[co-author: Daniel Goldstein]

In March 2020, the Federal Reserve (the “Fed”) announced that it would re-establish the Term Asset-Backed Securities Loan Facility (“TALF”) program, a market stabilization tool that was developed and last used by the Fed during the 2008 financial crisis to support the flow of credit to consumers and small businesses by facilitating the issuance of certain asset-backed securities (“ABS”). The TALF, established under Section 13(3) of the Federal Reserve Act and administered by the Federal Reserve Bank of New York (“FRBNY”), is part of a broader effort by the Fed to use its emergency lending authority to counteract the negative economic impact of the coronavirus pandemic, but is the only component of that effort focused directly on the ABS market.

The following is a summary guide of “TALF 2.0” primarily based on the terms and conditions and the Frequently Asked Questions (“FAQ”) released by the Fed to date. Orrick will continue to follow developments in the Fed’s implementation of TALF 2.0 and will periodically update this summary as additional information becomes available.

Facility Mechanics and Loan Terms

• Under the TALF, the FRBNY will commit to lend to a special purpose vehicle (“TALF SPV”) on a recourse basis. The Treasury Department will also make a $10 billion initial equity investment in the TALF SPV, using funds appropriated to the Exchange Stabilization Fund under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
• In turn, the TALF SPV will initially make up to $100 billion of loans available to “Eligible Borrowers” that pledge “Eligible Collateral.”
• A prospective borrower will not be able to access the TALF directly, but will be required to enter into a customer agreement with a designated “TALF Agent” (initially limited to certain Primary Dealers designated by the Fed) that will act on the borrower’s behalf. Each TALF Agent will execute the Master Loan and Security Agreement (“MLSA”) for itself and as agent for its borrower customers, and will, among other functions, perform due diligence on the borrower, take all actions required of the borrower, and generally serve as an intermediary between the borrower and the TALF SPV’s custodian bank (“Custodian”).^[1]
• Each TALF loan will have a three-year term, will be fully secured by eligible ABS, and otherwise will be nonrecourse to the borrower.^[2] A borrower (acting through a TALF Agent) will be permitted to request one or more loans on fixed subscription dates that will generally occur twice each month. In general, a borrower must request a minimum of $5 million for each loan and may pledge only a single eligible ABS per TALF loan.^[3] There is no maximum loan amount.
• If the TALF loan settlement date occurs on the same day as the closing of a newly issued ABS, loan proceeds will be paid directly to the party expected to deliver the ABS to the Custodian (the TALF Agent or the underwriter of the ABS) against delivery of such ABS. Disbursement of the loan proceeds will be contingent on receipt by the Custodian of the ABS, an administrative fee and, if applicable, any additional funds required to purchase such ABS.
• Borrowers must repay the TALF loan on the maturity date.^[4] Borrowers will be allowed to pre-pay, without penalty, loans in whole or in-part,^[5] but will not be permitted to substitute collateral. Generally, any remittance of principal on ABS collateral will be applied to reduce the principal balance of the TALF loan in proportion to the original haircut taken on the ABS. However, under certain circumstances (such as the occurrence of an event of default under the related ABS agreements),^[6] all cash flow received on the ABS must be applied to reduce the balance of the TALF loan.
• The Fed will publicly disclose information on TALF loans and borrowers on a monthly basis, including the identity of each borrower and its “Material Investors” (defined as those persons or entities that directly or indirectly own 10% or more of any outstanding class of securities of the borrower), as well as the amount borrowed, the interest rate payable on each loan, and the ABS collateral pledged by each borrower.
• The first subscription date will be June 17, 2020, and the first loan settlement date (also referred to as the loan closing date) will be June 25, 2020. The program is scheduled to terminate on, and no further credit extensions will be made after, September 30, 2020 (the “TALF Termination Date”), unless extended.
• The FRBNY has posted the form of MSLA, along with forms of certain documentation, on its website. Together, the MLSA, FAQ and the term sheet collectively constitute all of the terms and conditions applicable to each TALF loan. In addition, each TALF Agent will have its own form of customer agreement with borrowers, pursuant to which borrowers will be required to provide certain representations required by the FRBNY.^[7]

TALF Program Structure*

*As noted above, in the case where the TALF loan settlement date occurs on the same day as the closing of a newly issued ABS, loan proceeds will be paid directly to the party expected to deliver the ABS to the Custodian (the TALF Agent or the underwriter of the ABS) against delivery off such ABS.

