The Federal Reserve released new details about the current iteration of its Term Asset-Backed Securities Loan Facility, or TALF, on May 12 (the “May 12 Release”), including a revised term sheet (the “Term Sheet”) for the facility and the initial set of frequently asked questions (the “FAQs”).  The Term Sheet replaces a previously published version from April 9.  Together, the new documents bring the final terms of the program into greater focus—though the Federal Reserve has not yet published the full terms and conditions for participation in the facility and has not announced a launch date. 

The current TALF (commonly referred to in the market as TALF 2.0) is based on the original TALF (TALF 1.0) that was created during the 2008/2009 financial crisis.  In each case the facility uses an “equity” investment from the U.S. Treasury in a Federal Reserve special purpose vehicle (SPV) along with leverage from the Federal Reserve to make up to $100 billion of non-recourse three-year loans secured by eligible asset-backed securities (ABS).  As with TALF 1.0, we expect the current TALF to provide pricing support to the ABS market by providing favorable credit to ordinary course ABS purchasers, as well as incentivizing investment managers to set up TALF-focused funds that seek to generate attractive returns with ABS purchases and TALF leverage.

Key New Information in the May 12 Release

• The basic structure and economic terms of the facility remain unchanged but the May 12 Release answered some detailed questions about borrower and collateral eligibility and some operational details.

• Helpful changes related to leveraged loan collateralized loan obligations (CLOs) included the express allowance of CLOs with a non-U.S. issuer (since utilizing a Cayman Islands issuer is market practice) and the eligibility of CLOs with underlying loans where the lead or co-lead arranger was a U.S entity, even if not all originating lenders were U.S.-based, and loans that were originated on or after January 1, 2019.  Though the May 12 Release also specified concentration and other quantitative metrics that must be met by the CLO pool, including that all underlying loans are current as to principal and interest, and provided that interest rates on TALF loans for CLOs would be based on a spread to the Secured Overnight Financing Rate (SOFR).

• The FAQs included the “Material Investor” concept from TALF 1.0—which is a direct or indirect owner of 10% or more of any outstanding class of securities—though in this case specified that the identity of such Material Investors would be subject to disclosure by the Federal Reserve and that borrowers could not have foreign governments as Material Investors in the fund or investment manager.

• Borrowers would be required to certify that they are unable to secure adequate credit accommodations from other banking institutions and are not insolvent.  With regard to the former, the FAQs go on to state that this means current financing options have pricing or terms that are inconsistent with a normal, well-functioning market.

• Collateral will generally not be eligible if the borrower (or an affiliate) is also a borrower with respect to a debt obligation included in the ABS, or if the borrower (or an affiliate) was also the originator that securitized the ABS.

• Borrowers may pledge ABS issued on the same day they subscribe for the TALF loan, or eligible ABS acquired in arms-length secondary market transactions within 30 days prior to such date.

• As in TALF 1.0, the loan amount is generally determined based on market value of the ABS, which is capped at par (except for Small Business Administration ABS, which is capped at 105% of par).  Therefore securities purchased at a premium are effectively only eligible for a lower leverage amount than implied by the stated haircut.

Loan Terms

• Three-year maturity;

• Non-recourse to borrower;

• Fully secured by eligible ABS — with amounts advanced based on a haircut schedule by sector, subsector and average maturity and haircuts of between 5 and 22% generally applied to the market value of the ABS[1];

• No stated maximum loan amount per borrower, though the total amount initially available on an aggregate basis under the current TALF is $100 billion;

• Pre-payable in whole or in part, but generally no substitution of collateral;

• Interest rates between 75 and 150 basis points over the applicable index, with amounts and relevant index differing by collateral type;

• Administrative fee of 10 basis points of the loan amount will be assessed by the SPV on the settlement date.

Eligible Borrowers

• The TALF is open to U.S. businesses that (a) are created or organized in the U.S. or under the laws of the U.S., (b) have significant operations[2] and a majority of their employees in the U.S., and (c) maintain an account relationship with a primary dealer.

• As with other Federal Reserve and U.S. Treasury assistance programs under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the conflict of interest provision would exclude participation by specified members of the executive branch or Congress, their immediate families and entities that they “control”.

• A U.S. subsidiary or U.S. branch or agency of a foreign bank may also be an eligible borrower, provided that it satisfies all of the relevant eligibility criteria.

• An investment fund (even if newly formed) created or organized in the U.S. and managed by an investment manager that is created or organized in the U.S. and has significant operations in and a majority of its employees in the U.S. may also be an eligible borrower.

• A U.S. business (or an investment manager in the case of investment funds) with a Material Investor that is a foreign government is not an eligible borrower.

• Borrowers must at all times meet the eligibility requirements and therefore must have a mechanism to continuously monitor direct and indirect investors and escalate any Material Investor to their TALF agents for due diligence review.

• Borrowers must certify that they are unable to secure adequate credit accommodations from other banking institutions, which may be based on unusual economic conditions in the market (i.e., lending may be available, but at prices or on conditions inconsistent with a normal, well-functioning market).

Eligible Collateral

• ABS Structure — Eligible collateral must be ABS that are U.S. dollar denominated, created via cash purchases of underlying collateral (versus synthetic exposure from derivatives) and excludes ABS squared (ABS with other ABS as underlying collateral) and ABS with interest payments that have pre-set changes (step up or step down) on specified dates.  Eligible collateral must be cleared through the Depository Trust Company and may be registered or privately placed.  Eligible ABS may not be optionally redeemable within three years of the loan disbursement date (other than pursuant to customary clean-up calls).

