the institution uses sweep arrangements or takes other actions that result in funds in a noninterest-bearing transaction account being transferred to or reclassified as an interest-bearing account or a non-transaction account, this must be disclosed to affected customers and they must be advised in writing that such actions will void the FDIC guarantee.
  • Beginning on November 13, 2008, institutions will be assessed on a quarterly basis an annualized 10 basis point assessment on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000. An Eligible Entity that opts out prior to December 5, 2008 will not pay any assessments under the TAGP.

Debt Guarantee Program

  • The FDIC will temporarily guarantee newly issued senior unsecured debt of a participating Eligible Entity in a total amount up to 125 percent of the par or face value of senior unsecured debt outstanding, excluding debt extended to affiliates, as of September 30, 2008, that is scheduled to mature before June 30, 2009.
  • For Eligible Entities that are depositary institutions and had no senior unsecured debt or only had federal funds purchased at September 30, 2008, the debt issuance cap is 2% of consolidated total liabilities as of September 30, 2008.
  • Eligible Entities that are not depositary institutions and had no senior unsecured debt at September 30, 2008 may apply to the FDIC to have some debt covered under the DGP.
  • Short-term senior unsecured debt with a maturity of 30 days or less issued after December 5, 2008 is excluded from the DGP.
  • The debt cap will be calculated as of September 30, 2008 including debt with 30-day or less maturity issued at that point even though such debt is not guaranteed if issued after December 5, 2008.
  • If an Eligible Entity remains in the Debt Guarantee Program, it must include the FDIC’s model disclosure statement in all written materials provided to creditors regarding any debt covered by the guarantee. An Eligible Entity participating in the DGP must provide a model disclosure statement with senior unsecured debt that is not covered by the guarantee.
  • Guaranteed debt may not be used to prepay non-guaranteed debt.
  • Beginning on December 6, 2008, a participating Eligible Entity will be assessed fees for debt guarantee coverage. All eligible debt (i) issued on or after October 14, 2008 (except for overnight debt) and on or before December 5, 2008 (and still outstanding on December 5, 2008) and (ii) all eligible debt issued on or after December 6, 2008, through June 30, 2009, will be charged an annualized fee on a sliding scale from 50 basis points to 100 basis points per annum depending on maturity of debt. A ten basis point surcharge will be assessed against holding companies whose insured depository institutions control less than 50% of the parent company’s assets. The fee will be calculated for the maturity period of that debt or June 30, 2012, whichever is earlier.
  • The FDIC will guarantee the timely payment of principal and interest. The guaranteed debt is backed by “full faith and credit of the United States”

Eligible Entities

The following entities are eligible to participate in the TLGP subject to any restrictions that might be imposed by the FDIC in consultation with the institution’s primary regulator:

  • FDIC-insured depository institutions;
  • any U.S. bank holding company or financial holding company that has at least one insured depository institution subsidiary;
  • any U.S. savings and loan holding company that either (i) engages only in activities that are permissible for financial holding companies to conduct under Section (4)(k) of the Bank Holding Company Act of 1956 (“BHCA”) or (ii) has at least one insured depository institution subsidiary that is the subject of an application that was pending on October 13, 2008, pursuant to Section 4(c)(8) of the BHCA; or
  • any other affiliate of an insured depositary institution approved by the FDIC after consultation with the appropriate Federal banking agency, which affiliate will be deemed to have opted into the DGP (“Eligible Entities”).

Opt-Out and Election Form

Eligible Entities must inform the FDIC no later than 11:59 p.m. EST on December 5, 2008 whether they will opt-out of either or both programs under TLGP. The election must be made on the FDIC’s e-business website, FDICconnect.

All Eligible Entities within a holding company structure must make the same decision regarding participation in each component of the TLGP. If they do not, none of the members will be eligible to participate in that component of the TLGP.

An Eligible Entity’s decision to opt out of either component of the TLGP will be publicly available. The FDIC will post on its website a list of those entities that have opted out of either or both components of the TLGP.

The FDIC will not, however, post a list of the participating entities. All guarantees will terminate immediately upon the filing of an opt-out election.

