“TALF 2.0”: A Primer for TALF-eligible Asset-backed Security Issuers

(updated as of June 10, 2020) | June.02.2020

“TALF 2.0”: TALF is Back.

In March 2020, the Federal Reserve (the “Fed”) announced that it would re-establish the Term Asset-Backed Securities Loan Facility (“TALF”) program, a market stabilization tool that was developed and last used by the Fed during the 2008 financial crisis to support the flow of credit to consumers and small businesses by facilitating the issuance of certain types of asset-backed securities (“ABS”).  The new version of TALF (“TALF 2.0”), which is established under Section 13(3) of the Federal Reserve Act and administered by the Federal Reserve Bank of New York (“FRBNY”), is part of a broader effort by the Fed to use its emergency lending authority to counteract the negative economic impact of the coronavirus pandemic, but is the only component of that effort focused directly on the ABS market.  While TALF 2.0 is similar in many ways to the original TALF, there are also some significant differences.[1]

This alert serves as a primer for issuers of ABS (and other ABS market participants) that may be interested in understanding some of the key criteria that will determine whether an ABS is TALF-eligible, as well as some of the obligations and responsibilities that would be imposed on an ABS issuer should it choose to issue ABS under the program.  It assumes that the reader is familiar with TALF’s basics.  Any reader who is not familiar with the basics, however, should know beforehand (at the very least) that, under TALF, the FRBNY will lend to TALF II LLC, a special-purpose vehicle established by the Fed and the U.S. Department of the Treasury (the “TALF SPV Lender”)[2], which in turn will make non-recourse loans to eligible borrowers.[3] Each borrower will be obligated to use the proceeds of its loan to acquire or finance eligible ABS that are considered to be newly issued (or, more accurately, sufficiently recently issued) under the terms of TALF and also will be obligated to pledge its ABS to the TALF SPV Lender to secure the repayment of its loan. Underlying TALF is the expectation that TALF, ultimately, will support credit availability to, and thereby prop up, consumers and businesses, the financial obligations of which will be securitized through the TALF-eligible ABS having “more normal interest rate spreads” through the COVID-related crisis.        

Orrick will continue to follow developments in the Fed’s implementation of TALF 2.0 and will periodically update this alert, along with its other TALF 2.0 alerts, as additional information becomes available.

Which types of ABS can be TALF-eligible ABS?

Only Certain Asset Classes Allowed.  Not any ABS is, or will be, a TALF-eligible ABS. Only nine types of ABS (designated by underlying asset class) are eligible as collateral under TALF.  These include ABS secured by the following types of assets, but only to the extent that they satisfy all of TALF’s other criteria:

  • Auto loans and leases
  • Student loans
  • Credit card receivables (both consumer and corporate)
  • Equipment loans and leases
  • Floorplan loans
  • Insurance premium finance loans
  • Certain types of Small Business Administration-guaranteed loans
  • Leverage loans (certain types of static CLOs)
  • Commercial mortgages (certain types of CMBS)

Stringent Ratings Requirements and No Synthetics. According to the Fed’s terms, each TALF-eligible ABS must be a U.S. dollar denominated, cash ABS (that is, not a synthetic ABS), and must (A) have a credit rating in the highest long‐term or, if no long‐term rating is available, the highest short‐term, investment-grade rating category from at least two eligible nationally recognized statistical rating organizations (“NRSROs”) and (B) not have a credit rating below the highest investment‐grade rating category from an eligible NRSRO.  Currently, the only NRSROs recognized by TALF are Fitch, Moody’s and S&P,  at least one of which must provide a required rating, as well as DBRS and Kroll, either of which may provide a “second” required rating.

The ABS Must Be Newly Issued. All eligible ABS other than CMBS, Small Business Administration (“SBA”) Pool Certificates, and Development Company Participation Certificates must be issued on or after March 23, 2020.  CMBS issued on or after March 23, 2020, will not be eligible.  SBA Pool Certificates or Development Company Participation Certificates must be issued on or after January 1, 2019.

