CLOs and Term Asset-Backed Securities Loan Facility (TALF)—We’re Not That Desperate (Yet)

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.

Please see full Publication below for more information.

LOADING PDF: If there are any problems, click here to download the file.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP

Dechert LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.