The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDERAL RESERVE BANK OF NEW YORK Fiscal Agent of the United States r Circular No. 2 9 4 1 1 L May 5, 1945 J REGULATION Y T-Loans for Prime Contractors and Subcontractors Engaged in War Production To All Banks, Other Financing Institutions and Others Concerned in the Second Federal Reserve District: W e believe that all prime contractors and subcontractors should consider immediately whether they have made adequate arrangements to recover their working capital invested under war production contracts, in the event such contracts are terminated or cancelled for the convenience of the Government. Ordinarily, unless those engaged in war production have assured financing under a V or T guarantee arrangement or by other means, working capital employed in such production would not become available for other purposes until a claim had been prepared and submitted for approval and payment. If a claimant should be a subcontractor, particularly one below the first tier, it is possible his claim would not be paid until after the prime contractor had received his compensation from the government contracting agency. Among the methods of interim financing authorized by the Contract Settlement Act of 1944, probably the most simple and convenient is that afforded by so-called T-Loans made pursuant to Regulation V of the Board of Governors of the Federal Reserve System. The T - L o a n method of interim financing is available generally in respect of all war production prime contracts of the W a r Department or the Navy Department and all subcontracts thereunder. The financing can be limited to provide for the release of working capital invested in one particular contract if and when it is terminated, or can, where appropriate, be arranged to give broader coverage. At the time the application for a T-Loan is filed, provision may be made to include then existing contracts in the borrowing base when subsequently terminated. Under the T-Loan financing plan, a prime contractor or subcontractor may arrange with a commercial bank or other financing institution to obtain, upon cancellation or termination for the convenience of the Government, loans against ( a ) accounts receivable, ( b ) reimbursable expenditures for inventory (including direct labor, cost of raw materials and parts and supplies), ( c ) reimbursable amounts paid or to be paid to his subcontractors, ( d ) reimbursable manufacturing and administrative overhead, to the extent that these items are applicable to the prime contracts or subcontracts covered by the arrangement. If the T-Loan arrangement has been made before termination, the advance can be obtained promptly by the contractors subsequent to the termination. Such a T - L o a n is repayable f r o m the proceeds of the settlement of the claim which the borrower is required to file after a contract has been terminated. The T-Loan form of financing may be covered by a simple standard form of loan agreement which places a minimum of restrictions upon the borrower. A s part of a T - L o a n arrangement it is necessary for the financing institution to obtain a T - L o a n Guarantee Agreement, through the Federal Reserve Bank of its district, from either the W a r Department or the Navy Department. Such guarantees protect the financing institution against loss on the loan to an extent agreed upon between it and the guarantor. While both of these Services have the authority to guarantee T-Loans fully, guarantees in excess of 9 0 % will be considered only when the prospective borrower is small and financially weak, or in other exceptional circumstances. While T-Loans may be negotiated after, as well as before, contracts are terminated, and every effort will be made to process guarantee applications promptly, it is desirable for war production contractors who will require the protection afforded thereby to complete their arrangements prior to the event of termination in order to be certain of receiving such financing without undue delay. A n arrangement made in advance entails the payment by the contractor to the financing institution of a commitment fee on the average daily unused balance of the credit involved. Such fee cannot exceed of 1 % per annum. Moreover, we have been informed that pursuant to the provisions of the Joint Termination Regulation the expenses of such a fee may be properly included as a reimbursable cost in a termination claim. The financing institution's commitment to the prospective borrower in respect of termination financing may be cancelled by such borrower at any time in accordance with the terms of the contract between them. W e should appreciate it if you would communicate with all of your customers who are engaged in war production and who have not availed themselves of the protection afforded by the T-Loan procedure and point out to them the benefits to be obtained thereunder; also to urge them, if they anticipate the need for such financial protection, to arrange to have you file an application on their behalf immediately and not wait until their contracts are terminated or cancelled. Technical data respecting T-Loan procedure was furnished to you in our Circular No. 2837, dated September 12, 1944. W e shall be glad to supply you with any further information you may require. Additional copies of this circular will be furnished upon request. ALLAN SPROUL, President.
@FedFRASER