FAQs and Revised Term Sheet Released for Revived TALF Program

Morgan Lewis
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Morgan Lewis

The US Treasury Department and Federal Reserve Bank of New York recently released a new set of FAQs and a revised term sheet for the new Term Asset-Backed Securities Loan Facility (TALF) program, which is intended to address the liquidity crisis caused by the coronavirus (COVID-19) global pandemic through non-recourse lending collateralized by issuances of eligible asset-backed securities. The changes include clarifying that certain US-organized and managed investment funds will be permitted to borrow TALF loans, and adding a required borrower certification that it is otherwise “unable to secure adequate credit accommodations.”

The new TALF program was launched to encourage new consumer and small business lending by supporting issuance of eligible ABS. On May 12, 2019, Treasury and the Federal Reserve released FAQs and a revised term sheet for the TALF, which address a number of questions that have been of great interest to market participants, and also raise a number of new questions. These include:[1]

  • Investment funds will be permitted to borrow TALF loans, including funds formed solely for the purpose of financing TALF eligible ABS, subject to a number of requirements.
  • A borrower must be created or organized in the United States or under US laws, and have significant operations and a majority of its employees in the United States. For borrowers other than investment funds, the operations/employees tests are applied to the borrower and its consolidated subsidiaries (but not parent or sibling affiliates). For investment funds, these tests are applied to the investment manager (alone, without taking into account its consolidated subsidiaries).
  • A borrower will be required to certify that it is unable to secure adequate credit accommodations from other banking institutions. According to the agencies, this does not necessarily mean that the borrower cannot obtain other financing, just that prices or conditions that are available are “inconsistent with a normal, well-functioning market.” It is not clear what standard borrowers will have to meet to give this certification, or whether TALF agents will have related diligence obligations.
  • At the outset of the program, the rating agencies that are eligible to provide the required ratings for purposes of the TALF program are S&P Global Ratings, Moody’s Investors Service Inc. and Fitch Ratings Inc.
  • With respect to the requirement that all or substantially all of the pool assets be new issue, the cutoff date (with certain exceptions) is January 1, 2019. For legacy master trusts, eligible ABS generally must be issued to refinance existing ABS and in amount no greater than the maturing ABS. Issuers may refinance up to 30 days before the maturity of the refinanced ABS, but there is not yet any specified earliest date upon which ABS must have matured to be considered “refinanced.” These tests are applied at the sponsor level, so the aggregate limit among multiple master trusts with the same sponsor may be allocated among those master trusts in any manner.
  • The US nexus tests for issuers have been changed to focus on the pool assets. In general, all or substantially all of the pool assets must be both originated by US- organized entities (including a US branch of a foreign bank) and made to US-domiciled obligors. For CLOs, all or substantially all of the underlying loans must be arranged by a lead or co-lead manager that is US-organized (again including a US branch of a foreign bank) and made to US-domiciled obligors.
  • “All or substantially all” of the pool assets generally means 95% of the dollar amount of the pool assets.
  • The identity of “material investors” in a borrower will be required to be monitored and disclosed to the Federal Reserve on an ongoing basis, and the Federal Reserve will make that information public. “Material investor” is defined to include any person who owns, directly or indirectly, 10% or more of any outstanding class of securities of an entity.
  • Investors may borrow against eligible ABS they already own only if they were acquired in arms-length secondary market transactions within 30 days prior to the loan subscription date, other than for legacy CMBS.
  • Private loans made for the purpose of refinancing existing private or federally-guaranteed student loans are eligible collateral, but subject to the same haircuts as other private student loans.

The most significant newly-announced details are reflected in the comparison table below. There are still some significant missing items, including:

  • The agencies have yet to announce detailed borrowing procedures and timelines.
  • It is still not clear whether the new TALF program will include the original program’s requirement for issuers to provide an accountants’ attestation as to the sponsor’s assertion that the ABS are “eligible collateral” is fairly stated in all material respects.

