Alert October 27, 2009

FDIC Approves Final Rule to Phase Out the Debt Guarantee Component of the Temporary Liquidity Guarantee Program

The FDIC approved a final rule (the “Final Rule”) to phase out the Debt Guarantee Program (the “DGP”) of the Temporary Liquidity Guarantee Program (the “TLGP”).  In October 2008, the FDIC adopted the TLGP as part of a coordinated effort by the FDIC and other federal agencies to address disruptions in credit markets and the resultant inability of financial institutions to obtain funding and make loans to creditworthy borrowers.  For more on the TLGP generally, please see the October 14, 2008 Alert and the November 25, 2008 Alert.  The FDIC had previously extended the DGP for four months, and recently extended the Transaction Account Guarantee Program of the TLGP for six months.  For further discussion on the previous extension of the DGP, please see the February 17, 2009 Alert; and for further discussion on the extension of the Transaction Account Guarantee Program please see the September 1, 2009 Alert.

To ensure an orderly phase-out of the DGP, the FDIC is establishing a limited emergency guarantee facility.  For most insured depository institutions and other entities participating in the DGP, the program will conclude on October 31, 2009, with the FDIC’s guarantee expiring no later than December 31, 2012.  To the extent that certain of those entities become unable to issue non-guaranteed debt to replace maturing senior unsecured debt because of market disruptions or other circumstances beyond their control, an emergency guarantee facility will be available on an application basis to insured depository institutions participating in the DGP and any other entities that have issued FDIC‑guaranteed senior unsecured debt by September 9, 2009. 

Under the Final Rule, in order to utilize the emergency guarantee facility, an entity must apply to, and receive prior approval from, the FDIC.  The FDIC established a high application threshold for the emergency guarantee facility.  To use the emergency guarantee facility, applicants would be required to demonstrate their inability to issue non‑guaranteed debt or to replace maturing debt as a result of market disruptions or other circumstances beyond their control.  An applicant is required to submit a projection of its sources and uses of funds through December 31, 2012, a summary of its contingency plans, a description of any collateral that it can make available to secure its obligation to reimburse the FDIC for any payments made pursuant to the guarantee, a description of its plans for retirement of the FDIC‑guaranteed debt, a description of the market disruptions or other circumstances beyond its control that prevent it from replacing maturing debt with non-guaranteed debt, a description of management’s efforts to mitigate the effects of such disruptions or circumstances, conclusive evidence that demonstrates its inability to issue non-guaranteed debt and any other relevant information that the FDIC deems appropriate.

If the application is approved, the FDIC will guarantee the applicant’s senior unsecured debt issued on or before April 30, 2010.  The FDIC’s guarantee under the emergency guarantee facility would expire no later than December 31, 2012.  Participation in the emergency guarantee facility would be very expensive for the participating institution.  Debt guaranteed under the emergency guarantee facility will be subject to an annualized assessment rate equal to a minimum of 300 basis points.