Term Asset-Backed Securities Loan Facility: Orrick’s Guide to “TALF 2.0”

(updated as of September 1, 2020) | May.27.2020

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 asset-backed securities (“ABS”). The TALF, 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.

The following is a summary guide of “TALF 2.0” primarily based on the terms and conditions and the Frequently Asked Questions (“FAQ”) released by the Fed to date. Orrick will continue to follow developments in the Fed’s implementation of TALF 2.0 and will periodically update this summary as additional information becomes available.

Facility Mechanics and Loan Terms

  • Under the TALF, the FRBNY will commit to lend to a special purpose vehicle (“TALF SPV”) on a recourse basis. The Treasury Department will also make a $10 billion initial equity investment in the TALF SPV, using funds appropriated to the Exchange Stabilization Fund under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
  • In turn, the TALF SPV will initially make up to $100 billion of loans available to “Eligible Borrowers” that pledge “Eligible Collateral.”
  • A prospective borrower will not be able to access the TALF directly, but will be required to enter into a customer agreement with a designated “TALF Agent” (initially limited to certain Primary Dealers designated by the Fed) that will act on the borrower’s behalf. Each TALF Agent will execute the Master Loan and Security Agreement (“MLSA”) for itself and as agent for its borrower customers, and will, among other functions, perform due diligence on the borrower, take all actions required of the borrower, and generally serve as an intermediary between the borrower and the TALF SPV’s custodian bank (“Custodian”).[1]
  • Each TALF loan will have a three-year term, will be fully secured by eligible ABS, and otherwise will be nonrecourse to the borrower.[2] A borrower (acting through a TALF Agent) will be permitted to request one or more loans on fixed subscription dates that will generally occur twice each month. In general, a borrower must request a minimum of $5 million for each loan and may pledge only a single eligible ABS per TALF loan.[3] There is no maximum loan amount.
  • If the TALF loan settlement date occurs on the same day as the closing of a newly issued ABS, loan proceeds will be paid directly to the party expected to deliver the ABS to the Custodian (the TALF Agent or the underwriter of the ABS) against delivery of such ABS. Disbursement of the loan proceeds will be contingent on receipt by the Custodian of the ABS, an administrative fee and, if applicable, any additional funds required to purchase such ABS.
  • Borrowers must repay the TALF loan on the maturity date.[4] Borrowers will be allowed to pre-pay, without penalty, loans in whole or in-part,[5] but will not be permitted to substitute collateral. Generally, any remittance of principal on ABS collateral will be applied to reduce the principal balance of the TALF loan in proportion to the original haircut taken on the ABS. However, under certain circumstances (such as the occurrence of an event of default under the related ABS agreements),[6] all cash flow received on the ABS must be applied to reduce the balance of the TALF loan.
  • The Fed will publicly disclose information on TALF loans and borrowers on a monthly basis, including the identity of each borrower and its “Material Investors” (defined as those individuals or entities that directly or indirectly own 10% or more of any outstanding class of securities of the entity), as well as the amount borrowed, the interest rate payable on each loan, and the ABS collateral pledged by each borrower.
  • The first subscription date was June 17, 2020, and the first loan settlement date (also referred to as the loan closing date) was June 25, 2020. The program is scheduled to terminate on, and no further credit extensions will be made after, December 31, 2020 (the “TALF Termination Date”), unless extended.
  • The FRBNY has posted the form of MSLA, along with forms of certain documentation, on its website. Together, the MLSA, FAQ and the term sheet collectively constitute all of the terms and conditions applicable to each TALF loan. In addition, each TALF Agent will have its own form of customer agreement with borrowers, pursuant to which borrowers will be required to provide certain representations required by the FRBNY.[7]

TALF Program Structure*

diagram of TALF Program Structure

*As noted above, in the case where the TALF loan settlement date occurs on the same day as the closing of a newly issued ABS, loan proceeds will be paid directly to the party expected to deliver the ABS to the Custodian (the TALF Agent or the underwriter of the ABS) against delivery of such ABS.