The Underlying Assets Must Also Be Newly Issued. A “new issuance” requirement will apply to the underlying assets in the securitization, too.  All or substantially all (i.e., at least 95% of the principal balance) of the underlying assets, which TALF refers to as the “credit exposures,” must be originated or issued on or after certain prescribed dates that, as set forth in the chart below, vary according to asset class.[4]  For underlying assets that are in the form of loans drawn under an existing arrangement to extend credit, the origination dates of the underlying assets are the dates on which the loans were drawn or funded, not the date on which the arrangement for the extension of credit itself was put in place.  The FAQ[5] cites as examples floorplan lines of credit or loans secured by leases to rental car companies. In those instances, the origination dates would be the dates on which individual draws were made under the credit facilities, not the date on which the credit facilities themselves closed and became effective.

Underlying Credit Exposure

Origination Date Requirement

Auto Loan Receivables; Credit Card Receivables; Floor Plan Receivables; and Premium Finance Receivables

  • For auto loan ABS issued by non-revolving trusts: on or after January 1, 2019.
  • For ABS issued by existing revolving or master trusts: no origination date requirement but the ABS is only permitted if issued to refinance existing ABS of the same category maturing (or that matured)[6] on or after January 1, 2020 and prior to September 30, 2020 (i.e., the scheduled termination date of TALF 2.0, after which no further credit extensions will be made (the “TALF Termination Date”)) in amounts no greater than the amount of the maturing ABS.[7]
  • For ABS issued by master trusts established on or after March 23, 2020: on or after January 1, 2020.
  • An auto loan ABS issued by a new or existing trust with “revolving” features that, for example, permit replenishment of pool assets by providing for the application of pool proceeds to purchase from the originator (or its affiliates) additional assets, without such trust having other features of a revolving “master trust”, will not be eligible collateral.

Equipment Receivables

  • On or after January 1, 2019.

Leveraged Loans

  • Must be originated (or refinanced) on or after January 1, 2019.

Student Loans

  • Must be originated (or refinanced) on or after January 1, 2019.

SBA Loans

  • No restriction on the dates of the underlying loans or debentures so long as they collateralize SBA Pool Certificates and Development Company Participation Certificates on or after January 1, 2019.

Commercial Mortgages

  • No origination date requirement, but CMBS itself must be issued before March 23, 2020.

 

There Must Be a Substantial U.S. Nexus for the ABS’ Underlying Asset Pool. Under TALF, “all or substantially all” (i.e., at least 95% of the dollar amount) of an eligible ABS’ underlying assets must:

  • unless the ABS is a CLO, be originated by U.S.‐organized entities (including U.S. branches or agencies of foreign banks);
  • if the ABS is a CLO, have a lead or a co‐lead arranger that is a U.S.‐organized entity (which can be a U.S. branch or agency of a foreign bank); and
  • for all ABS, including CLOs and CMBS, be credit exposures to “U.S.‐domiciled obligors”[8] or, in the case of CMBS, relate to real property located in the United States or one of its territories.

No Steps (Up or Down); No ABS in the Asset Pool.  The Fed will not consider any ABS, the interest payments of which “step up” or “step down” to predetermined levels on specific dates, to be eligible as collateral under TALF.  In addition, none of an ABS’ underlying assets themselves can be ABS, cash or synthetic.

No Redemption Option.  ABS other than a CLO will not be TALF-eligible if it has a redemption option exercisable prior to three years after the disbursement date of any TALF loan secured by such ABS (other than pursuant to a “customary clean-up” call),[9]  or if the ABS permits a redemption option at any time it is owned by the FRBNY or the TALF SPV Lender.  A CLO with a redemption option exercisable no earlier than one year after the issuance date will be TALF-eligible, provided that it is a condition to the exercise of the option that the pledged CLO securities and any pari passu class(es) must be redeemed at their full outstanding principal amount plus any accrued interest. For CLOs, the option may be exercised even if the tranche is owned by the FRBNY or the TALF SPV Lender.

No CARES Support.  Eligible ABS will not include ABS issued or sponsored by (or CLOs with collateral managers that are) entities that have received support pursuant to Section 4003(b)(1)-(3) of the CARES Act, which makes loans available to air carriers and businesses deemed critical to national security.

DTC.  Eligible ABS must be cleared through the Depository Trust Company.