An Eligible Entity electing to remain in the Debt Guarantee Program must provide debt issuance cap information as described below (Debt Guarantee Program - Guarantee Limits), certified by its CFO, on the FDIC’s election form by December 5, 2008. The submission of cap information for covered debt will also be confirmation of the electing Eligible Entity’s agreement with the terms of the master agreement described below (Debt Guarantee Program -Master Agreement).

Debt Guarantee Program

General. Under the Debt Guarantee Program, the FDIC will temporarily guarantee all newly-issued senior unsecured debt up to prescribed limits that is issued by participating entities on or after October 14, 2008, through and including June 30, 2009. The guarantee will expire upon the earliest to occur of (1) the date the issuer opts out, (2) the maturity of the debt or (3) June 30, 2012.

The FDIC may allow an affiliate of an electing depository institution to take part in the DGP; the FDIC must receive a written request from the affiliate and a positive recommendation from the appropriate Federal banking agency. After consultation with appropriate Federal banking agency, the FDIC may determine in its discretion that the affiliate shall not be permitted to participate in the TLGP.

As described below (Payment of Claims by the FDIC Pursuant to the Debt Guarantee Program), the FDIC guarantee covers timely payment of interest and principal. The guaranteed debt is backed by the full faith and credit of the United States.

The guaranteed debt has been assigned a 20% risk weighting.

Definition of Senior Guaranteed Debt. The final rule contains a non-exclusive list of senior unsecured debt guaranteed by the FDIC. This list includes: federal funds purchased, promissory notes, commercial paper, unsubordinated unsecured notes U.S. dollar denominated certificates of deposit owed to an insured depository institution, an insured credit union as defined in the Federal Credit Union Act or a foreign bank, U.S. dollar denominated deposits in an international banking facility of an insured depository institution owed to an insured depository institution or a foreign bank, and U.S. dollar denominated deposits on the books and records of foreign branches of U.S. insured depository institutions that are owed to an insured depository institution or a foreign bank.

The senior unsecured debt must (i) be noncontingent, (ii) be evidenced by a written agreement (including a trade confirmation), (iii) contain a specified and fixed principal amount be paid in full on demand or on a date certain, (iv) not be subordinated to another liability, (v) be non-contingent and contain no embedded options, forwards, swaps or other derivatives, and (vi) (after December 5, 2008) be issued with a stated maturity of more than 30 days.

The debt may pay interest at a fixed or floating rate, but the floating interest rate must be based on a single index of a Treasury bill rate, the prime rate or LIBOR.

To avoid the creation of innovative, exotic or complex funding structures, the DGP excludes from its coverage such items as:

  • any obligation with a stated maturity of one month,
  • obligations from guarantees or other contingent liabilities,
  • derivatives,
  • derivative-linked products,
  • debt that is paired or bundled with any other security,
  • convertible debt,
  • capital notes,
  • the unsecured portion of otherwise secured debt,
  • negotiable certificates of deposit,
  • deposits in foreign currency and or other foreign deposits (unless expressly included as covered senior unsecured debt),
  • revolving credit agreements,
  • structured notes,
  • instruments that are used for trade credit,
  • retail debt securities (securities marketed to retail investors), and
  • any funds that regardless of form are swept from individual, partnership or corporate accounts held at insured depository institutions.

Loans from affiliates, including parents and subsidiaries, or to institution affiliated parties, including controlling shareholders, directors, and officers, are also excluded from the DLP. Debt that is contractually subordinated to other debt of the entity is not eligible for the Program.

Under the final rule, the proceeds from the issuance of FDIC-guaranteed debt may be issued to prepay other FDIC guaranteed debt, but may not be used to prepay outstanding non-guaranteed debt.

Guarantee Term. Eligible debt must be issued on or before June 30, 2009. The FDIC will provide the guarantee coverage for eligible debt until the earlier of the maturity date of the debt or 11:59 pm EST on June 30, 2012, regardless of whether the liability has matured at that time.

If an Eligible Entity chooses to opt out of the Debt Guarantee Program, the guarantee will terminate on the earlier of 11:59 pm EST on December 5, 2008, or at the time of the Eligible Entity’s opt-out decision.

Guarantee Limits. The FDIC will temporarily guarantee newly issued unsecured debt in a total amount up to 125 percent of the par or face value of senior unsecured debt outstanding, excluding debt extended to affiliates, as of September 30, 2008, that is scheduled to mature before June 30, 2009. For a holding company with multiple participants, the maximum guaranteed amount must be calculated for each individual entity.