Eligible Borrowers

  • An “Eligible Borrower” must:

    1. own “Eligible Collateral” (described in more detail below);
    2. be created or organized in the United States or under the laws of the United States;[8]
    3. have “significant operations”[9] in and a majority of their employees based in the United States; the Fed will consider only consolidated subsidiaries — not parent companies or sister organizations — for purposes of this criterion, and special rules apply to borrowers that are investment funds, as discussed below;
    4. maintain an account relationship with a TALF Agent;
    5. not have any Material Investor that is a foreign government;[10] and
    6. certify that (i) it is unable to secure adequate credit accommodations from other banking institutions,[11] (ii) it is not insolvent and (iii) it is not made ineligible by the conflicts of interest prohibition of Section 4019 of the CARES Act.[12]
  • The borrower will also generally be expected to continuously represent that it is an Eligible Borrower meeting the eligibility requirements. Accordingly, each TALF borrower is also expected to have a mechanism for continuously monitoring its direct and indirect investors, including foreign governments, while the TALF loan is outstanding.
  • Special Considerations for Investment Funds. According to the FAQ, an “investment fund” includes “(i) any type of pooled investment vehicle that is organized as a business entity or institution, including without limitation a hedge fund, a private equity fund, and a mutual fund, and (ii) any type of single-investor vehicle that is organized as a business entity or institution.” The fund’s portfolio can consist solely of TALF eligible ABS or a mix of TALF-eligible ABS and other assets. For any borrower that is an investment fund, however, the third criterion described above would apply to the investment fund manager instead of the borrower itself, and the investment fund manager (in addition to the borrower) must also satisfy the second criterion (it must be U.S. organized) and the fifth criterion (no Material Investors can be foreign governments).
  • Certain additional restrictions on the borrower’s relationship to the collateral also apply, as further discussed below.

Eligible Collateral

Each TALF loan must be secured by eligible collateral in the form of eligible ABS. Eligible ABS must satisfy certain requirements with respect to (i) the ABS itself and (ii) the related underlying credit exposures. Criteria (1), (6) and (7) below are the criteria relating to the underlying credit exposures.

  • “Eligible ABS” must:

    1. be ABS where the underlying credit exposures are one of the following: (i) auto loans or leases, (ii) student loans, (iii) credit card receivables (consumer or corporate), (iv) equipment loans or leases, (v) floorplan loans, (vi) premium finance loans for property or casualty insurance, (vii) certain small business loans that are guaranteed by the Small Business Administration (“SBA”),[13] (viii) leveraged loans or (ix) commercial mortgages[14];
    2. except for Commercial Mortgage-Backed Securities (“CMBS”), be issued on or after March 23, 2020 or, in the case of SBA Pool Certificates or Development Company Participation Certificates, January 1, 2019; CMBS must have been issued before March 23, 2020;
    3. be U.S. dollar-denominated cash ABS (i.e., not synthetic ABS);
    4. not be junior to any other class of securities backed by the same pool of assets;[15]
    5. 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 not have a credit rating below the highest investment-grade rating category from any eligible NRSRO. Initially, the only “eligible NRSROs” for purposes of the AAA-rating requirement are (i) S&P, Fitch and Moody’s (at least one of which must supply the required long-term or short-term rating, as applicable) and (ii) so long as the ABS has a qualifying rating from S&P, Fitch or Moody’s, DBRS and Kroll. ABS that achieved a AAA-rating though a third-party guarantee are not eligible.[16]
    6. except for CMBS, all or substantially all of the underlying credit exposures must have been originated on or after a specified origination date, each of which is specified by asset class in Exhibit A attached hereto;
    7. all or substantially all of the underlying credit exposures for such ABS (i.e., 95% or more of the dollar amount of the underlying assets in the ABS) must (i) for newly issued ABS, except Collateralized Loan Obligations (“CLOs”), be originated by U.S.-organized entities (including U.S. branches or agencies of foreign banks), (ii) for CLOs, have a lead or a co-lead arranger that is a U.S.-organized entity (including a U.S. branch or agency of a foreign bank), and (iii) for all ABS (including CLOs and CMBS), be to U.S.-domiciled obligors[17] or with respect to real property located in the United States or one of its territories;
    8. entitle their holders to payments of both principal and interest (i.e., interest-only or principal-only securities are not eligible)
    9. not have interest rates that are periodically reset by auctions, that have a variable rate demand feature, or that step up or step down to predetermined levels on specific dates, and must not be a zero-coupon instrument;
    10. be cleared through the Depository Trust Company; and
    11. have an average life that is less than the specified limit for such 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).
  • The FRBNY will reject ABS that do not meet the collateral eligibility requirements. The FAQ also notes that the FRBNY may, in its sole discretion, choose to reject eligible ABS for any reason, including based on considerations related to credit quality, transparency, and simplicity of the ABS structure.
  • Special Considerations for CMBS and CLOs.