Average Life.  Eligible ABS must not exceed the maximum permitted average life for the relevant type of ABS (five years for credit card, auto, equipment, floorplan and premium finance ABS, seven years for SBA Pool Certificates and private student loans and ten years for CMBS, CLOs and Development Company Participation Certificates).

What Will the Issuer and Sponsor of a TALF-eligible ABS Be Required to Do?

TALF requires that both “issuers” and “sponsors” of ABS assume responsibility for ensuring that an ABS is, in fact, TALF-eligible.  Under TALF, the “issuer” of an ABS will be “the legal entity that issues the ABS;” and the “sponsor” will be “the entity that organizes and initiates the ABS transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to the issuer.”  For CLOs, TALF considers the collateral manager to be the sponsor.

Apart from structuring their ABS and the ABS’ underlying asset pool to ensure that their ABS is, in fact, TALF-eligible, the issuer and sponsor of an ABS will be required to provide a number  of certifications and other information to the FRBNY via the e-mail address [email protected].  These will include the following:

  • Issuer and Sponsor Certification: An Issuer and Sponsor Certification as to TALF Eligibility for ABS (the Issuer and Sponsor Certification), confirming that, “after due inquiry” by the issuer’s and the sponsor’s “appropriate officers, agents and representatives,” the issuer and the sponsor have determined that [the relevant ABS] constitute eligible collateral under TALF.” [10] The form of the certification (together with the Indemnity Undertaking described below) is posted on the FRBNY’s website and can be found here: https://www.newyorkfed.org/medialibrary/media/markets/talfdocs/talf-issuer-sponsor-certification.pdf.[11]

    The form of the Issuer and Sponsor Certification requires the inclusion of (among other things) the following:

    • Specific certifications that certain of the eligibility requirements described above (beneath the heading “Which types of ABS can be TALF-eligible ABS?”) and the NRSRO-related requirements described below have been satisfied.
    • A certification to the effect that all data provided to any NRSRO in connection with the offering of the relevant ABS (whether or not the NRSRO actually rated the ABS or the NRSRO is an eligible NRSRO under TALF) has been (or will be) delivered to the TALF Lender SPV, and that the sponsor and the issuer have provided to each NRSRO “a written waiver or consent permitting the NRSRO to share its view of the credit quality of the ABS and its underlying assets with the TALF SPV [Lender] and FRBNY.”The sponsor and the issuer must also deliver to the TALF SPV Lender copies of each of such waivers or consents.
    • A certification to the effect that the independent accounting retained in connection with the ABS offering is required to report suspected fraud or illegal acts to “the TALF Compliance fraud hotline,” together with a consent and confidentiality waiver with respect thereto.
    • An acknowledgment that purchasers of the ABS that are affiliates of either the originators of the underlying assets or the issuer or sponsor will not be able to use the ABS as TALF collateral;
    • An undertaking to issue a press release and notify the TALF SPV Lender and all registered holders of the ABS if, at any time prior to the maturity of the ABS, the issuer or sponsor determines that their certification as to TALF eligibility was not correct when made or has ceased to be correct or, in the case of ABS issued by a revolving trust, an early amortization event has occurred.In addition, if the ABS issued by a revolving trust are newly issued ABS, the ABS’ governing documents will be required to include a provision requiring the issuer to provide such notification.
    • An undertaking to provide to the TALF SPV Lender, upon request at any time prior to the maturity of the ABS, copies of (i) the governing documents for the ABS and (ii) the servicer and/or trustee reports or any other similar reports provided or made available to investors in connection with the ABS.[12]
    • A representation to the TALF SPV Lender and the FRBNY that the related prospectus or offering document, when taken as a whole together with all information provided by the issuer or sponsor or on their behalf to any NRSRO in connection with the offering, does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
    • A certification that the sponsor (and, if the sponsor is an SPV, its direct or indirect ultimate parent) has provided to the TALF Lender SPV and the FRBNY the Indemnity Undertaking described below.
    • An agreement to provide the Treasury Department and other governmental authorities that have oversight responsibilities with respect to TALF (“oversight authorities”) and their respective agents, consultants, contractors and advisors access to “Information” (i.e., access to personnel and any relevant books, papers, records, and data requested by the oversight authorities) in the event of a “Warranty Breach” (i.e., the failure of the ABS to constitute eligible collateral under the relevant rules as in effect at the time the ABS were issued, except that the only failure of the ratings eligibility criteria to be considered will be the final rating of the ABS upon issuance, not any subsequent downgrades).
  • Indemnity Undertaking: An Indemnity Undertaking provided by the sponsor (and, if the sponsor is an SPV, its direct or indirect ultimate parent) for the benefit of the TALF SPV Lender and FRBNY covering losses related to any misrepresentation, breach of warranty, or breach of undertaking in the Issuer and Sponsor Certification.
  • Accountants’ Report; Management Report: (A) For all ABS other than CLOs and SBA ABS, an Auditor Attestation regarding the TALF eligibility of the ABS provided by a nationally recognized accounting firm, or (B) for CLOs, (i) an agreed upon procedures letter with respect to factual matters relating to the various TALF eligibility criteria for leveraged loans in the CLO (the “CLO AUP Report (TALF)”) and, if available, a copy of the agreed upon procedures report provided to the sponsor and underwriter or initial purchaser (the “CLO AUP Report (Industry)” and, together with the CLO AUP Report (TALF), the “CLO AUP Reports”). In connection with the Auditor Attestation, management of the issuer and the sponsor must complete and deliver to the accounting firm a “Report of Management on Compliance” (the “Management Report”) asserting that the ABS comply with the TALF eligibility criteria. In the Auditor Attestation, the accounting firm, in turn, will be required to opine that management’s assertion “is fairly stated, in all material respects.” In each CLO AUP Report (TALF), the accounting firm will be required to attest that it conducted certain procedures related to compliance of the CLO with the TALF eligibility criteria.[13] The current forms of the Auditor Attestation (together with an attached form of the Management Report) and CLO AUP Report (TALF) are posted on the FRBNY’s website and can be found here: https://www.newyorkfed.org/medialibrary/media/markets/talfdocs/talf-auditor-attestation.pdf; and

