Limited TLGP Extension and New Surcharge
March 20, 2009
Limited Extension
In an open meeting held on March 17, 2009, the Board of Directors of the Federal Deposit Insurance Corporation adopted an Interim Rule that extends the Debt Guarantee Program component of the Temporary Liquidity Guarantee Program from June 30, 2009 until October 31, 2009. In addition, for debt issued on or after April 1, 2009, the Interim Rule extends the expiration of the guarantee from June 30, 2012 to December 31, 2012. This extension applies automatically to all insured depository institutions, as well as to those financial institutions that have issued FDIC-guaranteed debt before April 1, 2009.
Financial institutions, other than insured depository institutions, that are participating in the Debt Guarantee Program but that have not issued FDIC-guaranteed debt before April 1, 2009 will need to apply by June 30, 2009 for approval from the FDIC to participate in the extension. These applications must include the information specified in the Interim Rule, including a description of an entity’s current condition and future prospects, capital, management and risks presented to the FDIC, and the FDIC may condition its approval on any requirements it deems appropriate.
Each financial institution participating in the extension will be subject to the limitations on issuing non-guaranteed debt described below. The Interim Rule does not change a participating entity’s existing debt guarantee limit or affect any conditions the FDIC may already have placed on issuances by such entity.
The Interim Rule takes effect immediately upon its publication in the Federal Register, which is expected shortly. The FDIC invites comments on all aspects of the Interim Rule, and in particular as to the appropriateness of the surcharges. All comments on the Interim Rule must be received within 15 days of its publication.
New Surcharges
The Interim Rule adopts new surcharges on guaranteed debt issuances that have a maturity of one year or more and are issued on or after April 1, 2009:
- For guaranteed debt that is not issued under the extension, because it is issued on or before June 30, 2009 and matures on or before June 30, 2012, the surcharge will be 10 basis points (annualized) for insured depository institutions and 20 basis points (annualized) for all other participants.
- For all guaranteed debt issued under the extension, because either it was issued after June 30, 2009 or it matures after June 30, 2012, the surcharge will be 25 basis points (annualized) for insured depository institutions and 50 basis points (annualized) for all others.
All surcharges will be in addition to current fees that apply to issuances of guaranteed debt. The additional surcharges will be deposited into the Deposit Insurance Fund, instead of the fund created to cover potential losses under the Temporary Liquidity Guarantee Program. According to the FDIC, depositing the surcharge in the Deposit Insurance Fund recognizes that a relatively small portion of the financial industry is actively using the Debt Guarantee Program, while all insured depository institutions would ultimately bear the risk of having to contribute in the event losses attributable to the program are recovered via systemic risk assessment.
Non-Guaranteed Debt
The Interim Rule, in conjunction with the Final Rule dated November 21, 2008 governing the Debt Guarantee Program (the “Original Rule”), now provides for the issuance of non-guaranteed debt as follows:
- Financial institutions to which the extension applies that made the election by December 5, 2008 under the Original Rule to be able to issue long-term non-guaranteed debt and paid the related fees:
Before June 30, 2009 (no change from the Original Rule):
- May issue non-guaranteed debt with maturities after June 30, 2012 (but may not issue any non-guaranteed debt with maturities on or before June 30, 2012).
After June 30, 2009:
- May issue non-guaranteed debt with maturities after June 30, 2012 without FDIC approval and without further cost.
- May issue non-guaranteed debt with maturities on or before June 30, 2012 only after applying for and obtaining FDIC approval, but without further cost.
- Financial institutions to which the extension applies that did not make the election under the Original Rule to be able to issue long-term non-guaranteed debt:
Before June 30, 2009 (no change from the Original Rule):
- May not issue non-guaranteed debt of any maturity.
After June 30, 2009:
- May issue non-guaranteed debt of any maturity only after applying for and obtaining FDIC approval.
- Financial institutions participating in the Debt Guarantee Program but to which the extension does not apply:
Before June 30, 2009 (no change from the Original Rule):
- May only issue non-guaranteed debt with maturities after June 30, 2012 and only if the participating entity made the election under the Original Rule to be able to issue long-term non-guaranteed debt and paid the related fees.
After June 30, 2009 (no change from the Original Rule):
- May issue non-guaranteed debt of any maturity without FDIC approval as the Debt Guarantee Program no longer applies to this category of issuers.
- After October 31, 2009, no issuance by any category of participating entity will be guaranteed.
Note that the Interim Rule is subject to a 15-day comment period and future interpretative guidance by the FDIC may affect the foregoing analysis.
See a copy of the Interim Rule
See a copy of the Board Memorandum
For additional information regarding the Temporary Liquidity Guarantee Program, please refer to the following Davis Polk memorandum: Temporary Liquidity Guarantee Program: FDIC Final Rule.
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If you have any questions about the matters covered in this newsflash, please contact any of the lawyers listed below or your regular Davis Polk contact:
John M. Brandow, Partner
212-450-4296 | john.brandow@dpw.com
Luigi L. De Ghenghi, Partner
212-450-4296 | luigi.deghenghi@dpw.com
Randall D. Guynn, Partner
212-450-4239 | randall.guynn@dpw.com
Michael Kaplan, Partner
212-450-4111 |
michael.kaplan@dpw.com
Arthur S. Long, Partner
212-450-4742 | arthur.long@dpw.com
Warren Motley, Partner
212-450-4032 | warren.motley@dpw.com
Annette Nazareth, Partner*
212-450-4804 |
annette.nazareth@dpw.com
Margaret E. Tahyar, Partner
011-33-1-56-59-36-70 | margaret.tahyar@dpw.com
Christopher S. Schell, Counsel
212-450-4011 | christopher.schell@dpw.com
Joerg Riegel, Associate
212-450-4253 | joerg.riegel@dpw.com
*Admission pending in DC; practicing in DC under the supervision of partners of the firm.