    • Eligible CMBS (i) may not be backed by only a single asset or obligations to only a single borrower and (ii) must bear interest at a pass-through rate that is fixed or based on the weighted average of the underlying fixed mortgage rates.
    • Only static CLOs are eligible collateral. In addition, the manager of a CLO must have its principal place of business in the United States. CLOs backed by commercial real estate are not eligible. Several additional limitations apply to CLOs. For further details, see Orrick’s previous client alert available here.
  • Other Eligible ABS Requirements and Exclusions.

    • Newly issued ABS (other than CLOs) will not be eligible if it contains a redemption option exercisable (a) 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),[18] or (b) at any time such ABS is owned by the FRBNY or the TALF SPV.
    • Eligible CLOs may contain a redemption option exercisable no earlier than one year after the issuance date, provided that it is a condition to the exercise of the option that the pledged CLOs and any pari passu class(es) are redeemed at their full outstanding principal amount plus any accrued interest outstanding. Such an option may be exercised even if the CLOs are owned by the FRBNY or the TALF SPV.
    • ABS positions retained by a sponsor or affiliate to satisfy obligations under risk retention rules (such as those implemented under the Dodd-Frank Act) are not eligible collateral.
    • ABS benchmarked to LIBOR will be expected to include adequate fallback language, such as that recommended by the Alternative Reference Rates Committee of the FRBNY or substantially similar fallback language.
    • Eligible ABS does 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.
    • ABS will not be eligible if the ABS issuance provides for prefunding or the retention of issuance proceeds in anticipation of application thereof to the purchase of additional receivables.

Valuation and Pricing

  • Interest Rates and Fees. The applicable interest rates for each type of collateral are available in the “Pricing Schedule” attached as Exhibit D. Interest rates for TALF loans will be set one day prior to their respective loan subscription date.Interest on TALF loans will be payable monthly (except for TALF loans secured by CLOs, which will be payable quarterly).[19] In addition, on the loan settlement date, the borrower must pay the TALF SPV an administrative fee equal to 10 basis points of the loan amount.
  • Collateral Haircuts. The size of each TALF loan will be based on the market value of the pledged ABS and the applicable haircut. See the “Haircut Schedule” attached as Exhibit B. The haircut will be based on, and vary according to, the ABS type and its average life. Eligible collateral will not be required to be marked to market after disbursement of the TALF loan.

    • For ABS collateral issued on the loan settlement date, the market value will be the price paid by the borrower to acquire such ABS, expressed as a percentage of par. For ABS collateral that is not issued on the loan settlement date, the market value will be equal to the lesser of (a) the purchase price paid by the borrower to purchase such ABS as set forth in the sale confirmation related to such purchase, (b) the market price as of the applicable TALF loan subscription date, which will be reported by the FRBNY to the Custodian, or (c) another value reported by the FRBNY to the Custodian based on its own collateral review and assessment.
    • However, for all ABS other than SBA ABS, the market value for purposes of determining the loan amount will be no greater than par. For SBA ABS with a market value above par, the TALF SPV will lend up to 105% of par value minus the haircut.
    • The FRBNY will validate the reasonableness of the purchase price paid by the borrower in comparison to various market data sources as of the trade date, and may also utilize an agent to perform a stress valuation. The FRBNY reserves the right to determine a different price with respect to any purchase price that does not reflect then-prevailing market conditions and, in rare cases, may reject the loan request.
  • Average Life Calculations. For ABS with bullet maturities, average life is determined by the expected principal payment date. For amortizing ABS, average life is defined as the weighted average life (“WAL”) to maturity based on the prepayment assumptions and market conventions set forth in Exhibit C, calculated as of the desired TALF loan settlement date. For auto rental fleets, the average life is the length of any revolving period plus six months. The FAQ includes certain adjustments to the average life calculations for an ABS that is pledged after its issuance date.
  • Prospectus Requirements. The issuer of a TALF-eligible ABS is expected to publish the ABS’ average life in its prospectus or offering document, calculated in accordance with the FRBNY’s prepayment assumptions, and to make a representation therein that the WAL for each triple-A rated tranche was calculated in accordance such assumptions. For auto and credit card ABS, the issuer is also expected to publish whether the deal is prime or subprime according to TALF criteria.[20] The FAQ emphasizes that the foregoing representations are material to the FRBNY’s determination of the haircuts.

