Canada: Fed Announces Expansion Of TALF To Two New Asset Classes

On May 1, 2009, the Federal Reserve Bank of New York (NY Federal Reserve) announced the expansion of its Term Asset-Backed Securities Loan Facility (TALF) to include commercial mortgage-backed securities (CMBS) and securities backed by insurance premium loans. The TALF program, launched by the NY Federal Reserve in March 2009, is intended to increase the availability of credit in the U.S. economy by providing non-recourse loans to purchasers of newly issued asset-backed securities (ABS). Purchasers pledge the ABS to the NY Federal Reserve to secure repayment of the TALF loans.

To qualify as eligible collateral for TALF loans, CMBS generally must satisfy the same criteria used to determine the eligibility of other ABS under the program. Specifically, the securities must be U.S. dollar-denominated cash (i.e., not synthetic) CMBS issued on or after January 1, 2009. Eligible CMBS must entitle holders to principal and interest payments (i.e., they may not be interest- or principal-only securities) and must bear interest at a pass-through rate that is fixed or based on the weighted average of the underlying fixed mortgage rates. The CMBS must have a credit rating in the highest long-term investment-grade rating category from the required number of TALF CMBS-eligible rating agencies (which have yet to be determined by the NY Federal Reserve) and must not have a credit rating below the highest investment-grade rating from any such rating agency.

CMBS issued by an agency or instrumentality of the United States or a government-sponsored enterprise are not eligible for the TALF program. Each CMBS must evidence an interest in a trust fund consisting of fully funded, first-priority mortgage loans that are current in payment, and may not include other CMBS, other securities or interest rate swap or cap instruments or other hedging instruments. The security for each mortgage loan must include a mortgage or other similar instrument on a fee or leasehold interest in one or more income-producing properties located in the United States or its territories, and all mortgage loans must have been originated on or after July 1, 2008. The NY Federal Reserve expects collateral pools to be diversified with respect to loan size, geography, property type, borrowers and other characteristics, but will consider CMBS backed by non-diversified collateral on a case-by-case basis.

Purchasers using TALF loans to purchase CMBS may elect either 3-year (bearing interest at a fixed annual rate of 100 basis points over the 3-year LIBOR swap rate) or 5-year (expected to bear interest at a fixed annual rate of 100 basis points over the 5-year LIBOR swap rate) TALF loans. Some of the interest received on collateral securing 5-year loans may be applied to accelerate repayment of the TALF loans, particularly in the fourth and fifth years of the loans. The collateral haircut (i.e., the risk capital that borrowers must provide) for CMBS with an average life of five years or less will be 15% of the value of the collateral CMBS, and will increase by 1% for each additional year of average life up to 10 years. Eligible CMBS may not have an average life beyond 10 years. Additionally, pooling and servicing agreements for the CMBS will be required to satisfy certain conditions prescribed by the NY Federal Reserve. Finally, eligible borrowers will be required to agree not to exercise any voting, consent or waiver rights under a CMBS without the NY Federal Reserve's consent.

The initial subscription date for TALF loans to purchase CMBS will be in late June, and the subscription and settlement cycle for such loans will occur in the latter part of each following month. The cycle for loans secured by non-CMBS asset-backed securities will continue to be at the beginning of each month.

The June subscription for loans for non-CMBS asset-backed securities will also include loans to purchase securities backed by insurance premium finance loans. These loans are extended to small businesses to enable them to obtain property and casualty insurance, and the loans are often funded through the ABS market. The average life of eligible premium finance ABS cannot exceed five years, and the securities must either be issued to refinance existing premium finance ABS maturing in 2009 or issued out of an existing or newly established master trust in which all or substantially all of the underlying exposures were originated on or after January 1, 2009. The NY Federal Reserve is to provide additional information about premium finance ABS for the June 2009 subscription.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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