In response to the economic consequences of the measures being taken to contain the spread of the novel coronavirus (COVID-19), the Board of Governors of the Federal Reserve System (the "Federal Reserve") revived the Term Asset-Backed Securities Loan Facility ("TALF"), a program it first deployed in 2008 in response to the recession. The new TALF program,1 authorized under section 13(3) of the Federal Reserve Act and using funds appropriated to the Exchange Stabilization Fund under section 4027 of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), will provide up to US$100 billion in loans from the Federal Reserve Bank of New York ("New York Fed") to certain eligible investors for the purchase of asset-backed securities ("ABS") in the highest rating category that are backed by underlying credit exposures (including auto loans and leases, student loans, credit card receivables, equipment loans and leases, floorplan loans, premium finance loans, small business loans, leveraged loans and commercial mortgages) that meet certain origination criteria (such asset-backed securities, "Eligible ABS Collateral").
Under TALF, the New York Fed will, via a special purpose vehicle, issue loans to investors who meet certain eligibility requirements (described below) for the purchase of Eligible ABS Collateral (such loans, "TALF Loans"). TALF Loans will be issued to borrowers through "TALF Agents," will be secured by the Eligible ABS Collateral and will have a maturity date of the earlier of (x) three (3) years from incurrence and (y) the maturity date of the Eligible ABS Collateral. The maximum amount of each TALF Loan is equal to the market value (capped, for most classes of Eligible ABS Collateral, at par) of the Eligible ABS Collateral minus a haircut, as specified below. TALF Loans will be non-recourse to the borrower except in limited circumstances. As currently structured, borrowers will be able to request one or more TALF Loans on fixed days each month. Below is a sample structure chart for a TALF Loan:
It is expected that the advance rates and interest rates on TALF Loans will be as follows:
- The maximum loan amount for CMBS Eligible ABS Collateral is equal to (1) the Base Value minus (2) the Base Dollar Haircut. "Base Value" is equal to the least of: (1) the dollar purchase price on the applicable trade date, (2) the market price as of the subscription date, and (3) a value based on the New York Fed's collateral review, provided, however, that the base value shall not be greater than par. "Base Dollar Haircut" is equal to: (1) for CMBS with an average life of five years or less, fifteen percent (15%) or (2) for CMBS with an average life greater than five (5) years, fifteen percent (15%) plus one (1) percentage point for each additional year (or portion thereof) of average life beyond five (5) years. No CMBS may have an average life beyond ten (10) years.
- The weighted average life for auto, credit card, equipment, floorplan and premium finance ABS must be five (5) years or less. For new-issue collateral other than these, the haircut will increase by one (1) percentage point for every year of average life beyond five (5) years. For legacy CMBS that have weighted average lives beyond five (5) years, the base dollar haircuts will increase by one (1) percentage point of par for each year of average life beyond five (5) years. Weighted average lives for all securitizations are capped at ten (10) years.
- "OIS" means the federal funds overnight index swap rate.
In addition, on each settlement date the borrower must pay an administrative fee to the New York Fed special purpose vehicle equal to ten (10) basis points of the TALF Loan. An investor may borrow against any Eligible ABS Collateral. However, if the Eligible ABS Collateral is not acquired on the same day the investor borrows under the TALF Loan, it must have been acquired in an arm's length secondary market transaction no more than thirty (30) days prior to the TALF Loan subscription date.
With respect to voting rights, the borrower under a TALF Loan may not exercise any voting or consent rights without the prior consent of the New York Fed.
No new TALF Loans will be made after September 30, 2020, unless TALF is extended by the Federal Reserve (such date, the "TALF Termination Date").
A US business that owns Eligible ABS Collateral (see below) may borrow from TALF if it meets the following requirements (such requirements, the "Borrower Eligibility Requirements," and any US business or investment fund that meets such requirements is an "Eligible Borrower:")
The borrower is created or organized in the United States.
Eligible Borrowers may include entities or institutions organized as limited liability companies, partnerships, banks, corporations and business or other non-personal trusts, provided such entities or institutions are created or organized in the United States.
An investment fund2 will meet this requirement if it is created or organized in the United States and managed by an investment manager that is created or organized in the United States and has significant operations in and a majority of its employees based in the United States.
A US subsidiary or US branch or agency of a foreign bank would be considered to be created or organized in the United States or under the laws of the United States, provided such branch or agency satisfies the other criteria to qualify as an Eligible Borrower under TALF.
The borrower has significant operations in and a majority of its employees based in the United States
The Federal Reserve has not strictly defined "significant operations," but has suggested the following examples of what would satisfy this requirement with respect to determining eligibility for participation in TALF:
"A borrower (or an investment manager (in the case of investment funds)) with greater than 50 percent of its consolidated assets in, annual consolidated net income generated in, annual consolidated net operating revenues generated in, or annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) generated in the United States as reflected in its most recent audited financial statements."
