The Board of Governors of the Federal Reserve System (the “Federal Reserve”), through the Federal Reserve Bank of New York, has lowered the pricing methodology for its Municipal Liquidity Facility (the “MLF”), the CARES Act lending program for state and local governments affected by COVID-19.  Under the MLF, a series of tax-exempt municipal notes will bear interest at a fixed rate that is based on a comparable maturity overnight indexed swap rate plus a spread.  The spread corresponds to the long-term ratings to be used for notes as of the pricing date.  On August 11^th, the Federal Reserve lowered this spread by 50 basis points for each rating category, from 100 basis points (down from 150 basis points) for AAA/Aaa-rated issuers to 540 basis points (down from 590 basis points) for below-investment-grade-rated issuers.  The Federal Reserve also lowered the pricing for a series of taxable municipal notes, with the interest rate now being determined by dividing the tax-exempt interest rate by 0.70 (up from 0.65).

To date, only the State of Illinois has participated in the MLF, with the issuance of $1.2 billion in general obligation bond anticipation notes on June 5, 2020, maturing in one year and bearing interest at 3.8%.  Given favorable market conditions of late, it remains to be seen whether the reduced interest rates will be enough to attract additional issuers to the MLF.