Restrictions on Borrower’s Relationship with Collateral

  • A TALF borrower must agree not to exercise, or refrain from exercising, any voting or consent rights under pledged ABS without the FRBNY’s consent.
  • A borrower must also agree not to enter into any hedging transactions that would hedge the credit risk associated with the pledged ABS while the related TALF loan is outstanding.[19]
  • Eligible ABS that is not issued on the same day an investor borrows from the TALF must have been acquired by the borrower in one or more arms-length primary or secondary market transactions no more than 30 days prior to the relevant loan subscription date, provided that each individual purchase transaction (i) involved proceeds of at least $1 million and (ii) was for a cash price that does not reflect any economic arrangement other than the purchase of such ABS.[22]
  • Otherwise eligible borrowers are restricted from pledging collateral to the TALF SPV where the borrower or an affiliate has certain connections to the underlying credit exposures, unless an exception applies. The below table lists these restrictions and certain exceptions provided in the FAQ. The definition of “affiliate” appears in the MLSA and is based on a traditional “control” requirement.[23]

An Eligible Borrower may not pledge…

Unless…

  • ABS backed by loans originated or securitized by the borrower or an affiliate
  • the collateral is an SBA ABS and the borrower has no knowledge that the underlying loans were originated by it or an affiliate, or
  • the collateral is a CLO backed by broadly syndicated loans that were originated by the borrower or an affiliate as part of a syndicate
  • ABS backed by a pool of floorplan loans or fleet leases that includes loans or leases under which the borrower or an affiliate is the obligor
  • all such loans or leases together constitute no more than 10% of the aggregate principal balance (or, for leases, the securitization value) of the pool as of the subscription date
  • if the borrower or its affiliate is a manufacturer, producer or seller of any products (including financial products such as insurance) or the provider of any services (such as education), an ABS backed by a pool of loans or leases that includes loans or leases financing the sale, provision or lease of such products or services
  • all such loans or leases together constitute no more than 10% of the aggregate principal balance (or, for leases, the securitization value) of the pool as of the subscription date
  • CMBS backed by a mortgage pool that includes loans made to the borrower or an affiliate
  • all such mortgage loans together constitute no more than 5% of the aggregate principal balance of the pool as of the subscription date
  • CLOs backed by a leveraged loan pool that includes loans made to the borrower or an affiliate
  • all such loans together constitute no more than 4% of the securitization value of the pool on the subscription date
  • The FAQ also states that the FRBNY will not fund a TALF loan if it believes that a potential borrower is motivated to request a TALF loan based on a direct or indirect economic interest in the underlying collateral and such economic interest would impact the incentive of such borrower to independently assess the risk of investment in such ABS. Prospective TALF borrowers with concerns that it could be rejected on this basis are encouraged to ask their TALF Agent to contact the FRBNY in advance of its loan request.
  • TALF borrowers are not subject to the compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under the CARES Act.

Issuer/Sponsor Deliverables

The FAQ also describes various certifications and documents required to be made or provided by the issuer or sponsor of the TALF-eligible ABS to the FRBNY, including: (i) the offering circular for the ABS, (ii) a sponsor certification on the eligibility of the collateral, (iii) a related indemnity undertaking agreement, (iv) an auditor attestation on TALF eligibility (or in the case of CLOs, an agreed upon procedures letter related to TALF eligibility criteria for CLOs), (v) a requirement to deliver all data the issuer or sponsor has submitted to any NRSROs concerning the ABS or its underlying exposures and a related waiver letter and (vi) all other data that it has analyzed to determine collateral eligibility. Orrick has published a separate alert, available here, discussing these requirements in further detail.