• Issuance Date — Eligible ABS (other than CMBS, SBA Pool Certificates and Development Company Participation Certificates) must have been issued on or after March 23, 2020, and at least 95% of the underlying credit exposures must have been newly issued (other than CLOs).  For CMBS, only “legacy” securities—defined as issued prior to March 23, 2020—are eligible. SBA Pool Certificates and Development Company Participation Certificates must have been issued on or after January 1, 2019.  At least 95% of the underlying collateral loans in leveraged loan CLOs must be loans that were originated or refinanced on or after January 1, 2019.

• Credit Ratings Requirement — Eligible ABS must have a long-term or short-term credit rating in the highest investment grade category from at least two eligible nationally recognized statistical rating organizations (“NRSROs”) and may not have a lower credit rating from any eligible NRSRO. Currently, the eligible NRSROs are S&P, Moody’s and Fitch. The Federal Reserve may consider including other NRSROs under the TALF.  ABS that are on review or watch for downgrade are generally not eligible.

If a CMBS is downgraded or placed on review or watch for downgrade after the subscription date but before the settlement date, the New York Fed will not deem it ineligible but will incorporate any associated declines in value into its valuation, which may affect the TALF amount extended against the CMBS. 

• U.S. Nexus — 95% or more of the underlying credit exposures must (a) for newly issued ABS (except for CLOs), be originated by U.S.‐organized entities (including U.S. branches or agencies of foreign banks), (b) for CLOs, have a lead or a co‐lead arranger that is a U.S.‐organized entity, and (c) for all ABS (including CLOs and CMBS), be to U.S.‐domiciled obligors or with respect to U.S. real property.

• Underlying Exposure Categories — Eligible ABS must be based on the following underlying credit exposures:

  • Auto loans and leases;

  • Student loans;

  • Credit card receivables (both consumer and corporate);

  • Equipment loans and leases;

  • Floorplan loans

  • Premium finance loans for property and casualty insurance;

  • Certain small business loans that are guaranteed by the Small Business Administration;

  • Leveraged loans; or

  • Commercial mortgages.

• Specific Exclusions from Eligibility:

  • New issue CMBS (issued on or after March 23, 2020) and any single asset, single borrower (SASB) CMBS;

  • CMBS that are junior to other classes of the same securitization;

  • CLOs that are based on commercial real estate loans (CRE CLOs);

  • Managed CLOs (Eligible CLOs may not include a period of reinvestment of collateral proceeds within three years after the TALF disbursement);

  • Legacy ABS (other than CMBS, SBA Pool Certificates and Development Company Participation Certificates) issued prior to March 23, 2020;

  • Legacy SBA Pool Certificates and Development Company Participation Certificates issued prior to January 1, 2019; or

  • Interest-only, principal-only or floating rate CMBS—only fixed or weighted average coupon securities paying principal and interest are eligible.

  • For a CLO to be eligible, the underlying leveraged loans must be current on principal and interest, senior secured, and subject to certain concentration limitations: no more than 10% second lien loans, 7.5% DIP loans, 4% to any single underlying obligor and 65% covenant lite loan for broadly syndicated CLOs (or 10% for middle market CLOs) as of the subscription date and eligible CLOs must also include at least one overcollateralization test.

• Eligibility of Other Collateral — The Term Sheet continues to note that expanding the scope to other asset classes “will be considered in the future”.  In TALF 1.0, the Federal Reserve acted several times to expand the scope of the facility to other categories of securities and this statement indicates the possibility of that occurring with the current TALF as well.

Timing and Process for Borrowing Under TALF

• The Federal Reserve will update the FAQs from time to time.  The New York Fed will publish a Master Loan and Security Agreement (MLSA) which will be the legal arrangement governing the TALF loans and associated pledge of eligible ABS.  The FAQs, the terms of MLSA and the terms announced by the Federal Reserve will constitute the terms and conditions for TALF loans.

• The TALF will be administered by the New York Fed via monthly TALF loan subscription dates when a borrower may submit loan requests, with the borrower’s primary dealer operating as agent to access the TALF and for delivery of collateral, administrative fee and any applicable margin and receipt of funds.  The New York Fed would then allocate loans based on the subscription requests.  TALF agents will initially consist of the primary dealers.  The Federal Reserve will consider increasing the number of TALF agents.

• The Federal Reserve will disclose the name of each participant, each Material Investor of a borrower, the amounts borrowed, the interest rate charged, the value of pledged collateral and the overall costs, revenues and fees on a monthly basis and will report related balance sheet items weekly on the H.4.1 statistical release.

The TALF May 12 Term Sheet is available here and the FAQs are available here.

[1] The loan amount for each CMBS is equal to (1) the base value minus (2) the base dollar haircut.  Base value is the lesser of the purchase price, market value at subscription and the New York Fed’s value based on collateral review, and may not be greater than par.  The base dollar haircut applies a haircut based on par, which effectively increases the haircut as a percentage of market value for market values less than par.

[2] According to the examples under the FAQs, a borrower (or an investment manager in the case of investment funds) with greater than 50% of its consolidated assets in, annual consolidated net income generated in, annual consolidated net operating revenues generated in, or annual consolidated operating expenses (excluding any expenses associated with debt service) generated in the U.S. as reflected in its most recent audited financial statements would be deemed to have “significant operations in the U.S.”