The Federal Reserve Releases Revised Terms of the Term-Asset Backed Securities Loan Facility

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On May 12, 2020, the Board of Governors of Federal Reserve System (the “Fed”) published a revised term sheet for the Term-Asset Backed Securities Loan Facility (the “TALF”), and the Federal Reserve Bank of New York (the “NY Fed”) published answers to additional frequently asked questions about the TALF. The TALF was originally announced on March 23, 2020 as part of an initiative to support the flow of credit to US consumers and businesses. The initial term sheet for was published by the Federal Reserve Board on April 9, 2020, and can be found at https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a1.pdf. The revised term sheet and the related FAQs can be found at https://www.federalreserve.gov/monetarypolicy/talf.htm.

Under the TALF, the NY Fed will lend to a special purpose vehicle (“TALF SPV”), which will provide non-recourse funding to eligible borrowers owning eligible collateral. Loan proceeds will be disbursed to the borrower, contingent on receipt by the TALF SPV’s custodian bank of the eligible collateral, an administrative fee, and margin, if applicable. No new TALF loans will be made after September 30, 2020.

The terms of the TALF remain mostly unchanged, including that the term of the loans will be 3 years, the loans will be nonrecourse to the borrower and will be fully secured by eligible asset-backed securities (“ABS”). In addition to the requirement to maintain an account relationship with a TALF agent, eligible borrowers must, consistent with the requirements for the other Fed programs, be created or organized in the US or under its laws, have significant operations in the US, and have a majority of their employees based in the US. The NY Fed will publish a Master Loan and Security Agreement, which will provide further details on the terms that will apply to borrowings under the TALF.

Eligible collateral includes US dollar denominated cash (i.e., not synthetic) ABS that 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 and do not have a credit rating below the highest investment-grade rating category from an eligible rating organization. With the exception of commercial mortgage backed securities (“CMBS”), SBA Pool Certificates, and Development Company Participation Certificates, eligible ABS must be issued on or after March 23, 2020. CMBS issued on or after March 23, 2020, will not be eligible.

To be eligible collateral, all or substantially all of the underlying credit exposures must be newly issued, except for CMBS. All or substantially all of the credit exposures underlying the eligible ABS must (1) for newly issued ABS, except for collateralized loan obligations (CLOs), be originated by US-organized entities (including US branches or agencies of foreign banks), (2) for CLOs, have a lead or a co-lead arranger that is a US-organized entity (including a US branch or agency of a foreign bank), and (3) for all ABS (including CLOs and CMBS), be to US-domiciled obligors or with respect to real property located in the United States or one of its territories. CMBS backed by only a single asset or obligations to only a single borrower, as well as commercial real estate CLOs, will not be eligible collateral. To be eligible, CMBS must entitle its holders to payments of principal and interest (i.e., must not be an interest-only or principal-only security). Each CMBS must bear interest at a pass-through rate that is fixed or based on the weighted average of the underlying fixed mortgage rates. CMBS must not be junior to other securities with claims on the same pool of loans.

The NY Fed clarified in the FAQs that a CMBS will not be eligible collateral for a particular borrower if the borrower is (or is an affiliate of) a borrower under a mortgage loan backing the CMBS, unless that loan, and each other mortgage loan in the CMBS mortgage pool made to an affiliate of the TALF borrower, together constitute no more than 5% of the aggregate principal balance of the mortgage loans in the pool as of the date of origination of such loan.

An eligible borrower (but not the issuers of eligible collateral) will be subject to the conflicts of interest requirements of section 4019 of the CARES Act and will be required to certify (and provide evidence) that it is unable to secure adequate credit accommodations from other banking institutions and that it is not insolvent. The NY Fed clarified that lack of adequate credit does not mean that no credit is available — lending may be available, but at prices or on conditions that are inconsistent with a normal, well-functioning market.

The Fed also outlined the information it will publicly disclose for TALF on a monthly basis. The Fed will disclose the name of each participant, the amounts borrowed, interest rate charged, and value of pledged collateral, as well as the overall costs, revenues, and fees. The disclosures are similar to those announced for the other Fed facilities that utilize CARES Act funds.

The TALF is not yet operational. The FAQs indicate that further information will be forthcoming.