Eligible Borrowers

• An “Eligible Borrower” must:

  1. own “Eligible Collateral” (described in more detail below);
  2. be created or organized in the United States or under the laws of the United States;^[8]
  3. have “significant operations”^[9] in and a majority of their employees based in the United States; the Fed will consider only consolidated subsidiaries — not parent companies or sister organizations — for purposes of this criterion, and special rules apply to borrowers that are investment funds, as discussed below;
  4. maintain an account relationship with a TALF Agent;
  5. not have any Material Investor that is a foreign government; and
  6. certify that (i) it is unable to secure adequate credit accommodations from other banking institutions,^[10] (ii) it is not insolvent and (iii) it is not made ineligible by the conflicts of interest prohibition of Section 4019 of the CARES Act.^[11]
• The borrower will also generally be expected to continuously represent that it is an Eligible Borrower meeting the eligibility requirements. Accordingly, each TALF borrower is also expected to have a mechanism for continuously monitoring its direct and indirect investors, including foreign governments, while the TALF loan is outstanding.
• Special Considerations for Investment Funds. According to the FAQ, an “investment fund” includes “(i) any type of pooled investment vehicle that is organized as a business entity or institution, including without limitation a hedge fund, a private equity fund, and a mutual fund, and (ii) any type of single-investor vehicle that is organized as a business entity or institution”. The fund’s portfolio can consist solely of TALF eligible ABS or a mix of TALF-eligible ABS and other assets. For any borrower that is an investment fund, however, the third criterion described above would apply to the investment fund manager instead of the borrower itself, and the investment fund manager (in addition to the borrower) must also satisfy the second criterion (it must be U.S. organized) and the fifth criterion (no Material Investors can be foreign governments).
• Certain additional restrictions on the borrower’s relationship to the collateral also apply, as further discussed below.

Eligible Collateral

Each TALF loan must be secured by eligible collateral in the form of eligible ABS. Eligible ABS must satisfy certain requirements with respect to (i) the ABS itself and (ii) the related underlying credit exposures. Criteria (1), (5) and (6) below are the criteria relating to the underlying credit exposures.

• “Eligible ABS” must:

  1. be ABS where the underlying credit exposures are one of the following: (i) auto loans or leases, (ii) student loans, (iii) credit card receivables (consumer or corporate), (iv) equipment loans or leases, (v) floorplan loans, (vi) premium finance loans for property or casualty insurance, (vii) certain small business loans that are guaranteed by the Small Business Administration (“SBA”),^[12] (viii) leveraged loans or (ix) commercial mortgages^[13];
  2. except for Commercial Mortgage-Backed Securities (“CMBS”), be issued on or after March 23, 2020 or, in the case of SBA Pool Certificates or Development Company Participation Certificates, January 1, 2019; CMBS must have been issued before March 23, 2020;
  3. be U.S. dollar-denominated cash ABS (i.e., not synthetic ABS);
  4. have a credit rating in the highest long-term or, if no long-term rating is available, the highest short-term investment-grade rating category from at least two eligible nationally recognized statistical rating organizations (“NRSROs”) and not have a credit rating below the highest investment-grade rating category from any eligible NRSRO. Initially, the only “eligible NRSROs” for purposes of the AAA-rating requirement are (i) S&P, Fitch and Moody’s (at least one of which must supply the required long-term or short-term rating, as applicable) and (ii) so long as the ABS has a qualifying rating from S&P, Fitch or Moody’s, DBRS and Kroll. ABS that achieved a AAA-rating though a third-party guarantee are not eligible.^[14]
  5. except for CMBS, all or substantially all of the underlying credit exposures must have been originated on or after a specified origination date, each of which is specified by asset class in Exhibit A attached hereto;
  6. all or substantially all of the underlying credit exposures for such ABS (i.e., 95% or more of the dollar amount of the underlying assets in the ABS) must (i) for newly issued ABS, except Collateralized Loan Obligations (“CLOs”), be originated by U.S.-organized entities (including U.S. branches or agencies of foreign banks), (ii) for CLOs, have a lead or a co-lead arranger that is a U.S.-organized entity (including a U.S. branch or agency of a foreign bank), and (iii) for all ABS (including CLOs and CMBS), be to U.S.-domiciled obligors^[15] or with respect to real property located in the United States or one of its territories;
  7. entitle their holders to payments of both principal and interest (i.e., interest-only or principal-only securities are not eligible)
  8. not bear interest payments that step up or step down to predetermined levels on specific dates and not be a zero-coupon instrument;
  9. be cleared through the Depository Trust Company; and
  10. not exceed the maximum permitted average life for such type of ABS (five years for credit card, auto, equipment, floorplan and premium finance ABS, seven years for SBA Pool Certificates and private student loans and ten years for CMBS, CLOs and Development Company Participation Certificates).
• The FRBNY will reject ABS that do not meet the collateral eligibility requirements. The FAQ also notes that the FRBNY may, in its sole discretion, choose to reject eligible ABS for any reason, including based on considerations related to credit quality, transparency, and simplicity of the ABS structure.

