Insured depository institutions and their holding companies that have elected to continue participating in the debt guaranty portion of the FDIC’s Temporary Liquidity Guarantee Program (“TLGP”) may issue senior unsecured debt guaranteed by the FDIC. However, the FDIC’s final rule applies certain requirements to that process.
Under the debt guarantee portion of the TLGP, the FDIC will guarantee certain “senior unsecured debt,” as defined in its final rule, issued after October 13, 2008 and on or before June 30, 2009. The FDIC’s guarantee on such debt will last until the earlier of the maturity of the debt or June 30, 2012. Issuers of guaranteed debt are subject to assessments equal to an annualized rate of 50 to 100 basis points, depending upon the term of maturity of the debt.
For institutions and holding companies to issue FDIC-guaranteed debt, they first must have elected to remain in the debt guarantee portion of the TLGP. Each entity also should have forwarded to the FDIC an executed copy of the “Master Agreement,” which covers the terms and conditions of the debt guarantee. Provided they did so, an insured institution has a guaranteed debt limit of either (i) 125% of the par value of the institution’s “senior unsecured debt,” as defined, outstanding on the close of business on September 30, 2008 and scheduled to mature on or before June 30, 2009, or (ii) if the institution had no such “senior unsecured debt” outstanding as of September 30, 2008 (or only had federal funds purchased on that date), its limit is 2% of its total consolidated liabilities as of September 30, 2008.
For a bank holding company or thrift holding company that had “senior unsecured debt” outstanding as of September 30, 2008, it has a separate guaranteed debt limit of 125% of that amount. However, a holding company that had no “senior unsecured debt” outstanding as of September 30, does not have the ability to issue FDIC-guaranteed debt immediately. Instead, it must submit a letter application to establish a guaranteed debt limit to the FDIC, with a copy to the applicable primary federal regulator of the holding company and its banking subsidiary. The final rule specifies that the letter application should contain a summary of the applicant’s strategic operating plan and the proposed use of the proceeds. We have been advised by FDIC staff that any holding company debt limit application should be justified in terms of the holding company’s ability to service the debt limit requested. FDIC staff has also advised that applications that contemplate the holding company downstreaming the proceeds of the debt to its subsidiary institution as regulatory capital will receive particular scrutiny since the FDIC views the TLGP as primarily a liquidity program rather than a capital program. Such applications should emphasize the liquidity benefits of that structure. The FDIC’s final rule indicates that its evaluations of holding company guaranteed debt limit applications will be based, after consultation with the applicable primary federal regulator, on the financial condition and supervisory history of the applicant.
In addition, any depository institution or holding company that already has an established debt guarantee limit under the final rule may seek to increase its limit by letter application to the FDIC. The preamble to the FDIC’s final rule indicates that an important consideration in evaluating such applications will be the extent to which the applicant demonstrates that the additional funding will be used to provide or reduce the cost of safe and sound lending in areas currently showing credit contraction (e.g., mortgage or small business lending or consumer credit). The final rule further allows a depository institution to combine its debt limit with that of its parent holding company upon prior written notice to the FDIC. The parent holding company’s limit is reduced by the amount that the institution’s limit is increased. The reverse (i.e., a holding company adding its subsidiary institution’s limit to its limit) is not contemplated by the final rule.
Finally, the final rule allows an affiliate of an eligible depository institution or holding company to apply to the FDIC to participate in the debt guarantee program. Relevant factors considered by the FDIC include the extent of the affiliate’s financial activities and those of the any other affiliates in the holding company structure and the strength, from a ratings perspective, of the applicant affiliate.
The FDIC’s final rule indicates that the agency reserves the authority to make exceptions to the guaranteed debt limit otherwise applicable. In addition to potentially increasing the limit upon application, the FDIC can reduce the limit of an institution or holding company or impose other restrictions or requirements, after consultation with the appropriate federal regulatory agency.
Annex A to the FDIC’s Master Agreement sets forth specific provisions that must be included in the governing documents for all guaranteed “senior unsecured debt,” including the designation of a representative of the holder for purposes of the debt guaranteed program. The FDIC’s final rule also requires specific disclosure of guaranteed debt status on “all written materials provided to lenders or creditors.” If an institution or holding company issues non-guaranteed debt, either because it elected the non-guaranteed option (and paid the associated fee) or because it has reached its guaranteed debt limits, the final rule also imposes specific disclosure requirements as to non-guaranteed status.