Despite the new announcements, only the broad outlines of the new TALF program are available. Further, detailed terms and conditions, including a form of Master Loan and Security Agreement (MLSA), will follow, but still are expected to be broadly consistent with those of the original TALF program.[2] Except for legacy CMBS, loans under the new TALF program will be made only for ABS issued on or after March 23, 2020, and will not be made after September 30, 2020 (unless the program is extended).

The following table compares certain terms of the new TALF program, as announced to date, with those of the original TALF program at the time it ceased lending in 2010.

New TALF Program

Original TALF Program

Aggregate amount

Up to $100 billion

Up to $200 billion

Asset classes

Auto loans and leases

Student loans (including refinance 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 (static CLOs only, no commercial real estate CLOs)[3]

Commercial mortgages (only if issued before March 23, 2020, no single asset CMBS, and credit exposures must be located in the US)

“Feasibility of adding other asset classes … will be considered in the future”

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 were guaranteed by the Small Business Administration

Eligible servicing advance receivables

Commercial mortgages

Ratings requirements

Highest long-term or (other than CMBS) short-term rating from at least two “eligible” rating agencies,which initially are limited to S&P, Moody's, and Fitch

Highest long-term or (other than CMBS) short-term rating from at least two eligible rating agencies, which were limited to S&P, Moody’s, Fitch, and DBRS (and Realpoint for CMBS)

New issue or legacy ABS

New issue only (only for ABS issued on after March 23, 2020), other than legacy CMBS (not eligible if issued on or after March 23, 2020)

New issue only, other than legacy CMBS

Age of receivables

"All or substantially all” of the receivables must be “new issue,” other than for legacy CMBS

Age cutoff date for all or substantially all of the pool assets generally is January 1, 2019

For legacy master trusts, eligible ABS generally must be issued to refinance existing ABS and in amount no greater than the maturing ABS. Issuers may refinance up to 30 days before the maturity of the refinanced ABS, but there is not yet any specified earliest date upon which ABS must have matured to be considered “refinanced.” These tests are applied at the sponsor level

For master trusts established on or after March 23, 2020, age cutoff date for all or substantially all of the pool assets is January 1, 2020

“All or substantially all” generally means 95% or more of the dollar amount of the pool assets

Each eligible asset class had detailed time limits with respect to origination of receivables, with accommodations made for revolving master trusts

Eligible borrowers

Each of the following that maintains an account relationship with a primary dealer:

A business entity created or organized in the US or under the laws of the US and that has significant operations and a majority of its employees based in the US

For borrowers other than investment funds, US operations/employees tests are applied to the borrower and its consolidated subsidiaries (but not parent or sibling affiliates)

For investment funds, US operations/employees tests are applied to the investment manager (alone, without taking into account its consolidated subsidiaries)

Each of the following that maintains an account relationship with a primary dealer:

A business entity organized under the laws of the US or a political subdivision or territory thereof that conducts significant operations or activities in the US (including such an entity that has a non-US parent company)

A US branch or agency of a foreign bank

An investment fund that is US-organized, and managed by an investment manager that has its principal place of business in the US

Monitoring and disclosure of material investors in borrower

The identity of “material investors” in a borrower will be required to be monitored and disclosed to the Federal Reserve on an ongoing basis

Federal Reserve will make that information public

“Material investor” is any person who owns, directly or indirectly, 10% or more of any outstanding class of securities of an entity

Not required

Prohibition on borrower-affiliated ABS

Eligible ABS may not be backed by loans originated or securitized by borrower or an affiliate of the borrower

Borrower or its affiliates may not be manufacturer, producer, or seller of products, or provider of services, which are financed by pool assets, unless they make up no more than 10% of the aggregate principal balance of the pool assets

Strict limits on borrower or its affiliates being an obligor on certain pool assets – no more than 5% of the aggregate principal balance of the pool assets for commercial loans backing eligible CMBS, no more than 10% of the aggregate principal balance of the pool assets for floorplan loans or fleet leases backing eligible ABS, and no more than 4% of the aggregate principal balance of the pool assets for leverage loans backing eligible CLOs

