As has been noted in several previous Kilpatrick Stockton Legal Alerts, the deadline for eligible entities to opt out of the Federal Deposit Insurance Corporation (“FDIC”) Temporary Liquidity Guarantee Program (“TLGP”) is 11:59 p.m., Eastern Standard Time, on this Friday, December 5, 2008. The TLGP has two components: a Debt Guarantee Program (“Debt Guarantee”), by which the FDIC will temporarily guarantee the payment of certain newly-issued senior unsecured debt and a Transaction Account Guarantee Program (“Transaction Account Guarantee”) under which the FDIC will temporarily guarantee certain accounts on an unlimited basis. Failure to opt out of a component of the program constitutes an irrevocable decision to continue in that part of the program. The necessary election forms are available on FDICconnect.
The TLGP was the subject of the FDIC’s recent final rule, which was published in the Federal Register on November 26, 2008. The final rule made numerous changes to the interim final rule that was adopted several weeks earlier. A Kilpatrick Stockton Legal Alert dated November 24, 2008 summarized changes made by the final rule. However, certain aspects of the final rule deserve particular emphasis.
The FDIC’s final rule on the TLGP substantially revises the operation of the Debt Guarantee from that which had been adopted in the interim final rule. Rather than having the guarantee triggered by receivership or bankruptcy of the obligor, it will now be triggered by a payment default. The FDIC will generally continue to make scheduled interest and principal payments under the terms of the debt instrument through maturity and become subrogated to the rights of any debt holder against the issuer to the extent of payments made under the guarantee.
As a consequence of these changes, the FDIC is requiring that eligible entities that do not opt out of the Debt Guarantee execute and file a “Master Agreement,” the form of which is available on its website, and which implements the debt guarantee process. The final rule also provides that the issuance of senior unsecured debt under the Debt Guarantee Program constitutes agreements to the terms and conditions of the Master Agreement.
Under the Master Agreement, the participating entity, among other things: (1) acknowledges the establishment of a debt owed to the FDIC for any payment made in satisfaction of the FDIC’s guarantee of a debt issuance by the participating entity and agrees to immediately honor the FDIC’s demand for payment of that debt along with interest; (2) arranges for the assignment to the FDIC by the holder of any guaranteed debt issued by the participating entity of all rights and interests related to that debt upon payment by the FDIC under the guarantee; and (3) allows for the issuer to elect to designate an authorized representative of the debt holder for purposes of making a claim on the guarantee. The Master Agreement also contains certain Representations and Warranties that the participating entity must be able to make. Notably, the FDIC’s final rule indicates that a participating entity’s default in the payment of any FDIC-guaranteed debt may be considered an unsafe or unsound practice and, if the entity is an insured depository institution, grounds for the appointment of a conservator or receiver.
Another revision made by the final rule relates to the category of eligible entities that did not have senior unsecured debt (as defined) on September 30, 2008 (or only had federal funds purchased). Not having such debt outstanding on September 30 means that the general guarantee limit (i.e., 125% of the par value of the debt outstanding on September 30 that was scheduled to mature on or before June 30, 2009) cannot apply. For insured depository institutions in that category, the final rule adopts a guarantee limit of 2% of consolidated total liabilities as of September 30, 2008. However, eligible entities that are not insured depository institutions, such as bank and savings and loan holding companies, are not subject to the 2% of liabilities limit. Instead, such entities must apply to the FDIC to determine what their guarantee limit will be and the FDIC will consult with the entity’s primary federal regulator in evaluating such applications.
The primary change related to the Transaction Account Guarantee was the inclusion of Lawyers Trust Accounts (IOLTA Accounts) and NOW accounts that pay less than 0.5% interest under the guarantee. For NOW accounts to qualify, the interest rate cannot exceed 0.5% at any time before the expiration of the program. If an institution is currently paying greater than 0.5% on its NOW accounts, it can readjust the rate before January 1, 2009, commit to maintain the rate at or below the 0.5% level through the end of the Transaction Account Guarantee and still have the accounts covered under the program.