• Special Considerations for CMBS and CLOs.

  • Eligible CMBS (i) may not be backed by only a single asset or obligations to only a single borrower, (ii) must bear interest at a pass-through rate that is fixed or based on the weighted average of the underlying fixed mortgage rates and (iii) must not be junior to other securities with claims on the same pool of loans.^[16]
  • Only static CLOs are eligible collateral. In addition, the manager of a CLO must have its principal place of business in the United States. CLOs backed by commercial real estate are not eligible. Several additional limitations apply to CLOs. For further details, see Orrick’s previous client alert available here.

• Other Eligible ABS Requirements and Exclusions.

  • Newly issued ABS will not be eligible if it contains a redemption option exercisable prior to three years after the disbursement date of any TALF loan secured by such ABS (other than pursuant to a “customary clean-up” call),^[17] or if the ABS permits a redemption option at any time it is owned by the FRBNY or the TALF SPV.
  • ABS positions retained by a sponsor or affiliate to satisfy obligations under risk retention rules (such as those implemented under the Dodd-Frank Act) are not eligible collateral.
  • ABS benchmarked to LIBOR will be expected to include adequate fallback language, such as that recommended by the Alternative Reference Rates Committee of the FRBNY or substantially similar fallback language.
  • Eligible ABS does not include ABS issued or sponsored by (or CLOs with collateral managers that are) entities that have received support pursuant to Section 4003(b)(1)-(3) of the CARES Act, which makes loans available to air carriers and businesses deemed critical to national security.
  • ABS will not be eligible if the ABS issuance provides for prefunding or the retention of issuance proceeds in anticipation of application thereof to the purchase of additional receivables.

Valuation and Pricing

• Interest Rates and Fees. The applicable interest rates for each type of collateral are available in the “Pricing Schedule” attached as Exhibit D. Interest rates for TALF loans will be set one day prior to their respective loan subscription date.Interest on TALF loans will be payable monthly (except for TALF loans secured by CLOs, which will be payable quarterly).^[18] In addition, on the loan settlement date, the borrower must pay the TALF SPV an administrative fee equal to 10 basis points of the loan amount.

• Collateral Haircuts. The size of each TALF loan will be based on the market value of the pledged ABS and the applicable haircut. See the “Haircut Schedule” attached as Exhibit B. The haircut will be based on, and vary according to, the ABS type and its average life. Eligible collateral will not be required to be marked to market after disbursement of the TALF loan.

