Risk & Compliance

BofA, Morgan Pull Off First U.S.-backed Deals

Bank of America's involves $9b in notes, while Morgan Stanley sells $350m of global notes.
Stephen TaubDecember 2, 2008

In deals backed by the U.S. government’s guarantee programs, Bank of America raised $9 billion and Morgan Stanley sold $350 million in notes.

BofA sold $6.75 billion of 3.5-year fixed-rate notes, $1 billion of 2-year floating-rate notes, $750 million of 3-year quarterly floating-rate notes and $500 million of 3-year monthly floating-rate notes, Reuters reported. Morgan Stanley’s sale involved global notes due in March 2011.

The two sales — coming under the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program — are likely to become models for what could become a slew of financings backstopped by FDIC guarantees.

The TLGP has two primary components: The Debt Guarantee Program, by which the FDIC will guarantee the payment of certain newly-issued senior unsecured debt, and the Transaction Account Guarantee Program, by which the FDIC will guarantee certain noninterest-bearing transaction accounts.

Under the Debt Guarantee Program, the FDIC would stand behind all newly-issued senior unsecured debt up to prescribed limits issued by participating entities from Oct. 14, 2008, through June 30, 2009. The guarantee would not extend beyond June 30, 2012. A so-called interim rule that is part of the plan says that, as a result of the guarantee, the unpaid principal and contract interest of an entity’s newly-issued senior unsecured debt would be paid by the FDIC if the issuing insured depository institution failed or if a bankruptcy petition were filed by the issuing holding company.

“The FDIC has created this program to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount,” the rule states.

For now, financial services firms are apparently jockeying to qualify for this assistance. For example, CIT Group, which recently applied to the Federal Reserve Board to become a bank holding company to take advantage of the government’s rescue programs, may also be eligible to receive TLGP funds. In a November research report, analysts Sameer Gokhale and Brendan Sheehy of Keefe, Bruyette & Woods, calculated that CIT would potentially be allowed to issue nearly $10 billion of guaranteed debt under the program rules.