TALF Update
March 2009
Authors: Irwin A. Kishner, John A. Rogers Jr.
Overview
On March 3, 2009, the U.S. Treasury Department and the Federal Reserve Board announced the launch of the Term Asset-Backed Securities Loan Facility (TALF), which is intended to increase the availability of credit to consumers and small businesses by stimulating demand for new issuances of asset-backed securities (ABS).
TALF creates an attractive financing mechanism for investment vehicles, including hedge funds and private equity funds, to acquire AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans, equipment loans, floorplan loans, SBA-guaranteed small business loans or receivables related to residential mortgage servicing advances. Under the TALF program, the Federal Reserve Bank of New York will make up to $200 billion of TALF loans available to purchasers of these ABS. The first loan settlement date for TALF loans was March 25, 2009, and the program will run through December 2009, unless further extended by the Fed.
TALF Loan Characteristics
- TALF loans are non-recourse loans with a three-year term, secured by eligible collateral (defined below);
- Interest on TALF loans is payable monthly, and the loans will not be subject to mark-to-market or re-margining requirements;
- TALF loans are pre-payable (in whole or in part and without penalty) at the option of the borrower, but substitution of collateral during the term of the loan will not be allowed (unless the collateral was determined to have been ineligible at the time the loan was made);
- The minimum size for each TALF loan is $10 million (there is no set maximum);
- Each eligible borrower (defined below) must be a customer of a primary dealer that is participating in TALF and must execute a customer agreement with the primary dealer prior to applying for any loan;
- The subscription date is the first Tuesday of every month.
Loans will be made at a "haircut" to the value of the eligible collateral in accordance with guidelines published by the Fed (initially 5% to 16% depending on the eligible collateral) and will bear interest at what the Fed believes are market favorable rates. Depending on the type of eligible collateral, interest rates will be 50 or 100 bps over 1-month LIBOR, 75 bps over the federal funds target rate, or 50 or 100 bps over the 3-year LIBOR swap rate. The purchase price of the eligible collateral may be up to 110% of par.
Eligible Borrowers
TALF defines "eligible borrowers" to include: (i) U.S.-based companies; (ii) U.S.-branches or agencies of foreign banks that maintain reserves with a Federal Reserve Bank; and (iii) U.S.-based investment funds that are managed by a U.S.-based investment manager (including funds set up for the purpose of investing in assets with TALF funding). One significant restriction is the exclusion of U.S. operations of foreign banks that are foreign government controlled (even if only temporarily as a result of stabilization measures). TALF also prohibits entities that originated the underlying credit exposures and their affiliates from borrowing under TALF to finance purchases of eligible collateral backed by such credit exposures.
Eligible Collateral
Eligible collateral will include U.S. dollar-denominated ABS issued after January 1, 2009 (except for SBA Pool Certificates and Development Company Certificates, which must have been issued on or after January 1, 2008), and having the highest credit rating from two or more of Fitch Ratings, Moody's Investors Service or Standard & Poor's. The ratings cannot be based on a guarantee, and the ABS may not be on credit watch or review or have a credit rating below the highest investment-grade rating category from any of those rating agencies. All, or substantially all, of the credit exposures underlying eligible ABS must be exposures to U.S.-domiciled obligors.
The Fed and the U.S. Treasury Department have indicated that they are prepared to expand the TALF program to include other types of ABS, and are currently analyzing the appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) as eligible collateral.
We will be providing further updates on TALF program developments as they become available.
If you are interested in learning more about the TALF program, please contact Irwin A. Kishner at (212) 592-1435 or ikishner@herrick.com or John A. Rogers, Jr. at (212) 592-6177 or jrogers@herrick.com.
Copyright © 2009 Herrick, Feinstein LLP. TALF Update is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.
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