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FEDERAL RESERVE BANK OF NEW YORK Fiscal A g e n t of the United States r Circular No. 2 6 8 1 L September 1, 1943 J REGULATION V WAR FINANCING To All Banks, Other Financing Institutions, and Others Concerned, in the Second Federal Reserve District : The following is the text of a press statement released in Washington, D. C. for publication in morning papers of September 1, 1943: "Government guaranteed V loans will be made available to war contractors and subcontractors on a much broader basis than heretofore, effective immediately, under a plan jointly announced today by the W a r and Navy Departments, the U. S. Maritime Commission and the Federal Reserve Board. " T h e plan is designed to assure contractors that their working capital invested in war production will not be frozen in the event of contract terminations. Interest on loans guaranteed under the new program will be assumed b y the Government upon termination of contracts as under present Regulation V guarantees. " T h i s decision to broaden industrial credit facilities was reached with a view to preventing any lag in war production which might be caused by fear on the part of contractors that their capital would be tied up as contracts are cancelled in response t o swiftly changing war requirements. This broadened V loan will g o far toward allaying such fears. " I n the past, advances under V loans have been restricted, in general, to working capital needs for war production. T h e broadening of the plan will enable contractors to obtain the use of most of their own working capital immediately upon 'termination of their contracts. Banks will be enabled to make such advances at once, and with a minimum of complications. T h e establishment of such credit arrangements will greatly minimize the problem of termination of war contracts. " T h e Services stress the fact that cancellation of contracts must not be construed as marking the beginning of a general curtailment of war production. On the contrary, with the war rapidly b e c o m i n g one of movement, with great allied offensives in progress and in prospect, materiel requirements are subject to sudden and unavoidable changes, and it is essential to remove all possible causes of delays in war production. "Details of the procedure for obtaining the liberalized V loans have gone forward to all Federal Reserve Banks from Washington. "Further Information Regarding the Broadened V Loan Program " T h e contractor or subcontractor will obtain a V loan exactly as at present except that, if the loan is intended to free his o w n working capital upon termination of contracts as well as to provide him with working capital needed to finance them, then there are to be two changes in the present guarantee agreement, v i z : " ( 1 ) T h e bank will be required at all times to have a participation in the loan and, accordingly* the original percentage of guarantee specified in the guarantee agreement will not b e increased by reason of contract cancellations, and (OVER) " ( 2 ) T h e bank must share with the Government any commitment fee, which may not exceed of 1 per cent per annum on the undisbursed portion of the credit, in the same proportion that the guarantee fee n o w bears to the interest payable on V loans, v i z : if the percentage of guarantee is 60 per cent, the Government's share is 10 per cent of the commitment fee. 65 % 70% 75% 80% 85% 90% 12^% 15% 17^2% 20% 22^% 25% " T h e amount of loans which a contractor will be entitled to obtain in the event of cancellations of his contracts will be stated in the loan agreement as a percentage of inventories, work in process, accounts receivable, and (without duplication) amounts paid or concurrently to be paid b y him to subcontractors or suppliers by reason of contract cancellations. Subcontractors and suppliers will receive protection under this program, because a borrower will be required to pay them whatever he owes them in connection with the items used as a basis for the borrowing. " L o a n agreements under the new program will include provision for such amounts of working capital to carry out war production contracts, as may be needed by the contractor in the particular case. In general, where the amount of credit needed to carry out the war production contracts is small in proportion to the amounts needed to free his o w n working capital upon contract terminations, the maturity of the credits under the new program may be longer and a minimum of restrictions will be placed upon the borrower by the guaranteeing agencies. " W h e n cancellations of the borrower's contracts occur, the maturity of that part of the loan proportionate to the amount of the contracts cancelled will be suspended and interest waived thereon, as is now provided under V guarantees. This suspension of maturity and waiver of interest will apply whether the funds have been advanced to the borrower before or after the cancellations have occurred." Additional copies of this circular will "be furnished upon request. ALLAN SPROUL, President.
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