Introduction
On March 23, 2020 the Federal Reserve Bank (the “Fed”) announced the establishment of the Term Asset-Backed Securities Loan Facility (the “TALF”) to “support the flow of credit to consumers and business” by facilitating the issuance of asset-backed securities (“ABS”) and improving the market conditions for ABS generally. (See Federal Reserve Press Release - March 23, 2020 and Federal Reserve TALF Term Sheet - March 23, 2020). The TALF will serve as a funding backstop to facilitate the issuance of eligible ABS on or after March 23, 2020. This new facility will initially be more limited, both in size and in scope, than the predecessor TALF program established in November 2008 (the “Legacy TALF Program”) during the 2008 financial crisis. The TALF will initially make up to US$100 billion of secured, non-recourse loans available to Eligible Borrowers (defined below) for a borrowing term of three years.

Legacy TALF Program during the 2008 Financial Crisis
During the 2008 financial crisis, the Fed created the Legacy TALF Program to stimulate the securitization markets by providing financing to third party investors in highly rated ABS issued on or after January 1, 2009. The Fed made available through the Legacy TALF Program up to US$200 billion in non-recourse loans to borrowers, equal to the market value of the securities less a haircut (which varied by asset class and expected life of the ABS). Under the Legacy TALF Program, the Department of Treasury (the “Treasury”) provided US$20 billion of credit protection to the Fed.

On May 1 and May 19, 2009, the Fed expanded the eligible assets to include both qualifying new issuance (see full description of the Legacy TALF Program (including newly issued CMBS), in the May 2009 Dechert-OnPoint – “The Federal Reserve Bank of New York Expands TALF to Include New Issuances of CMBS”) and legacy (see full description of the Legacy TALF Program (including legacy CMBS), in the May 2009 Dechert-OnPoint – “The Federal Reserve Bank of New York Expands TALF to Include Legacy CMBS”) commercial mortgage-backed securities (“CMBS”), respectively, as part of its public-private investment program initiative. Although the facility capacity was US$200 billion, only approximately US$70 billion was lent to investors. All Legacy TALF Program loans were repaid in full by October 2014. Term Asset-Backed Securities Loan Facility

Terms and Conditions of the TALF
The Fed is authorized to launch this program under Section 13(3) of the Federal Reserve Act with the approval of Secretary of the Treasury Mnuchin. Federal Reserve Act, Section 13 Powers of Federal Reserve Banks The Fed released a preliminary term sheet (see Federal Reserve TALF Term Sheet – March 23, 2020) for the TALF program, with additional terms and conditions, primarily based on the terms and conditions of the Legacy TALF Program, to be provided at a later date.

The Fed will provide financial support to investors in certain AAA-rated newly originated ABS. These loans are secured by the ABS at all times throughout the term of the loan. The Fed will create a special purpose vehicle (“SPV”) to facilitate loans to each borrower, and the Treasury, using the Exchange Stabilization Fund, will make an equity investment of US$10 billion in the TALF SPV.

Pricing
Eligible Collateral (as defined below), with respect to which the underlying credit exposures do not already have government guarantees will have an interest rate of:

1. for securities with a weighted average life of less than two years, the 2-year LIBOR swap rate + 100 basis points, or
2. for securities with a weighted average life of two years or greater, the 3-year LIBOR swap rate + 100 basis points.

 All other Eligible Collateral will have pricing terms set forth in the detailed terms and conditions at a later date. 

Fees
The SPV will charge an administration fee of 10 basis points of the loan amount on the settlement date for the Eligible Collateral.

Maturity and Prepayment
The TALF loans will have a maturity of three years and can be prepaid in whole or in part at the option of the borrower. The Fed’s term sheet stated that there will be no new credit extensions made under the TALF after September 30, 2020 unless the program is extended by the Fed.

Eligibility Criteria
Eligible Borrower
All U.S. companies that (i) own Eligible Collateral and (ii) maintain an account relationship with a primary dealer are eligible to borrow from the TALF (an “Eligible Borrower”). The Eligible Borrower must be formed under the laws of the U.S. or must be a U.S. branch or agency of a foreign bank.

Notably, the term sheet for the TALF does not include any track record or substance requirements for the companies that can participate, and the term sheet even specifies that a U.S. business entity with a non-U.S. parent company would be eligible. Accordingly, and consistent with the Legacy TALF Program, we expect that newly-established fund structures will be set up to comply with the eligibility requirements of the TALF and be Eligible Borrowers under it, allowing a broad range of potential investors to take advantage of the opportunities presented by the TALF.

Eligible Collateral
The eligible collateral will be limited to U.S. dollar denominated cash ABS in the highest long-term or short-term investment grade rating category from two eligible nationally recognized statistical rating organizations (each, a “NRSRO”) (such collateral, the “Eligible Collateral”). All Eligible Collateral must have been originated by a U.S. company and have an issuance date on or after March 23, 2020. All Eligible Collateral must be ABS and have one of the following underlying credit exposures:

1. Auto loans and leases;
2. Student loans;
3. Credit card receivables (both consumer and corporate);
4. Equipment loans;
5. Floorplan loans;
6. Insurance premium finance loans;
7. Certain small business loans that are guaranteed by the Small Business Administration; or
8. Eligible servicing advance receivables.

All Eligible Collateral will be valued and attributed a haircut in accordance with (i) its sector, (ii) the weighted average life of the ABS and (iii) the historical volatility of similar ABS. The haircut schedule for the Eligible Collateral will be published at a later date and the Fed has indicated that it will be broadly consistent with the haircuts in the Legacy TALF Program.

Potential Expansion of Eligible Collateral
Advocacy groups are currently requesting the expansion of the TALF to include legacy ABS issuances made prior to March 23, 2020 and expanding Eligible Collateral to include additional asset classes (both legacy and newly issued), such as (i) residential mortgage-backed securities, (ii) ABS backed by unsecured consumer loans, (iii) reverse mortgage-backed securities, (iv) CMBS and (v) mortgage servicing rights-backed securities. Further requests submitted to the Fed include expanding the credit ratings criteria for Eligible Collateral to permit (x) the highest rated tranche in any ABS that is investment grade rated and (y) only requiring a single NRSRO investment grade rating.

TALF Funds
As was the case in 2008-09, we anticipate that a wide variety of investment management firms will be considering the launch of dedicated private funds focused on TALF-covered securities. Such funds will need to be customized to address the unique market opportunities that TALF and the current financial uncertainties present, so will present special challenges for both sponsors and investors. However, the returns earned by many legacy TALF funds during the prior financial crisis should provide motivation for exploring this opportunity in the coming weeks and months.

Further Information and Moving Forward
Although the full terms, conditions and potential size and scope of the TALF program are still not finalized at this time, the success of the Legacy TALF Program during the 2008 financial crisis should create a sense of optimism by increasing liquidity and encouraging investment into the structured finance market. Dechert will continue to monitor all developments relating to the Fed announcements and congressional bills closely.