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Fiscal Agent of the United States
rCircular No. 2 6 9 1 1
L September 13, 1943 J

To All Banks, Other Financing Institutions, and Others Concerned,
in the Second Federal Reserve District:

For your information we set forth below the answers of the War Department, the NavyDepartment and the United States Maritime Commission to certain inquiries which have
thus far been made in connection with the broadened Regulation Y program outlined in our
Circular No. 2681 dated September 1, 1943, (the loans pursuant thereto being referred to as
" V T " loans).
1. Q. Is a guarantee agreement in order where
war production contractor has ample
working capital and only desires commitment because of doubts as to his future
cash position in the event of the cancellation of his war production contracts?
A. Y e s ; but at least a portion of the funds
to be provided under a " V T " loan agreement should be available to the contractor for financing war production as well
as for financing termination settlements.
This avoids any question as to the power
to guarantee a loan to be made available
solely after termination.
2. Q. W h a t is maximum maturity of commitments which would be approved by the
A. Three to three and one-half years, or
term of settlement provided in guarantee
agreement, whichever is shorter.
3. Q. Is it intended there should be a breakdown between amount committed for
"borrowed working capital" and amount
committed for freeing borrower's " o w n
working capital upon cancellations of his
war production contracts" or is it intended there should be over-all credit and
that the maximum amounts which may
be borrowed for the two purposes should
be limited by a loan formula?
A. It is intended that there should be an overall credit, and the maximum amounts which
may be borrowed may be borrowed for both
purposes or divided between the two
purposes, depending on agreement between
the borrower and the bank as to the loan
formula. The W a r Department will in
general permit the full credit to be used
for war production as well as on termination, but the Navy and Maritime Commission may in approving the terms of
the loan require a limitation on the

amounts to be drawn down before cancellation to amounts needed for financing
war production. A s indicated in question (1) a portion of the credit must be
so made available at the borrower's election even though he may not choose to
avail himself of the right to borrow until
after termination.
4. Q. Is credit available upon cancellations of
war production contracts to be limited
by amount of inventories, work in process, and accounts receivable, etc., which
are allocable to cancelled contracts?
A . No. The credit may be predicated on
total war production inventories and
work-in-process, and accounts receivable
attributable to both cancelled and uncancelled contracts.
In addition the
credit may be predicated upon moneys
which have been used or are to be used
concurrently to pay sub-contractors'
claims on cancelled contracts without
overlap, of course, with inventory or
5. Q. In determining borrower's own "working
capital" are bank loans, accounts payable, and other current liabilities to be
deducted from current assets?
A . Yes.
6. Q. Is amount of credit to be available upon
cancellation of war production contracts
to be limited by amount of borrower's
" o w n working capital"?
A. No, since the formula might include payments to subcontractors in excess of
then working capital or receivable representing a claim for facilities or expenditures expressly made reimbursable by
the procurement agency, or the borrower
may have a net minus working capital
or just a heavily extended position.

7. Q. Is amount of credit to be available upon
cancellation of war production contracts
to be limited by the proportion of borrower's "own working capital" which
the borrower's investment in inventories,
work in process, and accounts receivable
which are allocable to cancelled contracts bears to his aggregate investment
in inventories, work in process, and accounts receivable?
A. No, the credit to be available is to be a
percentage of the investment in war production inventories and work in process
and war production receivables and payments made or concurrently to be made
to subcontractors.
8. Q. Is credit available on cancellation of war
production contracts to be made available to subcontractors as well as prime
A. Yes.
9. Q. If borrower is prime contractor, may cancellation of war production contract
upon which he is subcontractor be made
a basis for credit?
A. Yes.
I.0. Q. Is it desired that guarantee agreements
should be so drawn that financing institutions must assume burden of verifying
inventories, goods in process and accounts receivable where loans are made
based on cancellation of war production
contracts or is it sufficient if loan agreement provides for certificates of borrower and provides that financing institution acting in good faith may rely
A. There is no change in policy in this respect from ordinary Regulation V loans.
The financing institution may provide in
the loan agreement for certification by
borrower. Inasmuch as the financing
institution in this type of loan will
always have at least a 10% interest, it is
believed that it will have sufficient incentive to exercise reasonable care to obtain
additional verification in those cases
where that appears to be necessary.
II. Q. Where borrower is presently being
financed by Regulation V loan, can
financing institution make commitment
separate and apart from outstanding loan
and guarantee and receive an independent guarantee therefor which does not
require the financing institution to waive
any protection afforded by section 5 of
outstanding guarantee agreement?
A. In general it is believed that the existing
V loan should be converted into a larger
V T loan where the latter type of loan
appears desirable. This will avoid seri-

ous problems of loans competing for
12. Q. Is the policy of the War Department
changed with respect to making Regulation V loans to borrowers who can
readily obtain needed credit accommodation without a guarantee?
A. No. It is the view of the War Department that any contractor engaged in war
production who needs money for that
production, including sufficient to cover
his tax liabilities with tax notes, can have
a Regulation V loan. If the amount of
borrowing sought is however, obviously
primarily for post-war protection, he
will have to take a new type V loan or
a " V T " loan. For instance, if a borrower
needs $7,000,000 for present war production and $20,000,000 to cover his war
production receivables and inventories
on termination, to permit him to use his
own working capital for re-conversion,
if the loan comes in at $20,000,000 it will
be classified as a V T loan. If it comes
in at $7,000,000 it will be classified as an
old form guaranteed loan. Moreover, in
the case of a weak contractor, the tendency of the W a r Department as heretofore will be to approve as a Regulation
V loan, a somewhat inflated credit on
the theory that the financing institution
needs additional protection in that type
of case.
13. Q. Where a bank makes a loan, after cancellation, under a commitment theretofore
given, does borrower pay interest on the
loan, or does service involved pay interest? If a correct interpretation of section 6, in such a case, is that the guarantor, rather than the borrower, pays interest, does not this section need revision?
This point is raised in view of fact that
first part of section 6 refers to adjustment of interest, which implies that borrower has previously paid it.
A. Where a bank makes a loan after cancellation under a commitment theretofore
given, interest is waived and guarantor
pays interest on a portion of loan proportionate to amount of cancellations, all as
provided in section 6 of guarantee agreement. Borrower must make request for
adjustment, and waiver of interest is
effective from adjustment notice date, as
provided by section 6. Not considered
necessary to revise section 6, inasmuch as
its provisions are applicable in the same
way under the broadened program as
under the ordinary type of V loan.
"Adjustment" referred to in section 6 is
the waiver of interest and suspension of
maturity on the portion of the loan

Additional copies of this circular will be furnished upon request.




Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102