The borrower maintains an account relationship with a primary dealer
In order to participate in the TALF program, each borrower must be a customer of a primary dealer (and have entered into a customer agreement authorizing the primary dealer to act as the borrower's agent for purposes of the TALF program. The primary dealer, on behalf of the borrower, will be required to enter into a Master Loan and Security Agreement ("MLSA") with the New York Fed, as lender, and the administrator and custodian. A current list of primary dealers is attached as Schedule II hereto.
The borrower has no Material Investor that is a foreign government
Any US business or, with respect to an investment fund that borrows under TALF, any investment manager of such investment fund, is ineligible to participate in TALF if any Material Investor of such US business or investment manager is a foreign government. A "Material Investor" is a person who owns, directly or indirectly, ten percent (10%) or more of any outstanding class of securities of an entity.
An Eligible Borrower will be required to make an ongoing representation in the MLSA that it is and will remain an Eligible Borrower for as long as the TALF Loan is outstanding. Accordingly, a TALF borrower is expected to have a mechanism for continuously monitoring its direct and indirect investors as long as the TALF Loan is outstanding. If any entity's direct or indirect ownership interest in the borrower reaches the Material Investor threshold (as defined above), the borrower must escalate such Material Investor to its TALF Agent for due diligence review.
It is expected the Federal Reserve will publicly disclose information on a monthly basis regarding TALF, including information regarding any Material Investor of an Eligible Borrower.
The borrower is unable to secure adequate credit accommodations from other banking institutions.
An Eligible Borrower will be required to certify that it is unable to secure adequate credit accommodations from other banking institutions and that it is not insolvent. This certification may be based on unusual economic conditions in the market or markets intended to be addressed by TALF. Lack of adequate credit does not mean that no credit is available. Lending may be available, but at prices or on conditions that are inconsistent with a normal, well-functioning market.
The borrower has no conflict of interest under of section 4019 of the CARES Act
An Eligible Borrower may not, and will be required to certify that it is not, controlled by a "covered individual" as defined by section 4019 of the CARES Act.3
Eligible Collateral for the TALF Loans includes US dollar ABS that have a "AAA" or similar credit rating that clears through the Depository Trust Company. The underlying credit exposures for the Eligible ABS Collateral must fall into one (1) of the nine (9) enumerated categories.
Eligible ABS Collateral may consist of master trusts with respect to certain TALF-eligible ABS asset classes that are backed by dynamic pools of receivables where consumers and businesses continuously draw on and repay their credit lines (such ABS asset classes, "Master Trust ABS"). The TALF-eligible master trusts may refinance existing Master Trust ABS provided, that (1) the maturity date4 of the refinanced Master Trust ABS is prior to the TALF Termination Date, and (2) the amount of the master trust Eligible ABS Collateral must not exceed the amount of maturing Master Trust ABS.5
The chart below summarizes the differing requirements for each category of underlying credit exposures and the related Eligible ABS Collateral.
- Eligible Floorplan Receivables may include auto floorplan ABS and non-auto floorplan ABS.
- In addition to the requirements set forth in this chart, CLOs are subject to the following requirements: (1) loans with interest rates tied to LIBOR are generally expected to have adequate fallback language, (2) the CLO concentration limits may not exceed ten percent (10%) for second lien loans, seven and five tenths percent (7.5%) for debtor-in-possession loans, sixty five percent (65%) for cov-lite loans (in a broadly syndicated CLO, ten percent (10%) for cov-lite loans (in a middle market CLO) and four percent (4%) for any single obligors and (3) the CLO must include at least one (1) overcollateralization test directing cash flows from lower tranches to the TALF eligible tranche.
- No single-asset single-borrower CMBS (SASB CMBS) or commercial real estate CLOs (CRE CLOs) are permitted.
- Rating may not be on review or watch for downgrade. Eligible ABS Collateral must obtain the rating without the benefit of a third-party guarantee.
- Explicit ratings are not required if the ABS or the underlying SBA loans are guaranteed by the US government.
- If the rating of the Eligible ABS Collateral is downgraded following issuance of the TALF Loan, no additional margin is required. However, the ABS may not be used as collateral for new TALF Loans unless it regains its status as Eligible ABS Collateral.
- Only legacy CMBS issued prior to March 23, 2020 is permitted.
- A newly issued ABS may not include a redemption option exercisable prior to three (3) years following the issuance of the TALF Loan (subject to an exception for "clean-up" call redemption). In addition, a newly issued ABS may not allow for redemption options at any time when the ABS is held by the New York Fed or related special purpose vehicle.
- At least ninety five percent (95%) of the dollar amount of the underlying loans in the CLOs must have a lead or co-lead arranger that is a US organized entity (including a US branch or agency of a foreign bank).
