TALF Extended to Legacy CMBS and CLOs

On April 9, 2020, the Federal Reserve unveiled an array of additional programs to bolster the U.S. economy in response to the COVID-19 pandemic. One of those programs is aimed at expanding the coverage of the Federal Reserve’s previously announced Term Asset- Backed Securities Loan Facility (TALF). TALF is a facility intended to help lenders meet the credit needs of households and U.S. businesses by supporting the issuance of asset-backed securities. A summary of the facility is available here.

Today’s announcement includes the following updates to the TALF program:

• Eligible Collateral to include Certain CMBS and CLOs. Both commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLOs) other than commercial real estate CLOs (CRE CLOs) will be included in the assets that are eligible to be pledged to the Federal Reserve under the TALF.

  • CMBS must have been issued prior to March 23, 2020 and the underlying credit exposures must be to real property located in the United States or one of its territories.

  • Only static CLOs will be eligible collateral. The eligible issuer must be a U.S. company and all or substantially all of the underlying loans must be “newly issued.” Whether the standard CLO Cayman/Delaware co-issuer structure will be an eligible issuer and the meaning of “newly issued” are open questions.

• Eligible Borrower. The definition of Eligible Borrower was updated to “a business that is created or organized in the United States or under U.S. laws and that has significant operations in and a majority of its employees based in the United States.”

• Exclusions from Eligible Collateral. Single‐asset, single‐borrower (SASB) CMBS and CRE CLOs will not be eligible collateral. In addition, servicing advance receivables are no longer eligible collateral.

• Other Additional Eligible Collateral. Equipment leases and leveraged loans were also added as eligible collateral.

These updates are reflected in a new term sheet released by the Federal Reserve that is available here. The term sheet includes the “haircut” schedule that will be imposed on the different asset-classes that are permitted to be purchased under the TALF, which is consistent with the schedule used for the TALF program established in 2008. A comparison of the term sheet released on April 9, 2020 against the original term sheet released on March 23, 2020 is available here.

Feedback

As the Federal Reserve and the Treasury Department finalize the programs, they continue to seek input from lenders, borrowers and other stakeholders. Comments may be sent until April 16, 2020 on the feedback form provided here.