    https://www.newyorkfed.org/medialibrary/media/markets/talfdocs/talf-aup-clo.pdf.

  • NRSRO “Data”: As already mentioned in the description of the Issuer and Sponsor Certification above, all “data” that the issuer or sponsor has submitted to any NRSROs concerning the ABS or its underlying exposures (but not transaction documents other than term sheets and offering documents).[14]
  • NRSRO Waivers or Consents: Also, as already mentioned in the description of the Issuer and Sponsor Certification above, a copy of each written waiver or consent provided to each NRSRO that received data on the ABS or its underlying assets from the issuer or sponsor (regardless of whether the NRSRO is rating the ABS or is an eligible NRSRO) permitting the NRSRO to share its view of the credit quality of the ABS and its underlying assets with the FRBNY.
  • Credit Rating Letters: The final credit rating letters from each relevant NRSRO.

Prospectus Requirements

The following information must be included in the prospectus for the ABS:[15]

  • a signed certification that the ABS is eligible collateral and a statement that the sponsor has executed and delivered the Indemnity Undertaking;
  • the ABS’ average life, calculated in accordance with the FRBNY’s prepayment assumptions, and a representation that the weighted average life for each triple A-rated tranche was calculated in accordance with such assumptions; and
  • for auto loan and credit card ABS, whether or not the deal is prime or subprime according to TALF criteria.

These requirements do not apply to eligible ABS issued on or after March 23, 2020 and before May 22, 2020.

Which available TALF loan subscription dates will be permitted to be used for TALF loans backed by newly issued ABS (other than SBA Pool Certificates)?

For newly issued ABS other than SBA Pool Certificates, in order for loan requests backed by the ABS to be made on any available subscription date, pricing must occur not earlier than two business days prior to that date and not later than that date. For an ABS that is priced earlier than two business days prior to any available subscription date, the loan request may be made on any subsequent subscription date.[16] As an example, the FAQ notes that if an ABS is priced on or after January 29 (Wednesday) and no later than January 31 (Friday), loan requests with respect to the ABS may be submitted on the January 31 subscription date. If an ABS is priced on or before January 28 (Tuesday), then loan requests with respect to the ABS may not be submitted on the January 31 subscription date, but may be submitted on subsequent subscription dates.