- Only static CLOs are permitted. No reinvestment is permitted at any time when the senior-most tranche in priority of payment (or, if the CLO structure includes multiple senior tranches that are pari passu in priority of payment, one (1) or more of such senior tranches) is owned by the New York Fed or the TALF special purpose vehicle. However, a period of reinvestment may begin at least three (3) years after the disbursement date of any TALF Loan secured by the pledge of such CLO. Eligible CLOs may permit underlying loans to be sold for cash at their par amount plus accrued interest to a sponsor where the cash proceeds are applied to amortize the CLO. CLO managers may also sell underlying loans that have defaulted in payment of principal and interest. However, proceeds of such sales may not be reinvested and must be used to amortize the CLO.
- For underlying eligible auto loan ABS issued by a non-revolving trust and Master Trust ABS, respectively. With respect to Master Trust ABS, the origination date for the underlying asset is the date on which the loan was drawn or funded and not the date on which the arrangement for the extension of credit was put in place.
- Private student loans that refinance existing student loans (private or government guaranteed) are Eligible ABS Collateral if the refinanced loan disbursement date is on or after January 1, 2019.
- With respect to Master Trust ABS, the origination date for the underlying asset is the date on which the loan was drawn or funded and not the date on which the arrangement for the extension of credit was put in place.
- There is no restriction on the dates of the underlying loans or debentures as long as the loans or debentures collateralize SBA Pool Certificates and Development Company Participation Certificates that were issued on or after January 1, 2019.
- Newly originated leveraged loans may include loans that have been refinanced on or after January 1, 2019
In addition to the information the Federal Reserve is required by statute to disclose to Congress, the Federal Reserve will also publicly disclose information on a monthly basis regarding each TALF Loan made during the operation of the facility, including information identifying each borrower and other participant in the facility, information identifying each Material Investor of a borrower, the amount borrowed by each borrower, the interest rate paid by each borrower, the types and amounts of Eligible ABS Collateral pledged by each borrower, and overall costs, revenues and other fees for the facility.
A launch date for the facility has not yet been announced. More information on the loan subscription dates and TALF Loan closing mechanics are expected to be released as well.
Haircut Schedule for each Eligible ABS Collateral Asset Class
For auto, credit card, equipment, floorplan and premium finance Eligible ABS Collateral, the weighted average life must be five (5) years or less. For other new-issue eligible collateral, haircuts will increase by one (1) percentage point for each additional year (or portion thereof) of average life beyond five (5) years. For legacy CMBS with average lives beyond five (5) years, base dollar haircuts will increase by one (1) percentage point of par for each additional year (or portion thereof) of average life beyond five (5) years. No securitization may have an average life beyond ten (10) years.
List of Primary Dealers
- Amherst Pierpont Securities LLC
- Bank of Nova Scotia, New York Agency
- BMO Capital Markets Corp.
- BNP Paribas Securities Corp.
- Barclays Capital Inc.
- BofA Securities, Inc.
- Cantor Fitzgerald & Co.
- Citigroup Global Markets Inc.
- Credit Suisse AG, New York Branch
- Daiwa Capital Markets America Inc.
- Deutsche Bank Securities Inc.
- Goldman Sachs & Co. LLC
- HSBC Securities (USA) Inc.
- Jefferies LLC
- J.P. Morgan Securities LLC
- Mizuho Securities USA LLC
- Morgan Stanley & Co. LLC
- NatWest Markets Securities Inc.
- Nomura Securities International, Inc.
- RBC Capital Markets, LLC
- Societe Generale, New York Branch
- TD Securities (USA) LLC
- UBS Securities LLC.
- Wells Fargo Securities, LLC
1 The TALF program was initially announced on March 23, 2020 (see here). Further clarifications to the TALF program were published in updated term sheets dated April 9, 2020 and May 12, 2020, and the Frequently Asked Questions section published on May 12, 2020. The May 12, 2020 FAQ and term sheet are available here and here. Please note that updates from the Federal Reserve on the TALF program are being provided on an ongoing basis.
2 Investment funds include "(1) any type of pooled investment vehicle that is organized as a business entity or institution, including without limitation a hedge fund, a private equity fund, and a mutual fund and (2) any type of single-investor that is organized as a business entity or institution."
3 Covered individuals include the President of the United States; the Vice President of the United States; heads of executive departments; members of Congress; and any spouse, child, son-in-law or daughter-in-law of any of the foregoing individuals.
4 For Variable Funding Notes ("VFN"), the maturity date is its commitment termination date. Eligible ABS Collateral may refinance Master Trust ABS that matures up to three (3) months prior to the issuance date of the Eligible ABS Collateral, or at any time after the issuance date of the Eligible ABS Collateral.
5 Limit is calculated at the sponsor level, instead of the master trust level. For VFN, the maximum amount of TALF-eligible ABS the issuer could issue prior to the TALF Termination Date is its maximum contractual principal balance. For VFN and Non-VFN ABS with controlled amortization periods prior to the TALF Termination Date, only the amount that amortizes prior to the TALF Termination Date counts towards the limit. Non-VFN ABS in controlled accumulation periods with bullet maturities do not count toward the limit.
Abbey MacDonald (Law Clerk, White & Case, New York) contributed to the development of this publication.
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