On May 20, 2020, the Federal Reserve Bank of New York ("FRBNY" or the "Fed") announced the first subscription date, June 17, 2020, in connection with the Term Asset-Backed Securities Loan Facility ("TALF 2020"). The Fed also issued revised Frequently Asked Questions ("FAQs")1 and the new Master Loan and Security Agreement ("MLSA")2 for the program, along with other updated forms and documents. On May 26, 2020, the Fed again released revised FAQs and a revised issuer/sponsor certification, as further discussed below.
This Legal Update replaces our prior Legal Update published May 18, 2020, and provides a comprehensive summary of the current FAQs, MLSA and related TALF 2020 materials released to date.
Key Highlights in Recent Fed Releases
- The first TALF loan subscription date will be June 17, 2020, with a settlement date of June 25, 2020;
- Going forward, the Fed expects to provide two subscription dates per month, each available to all eligible asset classes;
- Eligible NRSROs have been expanded to include DBRS and Kroll, as long as at least one qualifying rating is received from S&P, Moody's or Fitch;
- The forms for TALF borrower certifications as to inadequate credit accommodations, solvency and conflicts of interest have been provided on the TALF website, with further guidance in the FAQs;
- Details on collateral review, issuer/sponsor certifications, auditor assurances and SBA loan documentation have been provided in the FAQs and in related forms on the TALF website;
- The Fed updated its Borrower Due Diligence Policy and Conflicts of Interest Policy with specific guidelines and requirements, including with respect to due diligence on Material Investors and Control Persons of Borrowers, as well as the required contents of Conflicts of Interest Plans; and
- Operational subscription and closing mechanics have been provided, including detailed timing and delivery requirements for all parties.
Overview
TALF 2020 was established by FRBNY pursuant to Section 13(3) of the Federal Reserve Act, and was approved by the Secretary of the Treasury and the Board of Governors of the Federal Reserve System. The program is designed to facilitate the issuance of asset-backed securities ("ABS") and support the availability of credit to households and businesses. The TALF 2020 program was initially announced on March 23, 2020, in the wake of considerable strain on the securitization markets associated with the coronavirus pandemic. A similar initiative ("Original TALF") was instituted by the Fed in 2009 to restart primary issuance in the ABS markets following the 2008 financial crisis.
Under TALF 2020, a special purpose entity ("TALF II LLC" or the "Lender") will make loans available to borrowers as described in more detail below. Any such loans will have a three-year term, be fully secured by eligible ABS and will be non-recourse to borrowers. To support this facility, the Fed has committed to lend up to $100 billion to TALF II LLC on a recourse basis, and the US Department of Treasury will make an equity investment of $10 billion in TALF II LLC from funds appropriated to the Exchange Stabilization Fund under Section 4027 of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). The Lender will initially make up to $100 billion of loans available. On fixed days expected to occur twice each month, borrowers will be able to request one or more TALF loans, the proceeds of which will be disbursed to such borrowers (contingent on receipt by the TALF custodian of eligible collateral, an administration fee and margin, if applicable).
GENERAL TERMS AND CONDITIONS
The first TALF 2020 subscription date on which borrowers may request loans under the TALF program will be June 17, 2020, and the related loan settlement date will be June 25, 2020. The Lender will not extend loans under TALF 2020 after September 30, 2020 (the "TALF Termination Date"), unless such date is extended by the Board and the Department of the Treasury.
Borrowers may prepay TALF loans in whole or in part at any time. Substitution of collateral during the term of the loan is generally not permitted. Under the term sheet and FAQs, TALF borrowers will be required to certify as to their eligibility to participate in the program (as further discussed below), and will be subject to the conflicts of interest requirements of section 4019 of the CARES Act, which prohibits certain federal government affiliations.
During the operation of TALF 2020, the Fed will publicly disclose certain information on a monthly basis, including the identity of each borrower and each other participant in the facility, each Material Investor of a borrower, the amount borrowed by each borrower and corresponding interest rate paid, the types and amounts of collateral pledged for each loan, and overall costs, revenues and fees for the program. A "Material Investor" for purposes of the TALF 2020 program is a person who owns, directly or indirectly, 10% or more of any outstanding class of securities of an entity. This information was not publicly disclosed in such a manner by FRBNY in connection with the Original TALF program.
The Secretary of the Treasury and the Board may make adjustments to the terms and conditions applicable to TALF 2020 at any time during the operation of the program, with any such changes to be announced on the Fed's website.
Master Loan and Security Agreement (MLSA)
Borrowers are not able to access the TALF directly and, instead, must rely on primary dealers acting as agents ("TALF Agents") to facilitate TALF Loans. As stated above, on Wednesday, May 20th, the Fed released the form of Master Loan and Security Agreement (MLSA) for TALF 2020, which was generally based on the MLSA from the Original TALF but which includes material changes to that previous form. The MLSA is an agreement among TALF II LLC, as Lender, The Bank of New York Mellon, as the TALF custodian and administrator appointed by the Fed, and the TALF Agents that become party thereto, each on behalf of itself and its respective TALF borrowers. Each TALF borrower must enter into an individually negotiated agreement (each, a "Customer Agreement") with at least one TALF Agent specifying the parties' responsibilities and obligations under the TALF program. A borrower may (and many likely will) enter into Customer Agreements with multiple TALF Agents. Although a TALF Agent may facilitate a TALF loan secured by eligible collateral issued in a transaction for which that TALF Agent was not an underwriter or initial purchaser, there are practical considerations which may it more likely that the TALF Agent will be an underwriter or initial purchaser, as applicable.3
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Footnotes
1. A copy of the Fed's revised TALF 2020 Frequently Asked Questions can be found at https://www.newyorkfed.org/markets/termasset-backed-securities-loan-facility/term-asset-backed-securities-loan-facility-faq.
2. A copy of the TALF 2020 Master Loan and Security Agreement can be found at https://www.newyorkfed.org/medialibrary/media/markets/talfdocs/talf-mlsa.pdf.
3. In recognition of the role of the underwriter or initial purchaser as TALF Agent, the SEC issued an order exempting broker-dealers that are designated as TALF Agent from the requirements of Section 11(d)(1) of the Exchange Act, which generally prohibits a person that is both a broker and a dealer from, among other things, arranging for the extension or maintenance of credit to, or for a customer on any security, that was part of a distribution of a new issue of securities in which the broker-dealer participated as a member of the selling syndicate.
Originally published 28 May, 2020
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