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.
