ASA seeks unlikely MLF extension
The American Securities Association wants to see the Federal Reserve’s Municipal Liquidity Facility extended past 2020 following word from the Treasury Department that such an extension is unlikely.
In a letter sent to U.S. Treasury Secretary Steven Mnuchin and Fed Chair Jerome Powell on Friday, the ASA asked for the MLF to be extended past its current deadline of Dec. 31, 2020 and allow more issuers to participate in it.
“We appreciate the leadership of Secretary Mnuchin and Chairman Powell to stabilize financial markets, provide credit to the economy, and support the American people through the COVID-19 pandemic,” said Chris Iacovella, ASA CEO. “The Municipal Liquidity Facility has provided confidence to Main Street municipalities and its extension will ensure essential services like local hospitals and schools have access to capital during this critical time.”
In the letter, ASA cited concerns that another year could bring economic uncertainty and continued social distancing measures would impact municipalities’ revenues.
The traditional municipal market has been functioning well since volatility in March locked out many issuers from the market. Interest rates are now at near-record lows and just this week deals from Los Angeles, New York, North Carolina and Georgia were digested just fine.
ASA Head of Government Affairs and Director of Fixed Income Policy Kelli McMorrow said the MLF should extend into 2021 in case of another market disruption.
“Some of these municipalities may have been able to get through 2020, but another full year of downward pressure on these revenue streams could prove to be extremely challenging,” McMorrow said. “Additionally, access to the MLF in 2021 would provide a necessary backstop should there be a market disruption or an inability for certain issuers to access more traditional capital markets.”
In an Oct. 16 letter responding to written questions from the Congressional Oversight Commission, Treasury said the MLF should not be extended past the end of the year and also said rates for the program should be not decreased nor should the maximum term length of 36 months of the notes be decreased.
“At this time, the Treasury Department does not believe that the Municipal Liquidity Facility should be extended beyond its current expiration date of December 31, 2020,” Treasury wrote. “The Federal Reserve and Treasury continue to monitor market stability and issuer market access in order to determine whether any changes to this expiration date would be warranted.”
ASA wants to see the MLF broadened to more small and medium-sized issuers.
“This is especially important as the COVID-19 pandemic begins to impact more rural communities,” McMorrow said. “Small and medium-sized municipalities have fewer opportunities to access funding in the private markets, and it’s time for Washington to help these hardworking American communities overcome this unthinkable hardship.”
The MLF is open to counties with populations of 500,000 or more and cities of 250,000 or more. In June, the central bank allowed U.S. states to be able to have at least two cities or counties eligible to directly issue notes regardless of population. Governors of each state are also able to designate two issuers whose revenues are derived from activities such as public transit and tolls.
The Treasury has also said that eligibility does not need to be changed.
ASA wants pricing of the MLF to be decreased, which has been a sticking point, as well as longer maturities past the current 36 months.
During a Government Finance Officers Association panel last week, the Fed’s Kent Hiteshew said municipal market conditions at the end of this calendar year will determine whether the Fed and Treasury will continue to operate the MLF beyond Dec. 31, 2020.
Hiteshew also said that an expansion of the MLF won’t happen unless the program is extended into 2021.
This letter comes as the Fed lowered the minimum loan size on Friday for its Main Street Lending Program by more than half to make it more available to smaller businesses.