In calculating the September 30th debt cap, an Eligible Entity should include debt with maturities of 30 days or less outstanding at September 30th, even though such debt will no longer be guaranteed if issued after the opt-out date—11:59 p.m. EST on December 5, 2008.

If an electing depository institution did not have any senior unsecured debt (other than federal funds) outstanding on September 30, 2009, its debt issuance cap will be 2% of its total outstanding liabilities.

Eligible Entities that are not depositary institutions and had no senior unsecured debt at September 30, 2008 may apply to the FDIC to have some debt covered under the DGP.

The FDIC may also grant a participating entity authority to temporarily exceed the 125 percent limitation or may limit a participating entity to less than 125 percent.

The 125 percent limit may be adjusted for certain entities if the FDIC, in consultation with any appropriate Federal banking agency, determines it necessary.

Each electing Eligible Entity must calculate its outstanding senior unsecured debt as of September 30, 2008 and provide that information (even if the amount of the senior unsecured debt is zero) to the FDIC on the election form to be filed on or before December 5, 2008. All reports must contain a certification from the institution’s CFO (or equivalent) certifying the accuracy of the information reported.

A participating Eligible Entity must notify the FDIC by December 19, 2008 of each issuance of guaranteed debt between October 14, 2008 and December 5, 2008 that is still outstanding at December 5, 2008. This notification must include the CFO’s certification.

After December 5, 2008, a participating entity must notify the FDIC of each guaranteed debt issuance via FDICconnect; the CFO must certify that the issuance does not exceed the debt limit.

A participating entity may not represent that its debt is guaranteed by the FDIC if it does not comply with the rules governing the Debt Guarantee Program. If the issuing entity has opted out of the DGP, it may no longer represent that its newly-issued debt is guaranteed by the FDIC.

Similarly, once the 125 percent limit has been reached, the entity may not represent that any additional debt is guaranteed by the FDIC; moreover, it must specifically disclose that such debt is not guaranteed using the FDIC model disclosure form.

If an Eligible Entity does not opt out, all newly-issued senior unsecured debt, up to the debt issuance cap, will become guaranteed as and when issued. Generally, only after the participant has issued guaranteed debt up to the cap amount may it issue senior unsecured non-guaranteed debt. However, a participant may issue long-term (matures after June 30, 2012) non-guaranteed debt at any time if it has elected to participate in, and is paying the special fee for, the long-term non-guaranteed debt program described below (Fees - Guaranteed Debt - Issuance of Long-Term Non-Guaranteed Debt).

Combining Debt Cap. An insured depository institution may combine its debt limit with that of a direct or indirect parent participant. Participants interested in combining issuance caps must make a written request to the FDIC and the participant parent entity. Any use of a parent’s capacity to issue guaranteed debt will reduce the amount available to the parent under its debt cap.

Master Agreement. An Eligible Entity participating in the Debt Guarantee Program must execute a master agreement (designed to facilitate the payment guarantee by the FDIC). The agreement is available at the FDIC website. An executed copy (signed by the CFO) must be provided to the FDIC no later than ten business days after an Eligible Entity elects to participate in the DGP. In addition a completed executed copy of the master agreement signature page must be submitted to the FDIC within five business days of the election. The master agreement includes the following terms:

  • the Eligible Entity is required to provide notice to the FDIC within one business day of any failure to pay interest on or principal of any indebtedness,
  • the guaranteed debt documents must include the following terms:
  • appointment of a representative who will prosecute claims for payment under the guarantee for all creditors participating in the debt,
  • the representative must give the FDIC notice within one business day of any payment default by the participant,
  • the assignment of the debt instrument to the FDIC when the FDIC commences making guarantee payments,
  • the surrender of the debt instrument if the FDIC repays the debt in full while making guarantee payments, and
  • the FDIC must consent to any amendment to the debt instrument that modifies principal, interest, payment, default or ranking, and
  • no document governing guaranteed debt may provide for automatic acceleration of debt upon a default by the Eligible Entity to make timely payment provided the guarantee payments are being made by the FDIC.

An Eligible Entity will be required to comply with the provisions of the master agreement for all guaranteed debt issued after December 5, 2008.