On April 9, 2020, the Federal Reserve issued an updated term sheet for the Term Asset-Backed Securities Loan Facility (“TALF”).  Under TALF, the Federal Reserve will make an equity investment of $10 billion in a special purpose vehicle (“SPV”) that will in turn make up to $100 billion of non-recourse loans fully secured by eligible ABS.   

The stated purpose in establishing TALF is to help meet the credit needs of American consumers and businesses by facilitating the issuance of asset-backed securities.  Highlights of the changes to the 3/23/20 draft of the TALF term sheet include (i) the addition of highly rated newly issued collateralized loan obligations (“CLOs”) and legacy commercial mortgage-backed securities (“CMBS”) as eligible collateral, and (ii) providing pricing information (see summary below) and the schedule of “haircuts” for valuing various ABS collateral.

Unfortunately, the new TALF term sheet does not truly modernize the program from its founding as a response to the financial crisis of 2008.  Industry experts have promoted the expansion of the eligible asset classes to include assets that either were not particularly relevant to the consumer finance market or didn’t exist when the original TALF program was in effect.  Some of the missing asset classes are:

• unsecured consumer loans originated by marketplace lenders (a finance product that wasn’t a consumer staple in 2008-10 but now provides billions of dollars of credit to consumers),

• residential mortgage loans that do not qualify for the safe harbor protections introduced under the Dodd-Frank Act, also known as non-QM loans,

• private-label RMBS, and

• mortgage servicing rights.

There is still an opportunity for Treasury to heed the calls of the industry, particularly with respect to assets and borrower eligibility.  The Federal Reserve is taking comments on the TALF term sheet until April 16, 2020.  The Sheppard Mullin team is actively assessing the potential impacts and is willing to work with you to assemble comments to the Federal Reserve.  The link to the comment page is here.

Highlights of TALF as of 4/9/20

Facility:  $100 billion of non-recourse loans fully secured by Eligible Collateral.

Eligible Borrowers: All U.S. companies that own eligible collateral and maintain an account relationship with a primary dealer are eligible to borrow under the TALF.  A “U.S. company” is defined as a business that is created or organized in the United States or under the laws of the United States and that has significant operations in and a majority of its employees based in the United States.

Eligible Collateral:

• Highest investment-grade rated securities from at least two nationally recognized statistical rating organizations (“NRSROs”), and no credit rating below the highest investment-grade rating category from an eligible NRSRO.

• Substantially all assets underlying eligible ABS must be newly originated by a US Company and the issuer of the ABS must be a US Company except CMBS for which the underlying credit exposure is to real property located in the U.S. or one of its territories.

• Eligible ABS must be issued on or after March 23, 2020 except CMBS which must have been issued prior to March 23, 2020.

• Underlying credit exposures are one of the following:

• Auto loans and leases;

• Student loans;

• Credit card receivables (both consumer and corporate);

• Equipment loans and leases;

• Floorplan loans;

• Insurance premium finance loans;

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

• Leveraged loans; or

• Commercial mortgages.

Collateral Valuation: A haircut schedule was attached to term sheet.

Pricing:

• CLOs, the interest rate will be 150 basis points over the 30-day average secured overnight financing rate. For SBA Pool Certificates (7(a) loans), the interest rate will be the top of the federal funds target range plus 75 basis points. For SBA Development Company Participation Certificates (504 loans), the interest rate will be 75 basis points over the 3-year fed funds overnight index swap (“OIS”) rate.

• For all other eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 125 basis points over the 2-year OIS rate for securities with a weighted average life less than two years, or 125 basis points over the 3-year OIS rate for securities with a weighted average life of two years or greater. The pricing for other eligible ABS will be set forth in the detailed terms and conditions.

Click for the TALF 4/9/2020 Term Sheet.

As you are aware, things are changing quickly and there is no clear-cut authority or bright line rules.  This is not an unequivocal statement of the law, but instead represents our best interpretation of where things currently stand.  This article does not address the potential impacts of the numerous other local, state and federal orders that have been issued in response to the Covid-19 pandemic, including, without limitation, potential liability should an employee become ill, requirements regarding family leave, sick pay and other issues.