Eligible ABS may not be backed by loans originated or securitized by borrower or an affiliate of the borrower

Borrower or its affiliates could not be manufacturer, producer, or seller of products, or provider of services, which are financed by pool assets, unless they make up no more than 10% of the aggregate principal balance of the pool assets

Strict limits on borrower or its affiliates being an obligor on certain pool assets – no more than 5% of the aggregate principal balance of the pool assets for commercial loans backing eligible CMBS, and no more than 10% of the aggregate principal balance of the pool assets for floorplan loans or fleet leases backing eligible ABS

Prohibition on foreign government affiliation of borrower Neither borrower, nor an investment manager of a fund borrower, may have a material investor that is a foreign government

Borrower generally could not be controlled by a foreign government or is managed by an investment manager that is controlled by a foreign government

Exceptions were a US branch or agency of a foreign bank (other than a foreign central bank) that maintained reserves with a Federal Reserve Bank, or a US insured depository institution

Borrowing against already-owned eligible ABS Only permitted if ABS were acquired in arms-length secondary market transactions within 30 days prior to loan subscription date, except for legacy CMBS Permitted

Loan term

Three years

Three years generally, five years for CMBS and certain SBA loans

Loan amount

Not announced

Minimum $10 million, no maximum

Haircuts on market value of ABS collateral

Schedule of specific haircuts that vary by asset class and expected life of the ABS:

Auto, prime retail lease: 10% to 14%

Auto, prime retail loan: 6% to 10%

Auto, subprime retail loan: 9% to 13%

Auto, motorcycle and other RVs: 7% to 11%

Auto, commercial and government fleet: 9% to 13%

Auto, rental fleet: 12% to 16%

Credit card, prime: 5% to 8%

Credit card, subprime: 6% to 10%

Equipment, loan and lease: 5% to 9%

Floorplan, auto: 12% to 16%

Floorplan, non-auto: 11% to 15%

Premium finance, property and casualty: 5% to 8%

SBA loans: 5% to 6%

Student loans, private: 8% to 14%

Student loans, government guaranteed: 5% to 6%

Leverage loans, static CLOS: 20% to 22%

Commercial mortgages, legacy CMBS: 15%

Auto, credit card, equipment, floorplan, and premium finance cannot exceed 5-year average life

For all other ABS with average lives of more than 5 years, haircuts increase 1% for each additional year (or portion thereof), but average life cannot exceed 5 years

Schedule of specific haircuts that varied by asset class and expected life of the ABS:

Auto, prime retail lease: 10% to 14%

Auto, prime retail loan: 6% to 10%

Auto, subprime retail loan: 9-13%

Auto, motorcycle and RVs: 7-11%

Auto, commercial and government fleet: 9% to 13%

Auto, rental fleet: 12% to 16%

Credit card, prime: 5% to 8%

Credit card, subprime: 6% to 10%

Equipment, loan and lease: 5% to 9%

Floorplan, auto: 12% to 16%

Floorplan, non-auto: 11% to 15%

Premium finance, property and casualty: 5% to 8%

Servicing advances, residential mortgages: 12% to 16%

SBA loans: 5% to 6%

Student loans, private: 8% to 14%

Student loans, government guaranteed: 5% to 6%

Commercial mortgages, new-issue CMBS: 15%

Commercial mortgages, legacy CMBS: 15% (based on lesser of dollar purchaser price on trade date or market price on subscription date)

For ABS benefitting from a substantial government guarantee, with average lives of more than 5 years, haircuts increased 1% for every two additional years (or portion thereof)

For all other ABS with average lives of more than 5 years, haircuts increased by 1% for each additional year (or portion thereof)

Recourse to borrower

Generally, no, but may become recourse if borrower breaches certain representations, warranties, or covenants, as further specified in the MLSA