  • For ABS collateral issued on the loan settlement date, the market value will be the price paid by the borrower to acquire such ABS, expressed as a percentage of par. For ABS collateral that is not issued on the loan settlement date, the market value will be equal to the lesser of (a) the purchase price paid by the borrower to purchase such ABS as set forth in the sale confirmation related to such purchase, (b) the market price as of the applicable TALF loan subscription date, which will be reported by the FRBNY to the Custodian, or (c) another value reported by the FRBNY to the Custodian based on its own collateral review and assessment.
  • However, for all ABS other than SBA ABS, the market value for purposes of determining the loan amount will be no greater than par. For SBA ABS with a market value above par, the TALF SPV will lend up to 105% of market value minus the haircut, and the borrower will be expected to periodically prepay a portion of the loan, with such prepayments calculated to adjust for the expected reversion of market value toward par value as such ABS mature.
  • The FRBNY will validate the reasonableness of the purchase price paid by the borrower in comparison to various market data sources as of the trade date, and may also utilize an agent to perform a stress valuation. The FRBNY reserves the right to determine a different price with respect to any purchase price that does not reflect then-prevailing market conditions and, in rare cases, may reject the loan request.
• Average Life Calculations. For ABS with bullet maturities, average life is determined by the expected principal payment date. For amortizing ABS, average life is defined as the weighted average life (“WAL”) to maturity based on the prepayment assumptions and market conventions set forth in Exhibit C. For auto rental fleets, the average life is the length of any revolving period plus six months. The FAQ includes certain adjustments to the average life calculations for an ABS that is pledged after its issuance date.
• Prospectus Requirements. The issuer of a TALF-eligible ABS is expected to publish the ABS’ average life in its prospectus or offering document, calculated in accordance with the FRBNY’s prepayment assumptions, and to make a representation therein that the WAL for each triple A-rated tranche was calculated in accordance such assumptions. For auto and credit card ABS, the issuer is also expected to publish whether the deal is prime or subprime according to TALF criteria.^[19] The FAQ emphasizes that the foregoing representations are material to the FRBNY’s determination of the haircuts.

Restrictions on Borrower’s Relationship with Collateral

• A TALF borrower must agree not to exercise, or refrain from exercising, any voting or consent rights under pledged ABS without the FRBNY’s consent.
• A borrower must also agree not to enter into any hedging transactions that would hedge the credit risk associated with the pledged ABS while the related TALF loan is outstanding.^[20]
• Eligible ABS that is not issued on the same day an investor borrows from the TALF must have been acquired by the borrower in one or more arms-length secondary market transactions no more than 30 days prior to the relevant loan subscription date, provided that each individual purchase transaction (i) involved proceeds of at least $1 million and (ii) was for a cash price that does not reflect any economic arrangement other than the purchase of such ABS.^[21]
• Otherwise eligible borrowers are restricted from pledging collateral to the TALF SPV where the borrower or an affiliate has certain connections to the underlying credit exposures, unless an exception applies. The below table lists these restrictions and certain exceptions provided in the FAQ. The definition of “affiliate” appears in the MLSA and is based on a traditional “control” requirement.^[22]

• The FAQ also states that the FRBNY will not fund a TALF loan if it believes that a potential borrower is motivated to request a TALF loan based on a direct or indirect economic interest in the underlying collateral and such economic interest would impact the incentive of such borrower to independently assess the risk of investment in such ABS. Prospective TALF borrowers with concerns that it could be rejected on this basis are encouraged to ask their TALF Agent to contact the FRBNY in advance of its loan request.
• TALF borrowers are not subject to the compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under the CARES Act.

Issuer/Sponsor Deliverables

The FAQ also describes various certifications and documents required to be made or provided by the issuer or sponsor of the TALF-eligible ABS to the FRBNY, including: (i) the offering circular for the ABS, (ii) a sponsor certification on the eligibility of the collateral, (iii) a related indemnity undertaking agreement, (iv) an auditor attestation on TALF eligibility (or in the case of CLOs, an agreed upon procedures letter related to TALF eligibility criteria for CLOs), (v) a requirement to deliver all data the issuer or sponsor has submitted to any NRSROs concerning the ABS or its underlying exposures and a related waiver letter and (vi) all other data that it has analyzed to determine collateral eligibility. Orrick will separately publish an alert discussing these requirements in further detail.

Valuation and Pricing

• Interest Rates and Fees. The applicable interest rates for each type of collateral are available in the “Pricing Schedule” attached as Exhibit D. Interest rates for TALF loans will be set one day prior to their respective loan subscription date.Interest on TALF loans will be payable monthly (except for TALF loans secured by CLOs, which will be payable quarterly).^[18] In addition, on the loan settlement date, the borrower must pay the TALF SPV an administrative fee equal to 10 basis points of the loan amount.

• Collateral Haircuts. The size of each TALF loan will be based on the market value of the pledged ABS and the applicable haircut. See the “Haircut Schedule” attached as Exhibit B. The haircut will be based on, and vary according to, the ABS type and its average life. Eligible collateral will not be required to be marked to market after disbursement of the TALF loan.

