Should the U.S. Department of Treasury Extend the Municipal Liquidity Facility?

10/26/2020

The possibility of future market uncertainty could be the basis for an extension.

Back in April 2020, the Federal Reserve established the Municipal Liquidity Facility (MLF) to help cushion the escalated cash flow pressures that state and local governments faced as a result of the COVID-19 pandemic. With the federal relief program’s looming Dec. 31 sunset date, the Fed must determine whether to extend the expiration date past year-end, which would allow municipal entities more time to apply for and utilize financial aid.

According to HilltopSecurities Head of Municipal Strategy and Credit Tom Kozlik, the MLF should stretch the expiration date into 2021, citing that the pandemic will continue to aggravate the financial impacts on municipalities and municipal investors.

“The reality is that while the course of the virus seems tame now compared to March and April, not much has really changed for the better in recent months,” Kozlik wrote in an Oct. 14 commentary. “Uncertainty remains and the market still does not know the extent to which state and local government revenues will be impaired. Also, there is a wide differential in how state and local government credits are being impacted so far.”

U.S. Department of Treasury Not Expected to Extend MLF
In response to a question submitted by Commissioner Bharat Ramamurti and Congresswoman Donna E. Shalala on the CARES Act Congressional Oversight panel, the U.S. Department of Treasury recently stated that they don’t believe that the emergency lending program for state and local governments should remain operational beyond 2020.

“At this time, the Treasury Department does not believe that the Municipal Lending Facility should be extended beyond its current expiration date of December 31, 2020. 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,” said the Treasury.

Arguments for Extending the MLF: Revenues are Down, “Normal” at Least a Year Away
The arguments for extending the MLF are based on lower revenues and a return to a state of "normal" being at least a year away, according to Kozlik. A primary reason for extension is because, “Market uncertainty like we saw in March and April could surface again and that is the environment the MLF was initially created for in the first place,” he says.

In terms of support for credit quality, Kozlik also stressed the importance of another round of unencumbered aid.

“Governments are looking for aid to stave off additional rounds of employment cuts, bring budgets as close to a neutral position as possible, and allow critical public service providers the ability to maintain service levels as close to pre-March 2020 as possible,” Kozlik wrote in an Oct. 22 commentary.

Learn More
For a more in-depth analysis of how remote work may impacting municipal ratings, read Kozlik’s recent municipal commentaries:

 

Follow Tom Kozlik on Twitter, @tomkozlik, or connect with him on LinkedIn.

The paper/commentary was prepared by Hilltop Securities (HTS). It is intended for informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product. Information provided in this paper was obtained from sources that are believed to be reliable; however, it is not guaranteed to be correct, complete, or current, and is not intended to imply or establish standards of care applicable to any attorney or advisor in any particular circumstances. The statements within constitute the views of HTS as of the date of the document and may differ from the views of other divisions/departments of affiliate Hilltop Securities Inc. In addition, the views are subject to change without notice. This paper represents historical information only and is not an indication of future performance. This material has not been prepared in accordance with the guidelines or requirements to promote investment research, it is not a research report and is not intended as such. Sources available upon request.

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