TLGP's Debt Guarantee

December 3, 2008

Authored by: Robert Klingler

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.

Can an entity issue guaranteed debt to an insider?

No.  12 CFR Part 370.3(e)(5) explicitly provides that FDIC-guaranteed debt cannot be “owed to an affiliate, an institution-affiliated party, insider of the participating entity, or an insider of an affiliate.”

Can an entity use the proceeds of guaranteed debt to prepay non-guaranteed debt?

No.  12 CFR Part 370.3(e)(1) explicitly provides that FDIC-guaranteed debt cannot be “used to prepay debt that is not FDIC-guaranteed.”

If an institution has no intention to issue guaranteed debt, why should it elect to participate in the Debt Guarantee Program?

If an institution ends up not issuing any guaranteed debt, then there is no cost to participate in the Debt Guarantee Program. If, however, an institution has to borrow funds, it will be in much better position to do so if it can offer its lender FDIC-guaranteed debt.  Electing to participate in the Debt Guarantee Program preserves the entity’s flexibility, especially in the event that the market for non-guaranteed debt is further impacted by the availability of guaranteed debt.

What is the process for requesting a higher maximum debt guarantee limit?

The process for requesting (and standards for FDIC approving) increases in the debt guarantee limit are set forth in 12 CFR Part 370.3(h).  The FDIC has made clear that such requests do NOT need to be made prior to December 5, 2008.  We expect any approvals to be based on the stated intent of the programs: improving the liquidity of the banking system.

What is the process for opting into the Debt Guarantee Program?

See this post on completing the TLGP Election Form.