As revised, TALF may provide a safety net in the event of catastrophic CLO market conditions but is not likely to meet the goal of reviving the corporate loan market

Introduction -

On May 12, 2020, the Federal Reserve Board of Governors (the “Federal Reserve”) and the Federal Reserve Bank of New York (“New York Fed”) released an updated term sheet (the “New Term Sheet”) for the Term Asset-Backed Securities Loan Facility (“TALF”) program and updated its FAQs on TALF (“TALF FAQs”), revising and clarifying the specifics of its April 9, 2020 term sheet. Significantly, the New Term Sheet and TALF FAQs provided a number of clarifications and key additions applicable to collateralized loan obligation transactions (“CLOs”). Although eligible CLOs must be static, the definition of a “newly issued” leveraged loan was clarified to be any leveraged loan originated or refinanced on or after January 1, 2019, addressing a key concern from the prior term sheet. Another positive development was the clarification that the definition of eligible borrower (“Eligible Borrower”) under TALF will include investment funds so long as the investment manager of any such fund has significant operations in and a majority of its employees based in the United States.

Notwithstanding these clarifications (which demonstrate the Federal Reserve has a keen understanding of CLOs), the New Term Sheet continues to contain some short-comings vis-à-vis CLOs which will severely limit its utility other than as a backstop of last resort. For instance, the ability of TALF borrowers to make, and the diligence required to support, the certifications required under TALF (applicable to all TALF eligible ABS, not just CLOs) are presently opaque and lacking developed market standards. Furthermore, the requirements that CLOs be static, have no effective redemption option within a three year period and be subject to the highest haircuts and interest rates of any TALF eligible ABS will further undercut the utility of the program in terms of facilitating the flow of credit to U.S. businesses through CLOs. Accordingly, we are continuing to work with industry groups and other law firms active in the CLO space to ameliorate these shortcomings through further guidance from the Federal Reserve.

Set forth below in this OnPoint is a more detailed analysis of the New Term Sheet and the considerations relevant for CLOs.