 

Exhibit A

Origination Date Requirements

All or substantially all (i.e., at least 95% of the principal balance) of the relevant type of underlying credit exposures must be originated or issued on or after certain specified dates, as set forth in the chart below.[24]  For revolving facilities, the origination date is the date on which the underlying loan was drawn or funded, not the date on which the facility was put in place.

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)[25] on or after January 1, 2020 and prior to the TALF Termination Date in amounts no greater than the amount of the maturing ABS.[26]
  • For ABS issued by master trusts established on or after March 23, 2020—on or after January 1, 2020.

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.

 

Exhibit B

Haircut Schedule

SECTOR

SUBSECTOR

ABS AVERAGE LIFE (YEARS)

 

 

0-<1

1-<2

2-<3

3-<4

4-<5

5-<6

6-<7

7-<8

8-<9

9-<10

Auto

Prime[27] retail lease

10%

11%

12%

13%

14%

-

-

-

-

-

Auto

Prime retail loan

6%

7%

8%

9%

10%

-

-

-

-

-

Auto

Subprime retail loan

9%

10%

11%

12%

13%

-

-

-

-

-

Auto

Motorcycle/other recreational vehicles

7%

8%

9%

10%

11%

-

-

-

-

-

Auto

Commercial and government fleets

9%

10%

11%

12%

13%

-

-

-

-

-

Auto

Rental fleets

12%

13%

14%

15%

16%

-

-

-

-

-

Credit Card

Prime[28]

5%

5%

6%

7%

8%

-

-

-

-

-

Credit Card

Subprime

6%

7%

8%

9%

10%

-

-

-

-

-

Equipment

Loans and Leases

5%

6%

7%

8%

9%

-

-

-

-

-

Floorplan

Auto

12%

13%

14%

15%

16%

-

-

-

-

-

Floorplan

Non-Auto

11%

12%

13%

14%

15%

-

-

-

-

-

Leveraged Loan

Static

20%

20%

20%

20%

20%

21%

22%

23%

24%

25%

Premium Finance

Property and casualty

5%

6%

7%

8%

9%

-

-

-

-

-

Small Business

SBA 7(a) Loans

5%

5%

5%

5%

5%

6%

6%

-

-

-

Small Business

SBA 504 Loans

5%

5%

5%

5%

5%

6%

6%

7%

7%

8%

Student Loan

Private

8%

9%

10%

11%

12%

13%

14%

-

-

-

Commercial Mortgages

Legacy, Conduit

15%

15%

15%

15%

15%

16%

17%

18%

19%

20%

 

Exhibit C

Amortizing ABS Average Life Calculation (WAL)

SECTOR

SUBSECTOR

PREPAYMENT ASSUMPTION[29]

Auto

Prime retail lease

100% of prepayment curve

Auto

Prime retail loan

1.3% APS

Auto

Subprime

1.5% APS

Auto

Motorcycle/other recreational vehicles

1.5% APS

Auto

Commercial and government fleets

100% of prepayment curve

Equipment

Loans and leases

8% CPR

Leveraged Loan

Broadly syndicated and middle market loans

10% CPR

Small Business

SBA 7(a) loans

14% CPR

Small Business

SBA 504 loans

7% CPR

Student Loan

Private

8% CPR

 

CMBS. For CMBS, average life will be calculated as of the desired TALF loan settlement date on the basis of (i) the current composition of the mortgage pool, as reflected in recent servicer and trustee reports, (ii) the entitlement of the CMBS to make distributions (including, if applicable, its position in a time-tranched sequence of classes), (iii) the assumption that "anticipated repayment dates" are maturity dates, and (iv) a 0% CPR and the absence of future defaults. For this purpose, loans in default or special servicing will be considered as if they had not defaulted, and previously-modified loans will be considered according to their terms as modified.

