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Under the recently announced Term Asset-Backed Securities Loan Facility (the “2020 TALF”), the New York Federal Reserve will commit to lend on a recourse basis to a special purpose vehicle (the “TALF SPV”), which will initially make up to $100 billion of loans available to holders of highly-rated asset-backed securities (ABS). The loans will have a term of three years, will be nonrecourse to the borrower and will be fully secured by eligible ABS. This program will be based upon the similar program originally implemented in 2008 in connection with the most recent global financial crisis (the “2008 TALF”). The eligible ABS collateral will be valued and assigned a haircut according to a schedule (as yet unpublished) based on sector, weighted average life (WAL) and historical volatility, roughly in line with the schedule used for the 2008 TALF.
While the 2020 TALF will be generally consistent with the 2008 TALF, there are some key differences between the 2008 TALF and the 2020 TALF based on the information provided by the Federal Reserve to date.
- Time Between Announcement and Lending: The
Federal Reserve announced the 2008 TALF on November 25, 2008, but
began lending in March 2009, over three months after the initial
announcement. Due to the infrastructure and lending documents
already in place from the 2008 TALF, we expect a quicker start time
from announcement to lending for the 2020 TALF.
- Treatment of Commercial Mortgage Backed Securities
(CMBS): The 2008 TALF included CMBS as a permitted asset
class underlying TALF eligible ABS, while the 2020 TALF did not
include CMBS. The Federal Reserve stated that the feasibility of
adding other asset classes to the facility will be considered in
the future, and it is therefore possible the list will be modified
to include CMBS.
- Treatment of Legacy ABS: Eligible ABS
collateral for the 2008 TALF included certain pre-existing, or
“legacy” CMBS. The 2020 TALF requires that all eligible
ABS collateral be newly issued (i.e. issued after March 23, 2020)
and that substantially all of the underlying credit exposures be
newly issued as well. As stated above, it is possible the Federal
Reserve will modify the list of eligible collateral to include
certain legacy assets.
- Who May Borrow: Eligible borrowers under the
2008 TALF included (i) a U.S. company that conducted significant
operations or activities in the U.S.; (ii) a U.S. branch or agency
of a foreign bank (other than a foreign central bank) that
maintained reserves with the Federal Reserve; (iii) a U.S. insured
depository institution; and (iv) an investment fund that was
U.S.-organized and managed by an investment manager that had its
principal place of business in the U.S.
Any U.S. company is an eligible borrower under the 2020 TALF, and the eligible borrower is expressly permitted to have a non-U.S. parent company. While the text of the CARES Act appears to require an eligible borrower to have significant operations in and a majority of its employees based in the U.S., this requirement was not included in the TALF term sheet and it is not clear at this time whether the requirement will be applied to the TALF program.
- Interest Rates: Under the 2008 TALF, the
interest rate varied based on the sector and WAL of the assets
underlying the ABS, and included twelve different asset categories
and up to five different WAL categories for each asset category,
with the interest rate benchmark switching between LIBOR, Fed Funds
and the Prime rate depending on the asset category.
The 2020 TALF simplified the interest rate structure with only two categories applicable to all asset types: (i) the interest rate for loans secured by ABS with a WAL of less than two years will be 100 basis points over the two year LIBOR swap rate, and (ii) the interest rate for loans secured by ABS with a WAL of two years or greater will be 100 basis points over the three year LIBOR swap rate.
- Section 11(d)(1) Exemption for Primary Dealers: In connection with the 2008 TALF, the Securities and Exchange Commission (SEC) granted primary dealers a limited exemption from Section 11(d)(1) of the Securities Exchange Act of 1934's prohibition on underwriters arranging for the extension or maintenance of credit in connection with new securities offerings in order to allow primary dealers to facilitate TALF loans. While we have not seen a similar exemption granted as of yet, we expect the SEC will grant this exemption for primary dealers in connection with the 2020 TALF.