Generally, no, but could become recourse if:

Borrower failed to be eligible

Collateral eligibility representation was inaccurate

Certain other representations were breached

Borrower failed to properly surrender collateral to custodian at or before maturity

Pricing

Floating or floating specified for specific asset classes

Fixed rate, generally, for ABS without government guarantee: 125 basis points over two-year OIS rate for average life less than two years, 125 basis points over three-year OIS rate for average life two years or more

Floating rate, SBA Pool Certificates: 75 basis points over top of federal funds target range

Fixed rate, SBA Development Company Participation Certificates: 75 basis points over three-year OIS rate

Floating rate, CLOs: 150 basis points over 30-day average SOFR

Other pricing terms to be announced

Choice of fixed or floating

Floating rate, generally, for ABS without government guarantee: 100 basis points over one-month LIBOR

Floating rate, federally guaranteed student loans: 50 basis points over one-month LIBOR

Floating rate, private student loans with prime-based coupon: higher of 1% and prime rate minus 175 basis points

Floating Rate, SBA Pool Certificates: 75 basis points over federal funds target rate

Fixed rate three-year loans, generally: 100 basis points over one-year LIBOR swap rate for average life less than one year, 100 basis points over two-year LIBOR swap rate for average life more than one but less than two years, 100 basis points over three-year LIBOR swap rate for average life two years or more

Fixed Rate, SBA Development Company Participation Certificates: 50 basis points over three-year LIBOR swap rate for three-year loans, 50 basis points over five-year LIBOR swap rate for five year loans

Fixed rate, CMBS: 100 basis points over three-year LIBOR swap rate for three-year loans, 100 basis points over five-year LIBOR swap rate for five-year loans

Administrative fee

10 basis points on loan amount

5 basis points on loan amount

Offering type

Registered public ABS and Rule 144A ABS trading book-entry on DTC

Registered public ABS and Rule 144A ABS trading book-entry on DTC

Prepayment permitted

Yes

Yes

Collateral substitution permitted

No, even for CLOs (which must be static)

No

Prefunding permitted No No

Resecuritizations permitted

No

No

Synthetic ABS permitted

No

No

Additional corporate restrictions:

Section 4019 of the CARES Act, which restricts lending to any business that is directly or indirectly owned by the president, senior executive branch officials, or members of Congress (or certain of their immediate family members)

Fed has stated that TALF will not impose any requirements on borrowers with respect to employee compensation, distribution of dividends, or any other corporate decision[4]

As announced, would have imposed executive compensation limits, but these were removed before implementation

Borrowing procedures

Announced borrowing procedures include:

Borrower must certify that it is unable to secure adequate credit accommodations from other banking institutions. According to the agencies, this does not necessarily mean that borrower cannot obtain other financing, just that prices or conditions that are available are “inconsistent with a normal, well-functioning market”

Required issuer certifications and further required borrower certifications to be announced later

Limited borrowing dates, specifics not yet announced

Other borrowing procedures not yet announced

Borrowing procedures included:

Specified certifications in the offering documents, including that the ABS are eligible collateral

Accountants’ attestation that the sponsor’s assertion that the ABS are “eligible collateral” is fairly stated in all material respects

Limited pricing and settlement dates

[1] See the FAQs and the updated term sheet for the new TALF program, which originally was announced on March 23, 2020. See also the prior updated term sheet and the original term sheet for the new TALF program.

[2] The Structured Finance Association (SFA) has requested that the US Department of the Treasury and the Federal Reserve make a number of changes to the TALF to accommodate the unique needs resulting from the economic dislocation brought on by the COVID-19 pandemic, including allowing legacy ABS to serve as collateral for TALF loans and adding a number of other new permitted asset classes. Read the SFA’s letter.

[3] The FAQs also provide a number of specific eligibility criteria for the leveraged loans that back eligible CLOs.

[4] See the Federal Reserve’s March 29, 2020, report to Congress on the new TALF program.

[View source.]

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.

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