When do the required materials need to be complete and delivered to the FRBNY?

  • ABS issued on or after May 22, 2020: For ABS issued on or after May 22, 2020, the signed Issuer and Sponsor Certification, Indemnity Undertaking and Auditor Attestation or CLO AUP Reports (as applicable) must be delivered directly to the TALF SPV Lender and the FRBNY no later than 5:00 p.m. New York time on the day that the Form ABS-15G related to the transaction is filed. The NRSRO data and NRSRO waiver or consent must be submitted in the same manner no later than 5:00 p.m. New York time three weeks in advance of the first available TALF loan subscription date that immediately follows the pricing of the ABS, even if the issuer does not expect any borrowers to submit loan requests backed by the ABS on that subscription date. The prospectus or other offering document must be submitted on the actual subscription date for the relevant loan and may be preliminary (a so-called “red”), but the final (the so-called “black”) prospectus or offering document must be provided to the FRBNY no later than 12:00 p.m. New York time three business days prior to the related TALF loan settlement date.
  • ABS issued on or after March 23, 2020 and before May 22, 2020: For ABS issued on or after March 23, 2020 and before May 22, 2020, if the relevant TALF loan request is being made on a subscription date other than the June 17, 2020 subscription date, the Issuer and Sponsor Certification, the Indemnity Undertaking, the Auditor Attestation or CLO AUP Reports (as applicable), the NRSRO data, the NRSRO waiver or consent and a copy of the final prospectus or offering document must be delivered by e-mail directly to the TALF SPV Lender and the FRBNY no later than 3:00 p.m. New York time on June 30, 2020. For ABS issued during that time period for which a TALF loan request is being made on the June 17, 2020 subscription date, the submission deadlines will be 3:00 p.m. New York time on June 11, 2020 for the final prospectus or offering document and 3:00 p.m. New York time on June 15, 2020 for the other documents listed above.
  • All ABS: On each TALF loan subscription date (or, for loan requests being made on the June 17, 2020 subscription date backed by ABS issued on or after March 23, 2020 and before May 22, 2020, no later than 3:00 p.m. New York time on June 11, 2020), the borrowers’ TALF Agents must provide to the FRBNY (via [email protected]) the CUSIP numbers for all TALF ABS to be purchased or financed with a requested TALF loan. The final credit rating letters from each NRSRO must be submitted no later than 10:00 a.m. New York time on the TALF loan settlement date.[17]

What communications should issuers expect to receive after submitting “data” to the FRBNY?

According to the FAQ, if the FRBNY becomes aware of any factors that could adversely affect the eligibility of an ABS, the FRBNY will communicate with the issuer “as soon as practicable.” The issuer will be given an opportunity to discuss details and clarify potential areas of concern with the FRBNY.

If you have any questions regarding the terms and conditions of TALF or the responsibilities of issuers or sponsors thereunder, please contact any of the authors of this alert.

*Daniel Goldstein, a senior associate in Orrick’s Structured Finance group, is also an author of this article.

 


[1] We have published another Orrick alert that provides a more general overview of TALF 2.0 (see https://www.orrick.com/en/Insights/2020/05/Term-Asset-Backed-Securities-Loan-Facility-Orricks-Guide-to-TALF-2-0). For readers who are unfamiliar with TALF 2.0, it might be useful to read that alert in conjunction with this one.

[2]  The TALF SPV Lender will be supported by an equity investment made by the U.S. Department of the Treasury.

[3] A TALF loan, at inception, is certainly intended to be non-recourse, but will become full recourse to its borrower and payable upon demand by its borrower if the borrower turns out to have been an ineligible borrower, the borrower is found to have breached certain representations or covenants made by it in connection with its borrowing under TALF or if, prior to the maturity date of the loan, the borrower fails to properly surrender its ABS collateral to the TALF SPV Lender.

[4] The underlying credit exposures for eligible ABS may include financial assets that represent an interest in or the right to payments or cash flows from another asset pool (such as through a special unit of beneficial interest, collateral certificate, titling trust or similar intermediate security that does not have independent economic features) created in the normal course of business solely to facilitate the issuance of an ABS.  In such cases, the assets underlying the intermediate securities are considered to be the relevant underlying credit exposures for purposes of the chart below.