 

Exhibit D

Pricing Schedule

SECTOR
(Subsector)

FIXED 3 YEAR LOAN

 

FLOATING

 

Average Life of 1-<2 Years

Average Life of >=2 Years

 

Auto

2-year OIS rate
+ 125 bps

3-year OIS rate
+ 125 bps

N/A

Commercial Mortgage

Credit Card

Equipment

Floorplan

Premium Finance

Student Loan
(Private)

Leveraged Loan

N/A

30-day average SOFR
+ 150 bps

Small Business
(SBA 7(a) Loans)

N/A

Top of Fed Funds Range + 75 bps

Small Business
(SBA 504 Loans)

3-year OIS rate
+ 75 bps

N/A

 

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



[1] A copy of the form MLSA is available here. The Bank of New York Mellon will serve as Custodian and be party to the MLSA along with the TALF Agents and the TALF SPV.

[2] A TALF loan will become full recourse and payable upon demand if a borrower who received a TALF loan is found to have been ineligible at the time of the loan or is found to have breached certain representations or covenants specified in the MLSA.

[3] A borrower may pledge multiple SBA Pool Certificates with the same applicable haircut percentage to secure a TALF loan, provided each security has proceeds of at least $1 million.

[4] Borrowers may, in certain circumstances, surrender the collateral to the TALF SPV in lieu of repaying the loan. The MSLA also includes mechanisms permitting the borrower, in coordination with the TALF SPV, to sell the ABS and use the proceeds to pay off the TALF loan.

[5] If a borrower makes a partial prepayment, collateral securing its TALF loan will be released on a pro-rata basis, taking into consideration minimum ABS denominations.

[6] Other circumstances that would require all cash flow be applied to payment of principal and interest on the TALF loan include (i) in the case of an ABS revolving or master trust, the occurrence of an early amortization event or early redemption event and (ii) in the case of CMBS, the depletion of credit support where the aggregate outstanding principal balance of the classes that provide credit support to such CMBS, minus the aggregate amount of “appraisal reduction amounts” in effect with respect to the underlying assets, is less than or equal to zero.

[7] See Appendix 2A of MLSA.

[8] Includes U.S. subsidiaries and U.S. branches or agencies of foreign banks.

[9] The Fed does not define the term “significant operations.” However, the FAQ provides that “the following are examples of what would constitute significant operations in the United States for a borrower seeking to participate in the TALF: A borrower (or an investment manager in the case of investment funds) with greater than 50 percent of its consolidated assets in, annual consolidated net income generated in, annual consolidated net operating revenues generated in, or annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) generated in the United States as reflected in its most recent audited financial statements.”

[10] For this purpose, a sovereign wealth fund is considered a foreign government.

[11] The FAQ provides: “While these are not the only factors on which a TALF participant may rely in making this certification, a TALF participant may rely on one or more of the following factors: (i) unusual economic conditions in a sector of the ABS market or ABS markets intended to be addressed by the TALF, such as spreads in the primary or secondary ABS markets that are elevated relative to normal market conditions for the sector that the borrower is seeking to use as collateral for a TALF loan, or (ii) elevated rates or haircuts in the financing market (e.g., repo market) relevant for the collateral that the borrower is seeking to use for a TALF loan. Lack of adequate credit does not mean that no credit is available. Credit may be available, but inadequate in its amount, price, or terms.” As of the date of this Guide, market participants are uncertain as to specifically what actions would form the basis for, and support the making of, this certification. Some are of the view that this certification, which derives from other “lender-of-last-resort” lending programs implemented by the Fed, has no place in the TALF, in which the ultimate beneficiary of the financing is not necessarily the TALF borrower that would make the certification, but the entities and individuals to whom the financing will be passed on: namely the sponsors and originators of the underlying ABS and the consumers and businesses to which they lend.

[12] Section 4019 of the CARES Act prohibits the Fed from extending emergency relief funds (including TALF loans) to any business in which a “covered individual” directly or indirectly holds a 20% or greater equity stake. The term "covered individual" includes the president, vice president, heads of executive branch departments, and members of congress; as well as their spouses, children and sons/daughters-in-law. For purposes of this prohibition, the holdings of covered individuals who are related to each other are aggregated.

