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.
Article III contains standard provisions relating to corporate authority to enter into the Agreement and certifications that all regulatory filings are true and correct and contain no untrue statement of a material fact. The Issuer also certifies that any officers who are required to do so have made any applicable Sarbanes-Oxley certifications.
Article IV requires the Issuer to report the amount of existing and future Senior Unsecured Debt to the FDIC on a monthly basis and to provide such other information the FDIC may reasonably request from time to time within ten days of such a request. The reporting obligation also carries over to any defaults which the Issuer incurs under its Senior Unsecured Debt.
Article V provides that the loan documents evidencing any Senior Unsecured Debt must contain certain stipulations about the FDIC Guarantee and that the lender must assign the loan documents to the FDIC in the event the Guarantee is called upon. Significantly, no loan documents shall be permitted to contain a provision which results in an automatic acceleration of the Debt while the FDIC Guarantee is in effect or while payments are being made by the FDIC under the Guarantee.
The Annex to the Agreement contains language which must be included in any loan documentation evidencing Senior Unsecured Debt. One important provision requires the lender to provide written notice to the FDIC within one business day of any payment default under the Debt, without any regard for any cure period. This is a highly unusual provision to find in any loan documentation. It is questionable whether any lender is truly prepared to provide such notice so quickly. The Annex is silent on the consequences of the failure to provide the notice. As a practical matter, any lender seeking to take advantage of the Guarantee must insure that its internal processing area is prepared to provide the written notice on a hair trigger. It would probably be a good idea to go ahead and prepare a written “fill in the blank” notice letter in advance which could be used in such a situation.
The other provision of interest which must be included in loan documents is a provision stating that it is not a default if the Issuer fails to make a payment under the loan documents at a time during which the FDIC is making payments on the guaranteed debt. For the most part, it is the intent of the FDIC to continue making the normally scheduled payments due under the Debt which has been declared in default by the lender. If the Debt has a maturity date which extends beyond June 30, 2012, at any time thereafter, the FDIC can elect to make a payment in full of the principal and interest.