  • For ABS collateral issued on the loan settlement date, the market value will be the price paid by the borrower to acquire such ABS, expressed as a percentage of par. For ABS collateral that is not issued on the loan settlement date, the market value will be equal to the lesser of (a) the purchase price paid by the borrower to purchase such ABS as set forth in the sale confirmation related to such purchase, (b) the market price as of the applicable TALF loan subscription date, which will be reported by the FRBNY to the Custodian, or (c) another value reported by the FRBNY to the Custodian based on its own collateral review and assessment.
  • However, for all ABS other than SBA ABS, the market value for purposes of determining the loan amount will be no greater than par. For SBA ABS with a market value above par, the TALF SPV will lend up to 105% of market value minus the haircut, and the borrower will be expected to periodically prepay a portion of the loan, with such prepayments calculated to adjust for the expected reversion of market value toward par value as such ABS mature.
  • The FRBNY will validate the reasonableness of the purchase price paid by the borrower in comparison to various market data sources as of the trade date, and may also utilize an agent to perform a stress valuation. The FRBNY reserves the right to determine a different price with respect to any purchase price that does not reflect then-prevailing market conditions and, in rare cases, may reject the loan request.
• Average Life Calculations. For ABS with bullet maturities, average life is determined by the expected principal payment date. For amortizing ABS, average life is defined as the weighted average life (“WAL”) to maturity based on the prepayment assumptions and market conventions set forth in Exhibit C. For auto rental fleets, the average life is the length of any revolving period plus six months. The FAQ includes certain adjustments to the average life calculations for an ABS that is pledged after its issuance date.
• Prospectus Requirements. The issuer of a TALF-eligible ABS is expected to publish the ABS’ average life in its prospectus or offering document, calculated in accordance with the FRBNY’s prepayment assumptions, and to make a representation therein that the WAL for each triple A-rated tranche was calculated in accordance such assumptions. For auto and credit card ABS, the issuer is also expected to publish whether the deal is prime or subprime according to TALF criteria.^[19] The FAQ emphasizes that the foregoing representations are material to the FRBNY’s determination of the haircuts.

Restrictions on Borrower’s Relationship with Collateral

• A TALF borrower must agree not to exercise, or refrain from exercising, any voting or consent rights under pledged ABS without the FRBNY’s consent.
• A borrower must also agree not to enter into any hedging transactions that would hedge the credit risk associated with the pledged ABS while the related TALF loan is outstanding.^[20]
• Eligible ABS that is not issued on the same day an investor borrows from the TALF must have been acquired by the borrower in one or more arms-length secondary market transactions no more than 30 days prior to the relevant loan subscription date, provided that each individual purchase transaction (i) involved proceeds of at least $1 million and (ii) was for a cash price that does not reflect any economic arrangement other than the purchase of such ABS.^[21]
• Otherwise eligible borrowers are restricted from pledging collateral to the TALF SPV where the borrower or an affiliate has certain connections to the underlying credit exposures, unless an exception applies. The below table lists these restrictions and certain exceptions provided in the FAQ. The definition of “affiliate” appears in the MLSA and is based on a traditional “control” requirement.^[22]

• The FAQ also states that the FRBNY will not fund a TALF loan if it believes that a potential borrower is motivated to request a TALF loan based on a direct or indirect economic interest in the underlying collateral and such economic interest would impact the incentive of such borrower to independently assess the risk of investment in such ABS. Prospective TALF borrowers with concerns that it could be rejected on this basis are encouraged to ask their TALF Agent to contact the FRBNY in advance of its loan request.
• TALF borrowers are not subject to the compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under the CARES Act.

Issuer/Sponsor Deliverables

The FAQ also describes various certifications and documents required to be made or provided by the issuer or sponsor of the TALF-eligible ABS to the FRBNY, including: (i) the offering circular for the ABS, (ii) a sponsor certification on the eligibility of the collateral, (iii) a related indemnity undertaking agreement, (iv) an auditor attestation on TALF eligibility (or in the case of CLOs, an agreed upon procedures letter related to TALF eligibility criteria for CLOs), (v) a requirement to deliver all data the issuer or sponsor has submitted to any NRSROs concerning the ABS or its underlying exposures and a related waiver letter and (vi) all other data that it has analyzed to determine collateral eligibility. Orrick will separately publish an alert discussing these requirements in further detail.

Pricing Schedule

*Daniel Goldstein, a senior associate in Orrick’s Structured Finance group, is also an author of this article.