[5] By “FAQ” we are referring to the set of “Frequently Asked Questions” released by the Fed to date. The current version of the FAQ is available here: https://www.newyorkfed.org/markets/term-asset-backed-securities-loan-facility/term-asset-backed-securities-loan-facility-faq). 

[6] For these purposes, a variable funding note’s (“VFN”) maturity date is its commitment termination date and its amount is its maximum contractual principal balance, regardless of whether the VFN is renewed.  For VFNs with controlled amortization periods, only the amount that amortizes prior to the TALF Termination Date counts towards the limit.

[7] This limitation applies at the sponsor level.  The FAQ notes that if a sponsor has four master trusts with a total of $20 billion in ABS maturing (or that matured) on or after January 1, 2020 and prior to the TALF Termination Date, the maximum amount of TALF-eligible ABS the issuer could issue prior to the TALF Termination Date is $20 billion in the aggregate; it may issue that $20 billion in ABS from one master trust or from multiple master trusts. 

[8] U.S.-domiciled obligors are those domiciled in the United States or a political subdivision or territory thereof.

[9] A “customary clean-up call” with respect to a sponsor and its securitization refers to a clean-up call which is exercisable by the servicer or the depositor when the remaining balance of the assets or the liabilities of the issuer is not more than 10% (or a higher percentage customarily used by the sponsor in its securitizations that were offered before the TALF program was established) of the original balance of such assets or liabilities.

[10] This assertion may be made as of a date earlier than the date of the final prospectus or offering document. With respect to ABS issued on or after March 23, 2020, and before May 22, 2020, the issuer and the sponsor may rely on a previously issued certification made at the time of ABS issuance and conduct additional due diligence, as appropriate, to certify that the ABS is TALF-eligible as of the date of the required TALF certification.

[11] For SBA Pool Certificates, an “Assembler Undertaking” must be delivered in place of the Indemnity Undertaking provided by other ABS sponsors. The current form of the Assembler Undertaking is posted on the FRBNY’s website and can be found here: https://www.newyorkfed.org/medialibrary/media/markets/talfdocs/talf-sba-undertaking.pdf.

[12] Governing documents include the instruments and agreements (including any indenture, pooling and servicing agreement, trust agreement, servicing agreement, other similar agreement and other operative document) pursuant to which the ABS was issued, the underlying assets are serviced, and collections are applied, remitted and distributed.

[13] The Auditor Attestation and the CLO AUP Report (TALF) must be made as of the same date that the issuer and sponsor make their assertions in the Issuer and Sponsor Certification.

[14] The issuer or sponsor is also required to promptly provide the FRBNY any additional data provided to NRSROs subsequent to the initial delivery deadline. The FAQs define “data” to include any information prepared by or on behalf of the sponsor or issuer specifically for presentation to the applicable NRSROs, commonly known as the “rating agency book,” plus any information provided by or on behalf of the sponsor or issuer to the applicable NRSROs relating to (i) the underlying assets of the ABS, including information relating to its historical performance and the relevant characteristics of the collateral relating to eligibility criteria, (ii) the structure of the ABS, including any term sheets, cash flow projections, structural diagrams or draft offering documents provided to the NRSROs, and (iii) the issuer, sponsor, servicer or originators.  According to the FAQ, “data” does not include oral communications with NRSROs based on the FRBNY’s understanding that “material information” is “communicated in writing to the NRSROs,” and that email communications with the NRSROs need to be shared with the FRBNY only if they contain substantive information with regard to matters described above.

[15] Prospectuses and offering documents are not required for SBA Pool Certificates.

[16] The FAQ notes in the latter case, the ABS will be subject to the FRBNY’s price validation process described in the FAQ. Presumably, in either case, a loan request may be made on any subscription date occurring after the first available subscription date that immediately follows the pricing date, although the FAQ does not make this clear.

[17] In addition, for SBA Pool Certificates, the Assembler Undertaking must be delivered no later than four business days prior to the TALF loan settlement date.