Further Guidance on Debt Guarantee

December 11, 2008

Authored by: Robert Klingler

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.

Note: even if the CD does not meet the definition of senior unsecured debt, the CD will often be insured, in whole or in part, under the regular deposit insurance rules.

Prohibition Against Prepayment of Non-FDIC Guaranteed Debt

The FAQ clarifies that FDIC-guaranteed debt may not be used to extinguish or reduce any non-FDIC guaranteed debt by means of cash payment or by substitution or exchange of FDIC-guaranteed debt for non-FDIC guaranteed debt, if these payments, substitutions, or exchanges occur prior to the stated maturity of the non-FDIC guaranteed debt.

Master Agreement Deadline

The FAQ acknowledges the discrepancy between the cover page instructions to the Master Agreement (which indicated a ten business day deadline) and the Master Agreement and Election Form (which both indicated a five business day deadline).  The updated FAQ agrees with the cover page instructions, and thereby requires that the Master Agreement should be returned within ten (10) business days from the date of the issuer’s election.  (If no election form was completed, then the issuer “elected” to remain in the program on December 5, 2008, and the Master Agreement would be due on December 19, 2008.)

Process to Increase Limit on Guaranteed Senior Unsecured Debt

The FAQ expands on the provisions of 12 CFR Part 370.3(h) with regard to the procedures to establish or increase the cap under the Debt Guarantee Program.  The procedures require a letter application to the FDIC and the appropriate federal banking agency of the entity or the entity’s lead affiliated insured depository institutions.  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.

In evaluating applications from depository institutions to increase their limit, the FDIC will consider the financial condition and supervisory history of the eligible entity.

In evaluating applications from non-bank affiliates (i.e., bank holding companies) to establish or increase their limit, the FDIC will consider the extent of the financial activity of the entities within the holding company structure, the strength, from a ratings perspective, of the issuer of the obligations that will be guaranteed, and the size and extent of the activities of the organization.

The FDIC may consider any other relevant factors and/or impose any conditions it deems appropriate.  The FAQ indications that applications will be “closely” evaluated, and exceptions will be made “on a limited basis.”