On March 23 the Federal Reserve announced the creation of the Term Asset-Backed Securities Loan Facility, or TALF to support the asset-backed securities (ABS) market.  The new facility (commonly referred to in the market as TALF 2.0) is based on the original TALF (TALF 1.0) that was created during the 2008/2009 financial crisis.  In each case the facility uses an “equity” investment from the U.S. Treasury in a Federal Reserve special purpose vehicle (SPV), along with leverage from the Federal Reserve, to make up to $100 billion of non-recourse three year loans secured by eligible ABS.  As with TALF 1.0, we expect the current TALF to provide pricing support to the ABS market by providing favorable credit to ordinary course ABS purchasers as well as incentivizing firms to set up TALF-focused funds that seek to generate attractive returns with ABS purchases and TALF leverage.

The Federal Reserve released additional terms of the current TALF in a termsheet effective April 9, 2020, and indicated it would release additional terms and conditions further defining the program at a later date, with such terms being substantially based on those from TALF 1.0. The April 9 termsheet provides significant additional detail, particularly the description of loan terms and the inclusion of legacy commercial mortgage-backed securities (CMBS) and static leveraged loan collateralized loan obligations (CLOs) (subject to limitations discussed below) as eligible collateral. No launch date has been announced, and the April 9 termsheet specifies that no new credit extensions would be made after September 30, 2020 (unless extended). Below is the summary of the current TALF terms based on the material currently available.

Loan Terms

• Three year maturity;

• Non-recourse to borrower;

• Fully secured by eligible ABS — with amounts advanced based on a haircut schedule by sector, subsector and average maturity and haircuts of between 5 and 22%;

• Currently no stated maximum loan amount per borrower, though the total amount initially available on an aggregate basis under the current TALF is $100 billion;

• Pre-payable in whole or in part, but generally no substitution of eligible collateral for existing loans;

• Interest rates between 75 and 150 basis points over the applicable index, with amounts and relevant index differing by collateral type;

• Administrative fee of 10 basis points of the loan amount will be assessed by the SPV on the settlement date.

Eligible Borrowers

• Open to U.S. companies – defined to be businesses that are created or organized in the U.S. or under the laws of the U.S. and that have significant operations and a majority of their employees in the U.S.

• Borrowers must have an account relationship with a primary dealer to facilitate borrowing.

• As with other Federal Reserve and U.S. Treasury assistance programs under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the conflict of interest provision would exclude participation by specified members of the executive branch or Congress, their immediate families and entities that they “control”.

Eligible Collateral

• ABS Structure — Eligible collateral must be ABS that are U.S. dollar denominated, created via cash purchases of underlying collateral (versus synthetic exposure from derivatives) and excludes ABS squared (ABS with other ABS as underlying collateral) and ABS with interest payments that have pre-set changes (step up or step down) on specified dates.

• Issuance Date — Eligible ABS (other than CMBS) must have been issued on or after March 23, 2020, and underlying collateral must have been “newly issued”.  Only legacy CMBS—defined as issued prior to March 23, 2020--is eligible.

• U.S. Nexus — ABS issuer must be a U.S. company, and all or substantially all of the credit exposures must have been originated by a U.S. company.  Underlying exposure for eligible CMBS must be to U.S. real property.

• Credit Ratings Requirement — Eligible ABS must have a long-term credit rating (CMBS) or short-term credit rating (other ABS) in the highest investment grade category from at least two national recognized statistical rating organizations (“NRSROs”) and may not have a lower credit rating from any NRSRO.

• Underlying Exposure Categories — Eligible ABS must be based on the following underlying credit exposures (note that the final two categories are new categories not in the original March 23 release but added in the April 9 termsheet):

  • 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

• Specific Exclusions from Eligibility:

  • New issue CMBS (issued on or after March 23, 2020) and any single asset, single borrower (SASB) CMBS

  • Collateral loan obligations (CLOs) that are based on commercial real estate loans (CRE CLOs)

  • Managed CLOs (CLOs with a collateral manager that may buy and sell underlying loans)

  • Legacy ABS (other than CMBS) issued prior to March 23, 2020

• Eligibility of Other Collateral — The termsheet continues to note that expanding the scope to other asset classes “will be considered in the future”.  In TALF 1.0, the Federal Reserve acted several times to expand the scope of the facility to other categories of securities, and this statement indicates the possibility of that occurring with the current TALF as well.

Timing and Process for Borrowing Under TALF

• Based on TALF 1.0, we also expect the Federal Reserve to publish frequently asked questions and answers (FAQs) to guide the market, or to incorporate by reference the FAQs published with respect to TALF 1.0.

• TALF 1.0 was administered by the New York Fed via monthly TALF loan subscription dates where potential borrowers could submit requests for loans with respect to eligible collateral, with the borrower’s primary dealer operating as agent to access the TALF and for delivery of collateral and receipt of funds.  The New York Fed would then allocate loans based on the subscription requests.

The TALF April 9 termsheet is available here.