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Category Archives: Liquidity Guarantee

FDIC Clarifies Use of Guaranteed Debt to Provide Capital

By Rob Klingler - Friday, December 19, 2008

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.

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Using the TLGP Debt Guarantee to Provide Capital

By Rob Klingler - Thursday, December 11, 2008

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.

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Further Guidance on Debt Guarantee

By Rob Klingler - Thursday, December 11, 2008

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.

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TLGP: Debt Instrument Reporting

By Rob Klingler - Tuesday, December 9, 2008

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.

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Summary of the FDIC’s Master Agreement

By Jerry Blanchard - Friday, December 5, 2008

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.

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FDIC Debt Guarantee and Interbank CDs

By Rob Klingler - Friday, December 5, 2008

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.

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