FDIC Modifies TLGP to Guarantee Mandatory Convertible Debt

At its February 27, 2009 board meeting, the FDIC approved an interim rule (the “Interim Rule”) modifying its Temporary Liquidity Guarantee Program (“TLGP”) to guarantee Mandatory Convertible Debt.

The Interim Rule was described in the accompanying staff memorandum as a “very narrow targeted improvement to the TLGP.” The Interim Rule became effective on February 27, 2009. Comments on the Interim Rule must be received by March 19, 2009.

The key aspects of the Interim Rule are summarized below:

• Mandatory Convertible Debt. The TLGP is expanded to include senior unsecured debt that meets the definition of “eligible debt” under the TLGP and is required by the terms of the debt instrument to convert into common shares of the issuing entity on a fixed and specified date on or before June 30, 2012, unless the issuing entity (1) fails to timely make any payment required under the debt instrument, or (2) merges or consolidates with any other entity and is not the surviving or resulting entity.
• Under the Interim Rule, the FDIC would guarantee interest payments, and principal payments would also be guaranteed up to the amounts paid by the holders under the issuance.
• Eligible Issuances. The Interim Rule extends the FDIC guarantee to Mandatory Convertible Debt issued by TLGP participants from February 27, 2009 through June 30, 2009, the existing end date for TLGP issuances generally.
• Conversion Date. The conversion date for Mandatory Convertible Debt must be on or before June 30, 2012, the current date on which coverage under the TLGP expires.
• Required Disclosure. Issuers of FDIC-guaranteed Mandatory Convertible Debt will be required to modify the previously mandated disclosure to indicate that the expiration date of the FDIC’s guarantee is the earlier of the mandatory conversion date or June 30, 2012.
• Same Issuer Capacity Limitations. The interim rule does not modify the maximum amount of debt that a participant may issue with the benefit of the FDIC guarantee.
• Regulatory Approval. Prior to issuing Mandatory Convertible Debt, a prospective issuer must apply to the FDIC and its primary Federal banking regulator to obtain advance written approval for the issuance. In addition to the requirements imposed for other special approval requests under the TLGP, the Mandatory Convertible Debt application must include (i) the proposed date of issuance, (ii) the total amount of Mandatory Convertible Debt to be issued, (iii) the mandatory conversion date, (iv) the conversion rate, and (v) confirmation that certain required applications and notices have been submitted to the issuer’s primary Federal banking regulator.
• Capital Treatment Only Upon Conversion. In response to a question from Comptroller of the Currency John C. Dugan at the Board meeting, FDIC staff confirmed that Mandatory Convertible Debt would not be eligible for Tier 1 regulatory capital treatment until it converts into common stock.
• No Deductibility of Interest Payments. As described in the Interim Rule, we expect that interest payments on Mandatory Convertible Debt securities that convert by their terms into common stock would not be income tax deductible.
• Assessment Fee. The TLGP assessment fee charged to issuers of Mandatory Convertible Debt will be based upon the time period from issuance through the mandatory conversion date.