USPS Loses 20-Year FFB Borrowing Deal; Retains Access 

September 11, 2019

The Postal Service disclosed that it was unable to renew a very favorable borrowing agreement with the Federal Financing Bank of the U.S. Department of the Treasury.  The Postal Service first signed the agreement on April 1, 1999 and had renewed it annually until December 2018.  Then the FFB began renewing the Note Purchase Agreement for sixty–day periods.  Prior to the latest period ending on August 31, 2019 the USPS was unable to obtain another extension.  Thus, ends a 20-year run of a very flexible arrangement with the USPS lender. 

The 8-K filing with the Postal Regulatory Commission just before 5 pm on Friday, September 6 was published by the regulator on Monday, September 9.  It began with this description: 

On December 20, 2018, February 27, 2019, May 3, 2019, and July 1, 2019, the United States Postal Service (the “Postal Service”) filed with the Postal Regulatory Commission Current Reports on Form 8-K respectively disclosing the execution of the Twenty-Second, Twenty–Third, Twenty-Fourth, and Twenty-Fifth Amendments to a Note Purchase Agreement originally entered with the Federal Financing Bank (“FFB”) on April 1, 1999 (as amended, the “Original Agreement”). Those reports disclosed the FFB’s decision to extend the ability of the Postal Service to borrow under the Original Agreement for periods of only 60 additional days. The aforementioned December 20, 2018, February 27, 2019, May 3, 2019 and July 1, 2019 Current Reports on Form 8-K are hereby incorporated by reference.    

During the period of the current amendment, the Postal Service attempted to negotiate a new Note Purchase Agreement. However, a new agreement could not be reached and the Note Purchase Agreement expired, pursuant to the terms of the Twenty-Fifth Amendment to the Original Agreement, on August 31, 2019.    

The benefits to the Postal Service of the original agreement that spanned 20 years were described very well in the 1999 USPS Annual Report in the Liquidity section on pages 43 and 44.  It started with: 

Liquidity is the cash we have in the bank (the Postal Service Fund) and the amount of money we can borrow immediately.  In the 1990s, we have worked to rely less on the cash we have on hand and more on the ready availability of credit.  The change has saved our customers millions of dollars in interest expense.  Over the past few years, we have worked closely with the Department of the Treasury and its Federal Financing Bank (FFB) to put in place the tools we need to manage our cash and debt more effectively, including call options, floating rate debt with real-time call options, revolving credit lines, and notes on the shelf that we can draw upon with two days’ notice.   

The 1999 Annual Report goes on to describe in detail the ability of Postal Service financial managers to price and draw on new borrowings with a phone call.  It also explains the benefits of carrying near zero cash balances on 319 days in 1999. 

The 8-K points out that there still are contractual credit lines with the FFB that run through April 2020 and April 2021, which should cover USPS liquidity needs.  Further, the USPS law allows the Postal Service to have up to $15 billion in borrowings outstanding at any time.  It requires the USPS to give the Treasury the first right to purchase any postal debt with 15 days’ notice.  If Treasury decided not to buy postal debt, which it did once in the 1970s, the Postal Service is free to borrow elsewhere, albeit at a higher cost.  But the Treasury is very unlikely to allow USPS to issue debt in the open markets as a matter of policy 

The bottom line is that loss of the favorable Note Purchase Agreement should not cause a liquidity crisis any earlier than it would otherwise happen.  The loss is more the opportunity cost of not running postal cash management as effectively as possible. And even before the termination of the NPA, the Postal Service was not carrying zero cash balances as it did in 1999.  With historically low interest rates, and very little spread between short and long-term rates, the financial benefits of cash minimization are much less than they were before.