[13] Eligible small business ABS include ABS that are fully guaranteed by the full faith and credit of the U.S. government and backed by loans made pursuant to (i) Section 7(a) of the Small Business Act (“SBA Pool Certificates”) and (ii) the SBA’s Certified Development Company/504 loan program (“Development Company Participation Certificates”). SBA Pool Certificates that include Paycheck Protection Program loans in the underlying collateral pool are eligible ABS.

[14] Each CMBS must evidence an interest in a trust fund consisting of fully-funded mortgage loans and not other CMBS, other securities or interest rate swap or cap instruments or other hedging instruments. A participation or other ownership interest in such a loan will be considered a mortgage loan and not a CMBS or other security if, following a loan default, the ownership interest is senior to or pari passu with all other interests in the same loan in right of payment of principal and interest. The security for each mortgage loan must include (or, if payments due under the loan have been defeased, the security for the loan or its predecessor must have previously included) a mortgage or similar instrument on a fee or leasehold interest in one or more income-generating commercial properties.

[15] For this purpose a class of ABS that receives principal later in time than the most senior ABS class but that is otherwise pari passu with such class will not be considered “junior.” Money market eligible tranches for auto loan and equipment loan securitizations are not considered senior to the other triple-A rated securities in those transactions.

[16] ABS that have been placed on review or watch for downgrade are not eligible. Existing TALF loans will not be impacted by subsequent downgrades to ABS securing the loan. U.S. dollar-denominated cash ABS backed by loans, debentures, or pools under the SBA’s 7(a) and 504 programs do not require an explicit credit rating, so long as all of the underlying assets or the ABS themselves are fully guaranteed by the U.S. government. The issuer or sponsor is required to send the FRBNY the final credit rating letters from each eligible NRSRO rating the pledged ABS collateral no later than 10 a.m. (New York time) on the applicable TALF loan settlement date. Unsolicited ratings will not be considered in determining whether an ABS is TALF-eligible.

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

[18] The FAQ provides that 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.

[19] A borrower is afforded a grace period of 30 days to pay interest on a TALF loan if the net interest on the pledged ABS is not sufficient to cover the interest payment associated with the loan.

[20] For eligible ABS issued on or after March 23, 2020 and before May 21, 2020, the prospectus need not specify whether the deal is prime or subprime or include the WAL calculations based on the FRBNY’s prepayment assumptions. For Development Company Participation Certificates, the offering document must either contain the security’s WAL or include a supplement disclosing the security’s WAL.

[21] Direct hedges, such as credit default swaps on the specific ABS, and correlative hedges, such as short-selling the ABX index, are not permitted. Hedges on a borrower’s broader portfolio, which may include securities purchased with TALF loans, and interest rate hedges are not prohibited.

[22] The FAQ points to financing or hedging arrangements as examples of unrelated economic arrangements. However, a borrower may enter into short-term financing transactions that mature on or prior to the TALF loan settlement date.

[23] The MLSA defines “Affiliate” to mean “with respect to [any] specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.” It, in turn, defines “Control” as “the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise.”

[24] The underlying exposures for an 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 in Exhibit A.

[25] 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.

[26] 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.

[27] Auto loans and leases are considered prime if the weighted average FICO score of the receivables is 680 or greater. Receivables without a FICO score are assigned the minimum FICO score of 300 for this calculation. Commercial receivables can be excluded from this calculation if historic cumulative net losses on these accounts have been the same or lower than those on receivables to individual obligors and this information is available in the prospectus. In addition, the percentage of commercial receivables in a trust must not exceed 10%. For auto deals where a weighted average FICO score is not disclosed, the subprime haircut schedule will apply.

[28] Credit card ABS are considered prime if at least 70% or more of the receivables have a FICO score greater than 660. FICO scores must reflect performance data within the last 120 days. For credit card trusts where the percentage of receivables with a FICO score of greater than 660 is not disclosed, the subprime haircut schedule will apply.

[29] CPR (Conditional Prepayment Rate) represents the proportion of the principal of a pool of loans that is assumed to be paid off prematurely in each period. APS (Absolute Prepayment Speed) represents the percentage of the original number of loans that prepay during a given period.