The Fed Put In Loan Provisions

Posted by John Carney, Jun 24, 2008, 4:34pm

Federal Reserve And Loan Agreements.jpgCorporate loan agreements are being drafted to include an express provision allowing lenders to transfer their loans to the Federal Reserve, a loan expert tells DealBreaker. The Fed has been accepting a much broader range of collateral in exchange for short-term loans through what is known as Fed "repos." In a repo, dealers bid on borrowing money versus various types of general collateral.

The new provisions seem to anticipate the possibility that banks might use corporate loans in repos, accessing cash from the Fed in exchange for the credits. In the past the assignment provisions of loan agreements that governed transfers typically did not expressly permit transfer to the Fed. Instead, they permitted assignment to others commercial banks, insurance companies, investment or mutual funds or other entity that is an "accredited investor" under securities laws. The new provision illustrates the ever more pervasive role the Fed has in the current credit markets.

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Posted in: Fed, Loans

Comments

Posted by guest, Jun 24, 2008 4:46PM

That's one big ass CLO

Posted by guest, Jun 24, 2008 4:52PM

Carney, what law firm(s) is doing this, what banks are demanding this, and what corporations are so bent up to refinance that they are allowing this in their credit agreement?

Posted by guest, Jun 24, 2008 4:58PM

Out of curiosity, what is your source? Not because I dont believe you, but because this could be a huge liability.

Posted by guest, Jun 24, 2008 5:07PM

4:46:

or a true National Bank.

Posted by John Carney, Jun 24, 2008 5:09PM

Obviously I can't reveal the source. It's someone involved in the loan business from at a large credit market investor.

Posted by guest, Jun 24, 2008 5:20PM

I call bullshit. I'm in the process of amending and restating a credit agreement for my company. None of the 15 banks in our bank group has said bupkis about it.

Posted by guest, Jun 24, 2008 5:37PM

@5:20 Agree with you that this is bullshit. Any borrower would be stupid to accept the provision and any bank would be stupid to put it in there because it would show how weak their capital situation is. But then again, I wouldn't put it past Citi. Oh wait, are they even too big to fail anymore?

Posted by guest, Jun 24, 2008 6:15PM

These provisions aren't new. I have an '06 credit agreement in front of me that has such a provision.

Posted by guest, Jun 24, 2008 11:08PM

As long as rates, maturity etc stay the same and nothing is accelerated upon hand over to the FED - what's the big deal?

In fact, if I were the borrower, I'd suggest to put the language in. Ups the change to be able to buy the debt back later at a discount.

What am I missing?

Ari

Posted by guest, Jun 25, 2008 5:46AM

I just love the idea of the Fed being used as a dumping ground for all sorts of loans that are not worth the paper they're written on.

Luv it!

Posted by guest, Jun 25, 2008 9:26AM

@5:38 funny you mention Citi as I am in an amending/restatement of a CF, and they're the lone pain-in-the-ass in the whole process.

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