On Monday, March 23, the Federal Reserve announced that it will revive the Troubled Asset-Backed Securities Loan Facility (“TALF”) program, a tool that the Fed developed and last used during the 2008 financial crisis to support the flow of credit to consumers and small businesses by facilitating the issuance of certain asset-backed securities (“ABS”). The TALF, established under Section 13(3) of the Federal Reserve Act, is part of a broader effort by the Federal Reserve to use its lending authority to counteract the negative economic impact of the ongoing coronavirus pandemic, but is the only component of that effort focused directly on the ABS market.
A term sheet attached to the Federal Reserve’s announcement provides the initial details on “TALF 2.0”. At this point in time, there is not any more definitive information regarding what the TALF will look like. However, the Federal Reserve has indicated that it will publish more detailed terms and conditions for TALF 2.0 at a later date, and that the terms and conditions will be based primarily on the TALF that was implemented in 2008 (“2008 TALF”). When the terms and conditions become available, and as the implementation of TALF 2.0 evolves, Orrick will provide you with updates.
In the meantime, please find below a brief summary of the basic terms of TALF 2.0:
Mechanics and General Terms. Under the program, a special purpose vehicle (“SPV”) funded by the Federal Reserve Bank of New York (“New York Fed”) and the Treasury Department will initially make up to $100 billion of loans available to “Eligible Borrowers” that pledge “Eligible Collateral” in the form of eligible ABS issued on or after March 23, 2020. The SPV will be funded by loans from the New York Fed as well as an initial $10 billion equity investment by the Treasury Department. The TALF loans made by the SPV to borrowers who invest in eligible ABS will have a three-year term, will be fully secured by such ABS, and otherwise will be nonrecourse to the borrower. Borrowers will be allowed to pre-pay loans in whole or in-part, but generally will not be permitted to substitute collateral. The program is scheduled to terminate on September 30, 2020, unless extended by the Federal Reserve.
“Eligible Borrowers” are defined in the term sheet as U.S. companies (including U.S. entities owned by non-U.S. parent companies and U.S. branches of foreign banks) that own eligible ABS and maintain an account relationship with a primary dealer. Primary dealers are financial institutions that the Fed has authorized to transact directly with the Fed. A list of primary dealers can be found here on the New York Fed’s website.
“Eligible Collateral” is defined as “new” ABS that are issued on or after March 23, 2020, are U.S. dollar denominated cash ABS (i.e., not synthetic ABS), and do not bear interest payments that step up or step down to predetermined levels on specific dates. Eligible ABS must also have a credit rating in the highest long-term or the highest short-term investment-grade rating category from at least two eligible nationally recognized statistical rating organizations (“NRSROs”) and may not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. The underlying credit exposures for eligible ABS must be newly issued, must have been primarily originated by a U.S. company, and — at least for now (in its term sheet, the Federal Reserve has indicated that it will consider including additional asset classes in the future) — are limited to one of the following asset classes:
Valuation, Pricing, and Fees. The loan amount will be based on the value of the pledged ABS, as determined pursuant to a haircut which will vary based on the asset’s sector, weighted average life, and historical volatility. Collateral will not be marked to market. The interest rate for eligible ABS that are not backed by a government guarantee will be (a) 100 basis points over the 2-year LIBOR swap rate for securities with a weighted average life less than two years or (b) 100 basis points over the 3-year LIBOR swap rate for securities with a weighted average life of two years or greater. The pricing structure will be updated as necessary to account for the expected industry transition away from LIBOR. The SPV will charge an administrative fee of 10 basis points of the loan amount on the settlement date for collateral. According to the Fed’s term sheet, the Fed will publish a haircut schedule as part of the forthcoming terms and conditions that will be “roughly in line with the haircut schedule used for [2008 TALF].” The final iteration of the haircut schedule used in connection with the 2008 TALF can be found here.
Although, according to the Federal Reserve’s term sheet, the forthcoming terms and conditions of TALF 2.0 will be based primarily on the 2008 TALF, the initial term sheet indicates that there may be some potential differences from the prior facility. For example:
The full extent of these differences and the process for borrowers hoping to access the facility will become clearer as TALF 2.0 begins to take shape in the coming weeks. In addition, securitization industry groups have already provided feedback to the Fed and Treasury, identifying and outlining what they believe would be important modifications to TALF 2.0 as it is currently proposed. The proposals focus on expanding the definition of “Eligible Collateral” to include asset classes not currently included in the definition and to include legacy ABS (not just new issues), broadening the current ratings criteria beyond AAA-rated ABS only and streamlining the process for borrowing under the facility.
Orrick will be tracking the implementation and evolution of TALF 2.0 and regularly providing updates along the way.
 Although the Federal Reserve may revise this definition for TALF 2.0, the terms and conditions of the 2008 TALF define “Eligible Borrower” to mean any U.S. company that owns eligible collateral, provided the company maintains an account relationship with a TALF Agent, as designated by the New York Fed. An entity is a U.S. company if it is (1) a business entity or institution that is organized under the laws of the United States or a political subdivision or territory thereof (U.S.-organized) and conducts significant operations or activities in the United States, including any U.S.-organized subsidiary of such an entity; (2) a U.S. branch or agency of a foreign bank (other than a foreign central bank) that maintains reserves with a Federal Reserve Bank; (3) a U.S. insured depository institution; or (4) an investment fund that is U.S.-organized and managed by an investment manager that has its principal place of business in the United States. An entity that satisfies any one of the requirements above is a U.S. company regardless of whether it is controlled by, or managed by, a company that is not U.S.-organized. Notwithstanding the foregoing, a U.S. company excludes any entity, other than those described in clauses (2) and (3) above, that is controlled by a foreign government or is managed by an investment manager, other than those described in clauses (2) and (3) above, that is controlled by a foreign government. A financing subsidiary of a Public-Private Investment Fund (“PPIF”) established pursuant to the Legacy Securities Public-Private Investment Program may be an eligible borrower only with respect to legacy CMBS and only if the PPIF is receiving Treasury-supplied debt financing equal to or less than 50 percent of the PPIF’s total equity (including private and Treasury-supplied equity) and satisfies all other borrower eligibility requirements. See Term Asset-Backed Securities Loan Facility: Terms and Conditions (November 13, 2009), https://www.newyorkfed.org/markets/TALF_Terms_print.html.
 Press Release, Federal Reserve announces expansion of eligible collateral under Term Asset-Backed Securities Loan Facility (TALF), May 1, 2009, https://www.federalreserve.gov/newsevents/pressreleases/monetary20090501a.htm.
 Term Asset-Backed Securities Loan Facility: Frequently Asked Questions (October 5, 2009), https://www.newyorkfed.org/markets/talf/talf_faq_100509.html.