(updated as of September 1, 2020)
June.02.2020
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 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.
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:
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.
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Underlying Credit Exposure |
Origination Date Requirement |
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Auto Loan Receivables; Credit Card Receivables; Floor Plan Receivables; and Premium Finance Receivables |
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Equipment Receivables |
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Leveraged Loans |
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Student Loans |
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SBA Loans |
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Commercial Mortgages |
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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:
No Auction Resets; No Variable Rate Demands; No Steps (Up or Down); No ABS in the Asset Pool. The Fed will not consider any ABS, the interest rates of which are periodically reset by auctions, have a variable rate demand feature, or “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 be within the permitted average life for the relevant type of ABS (under five years for credit card, auto, equipment, floorplan and premium finance ABS, under seven years for SBA Pool Certificates and private student loans and under ten years for CMBS, CLOs and Development Company Participation Certificates).
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 both of the e-mail addresses [email protected] and [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:
https://www.newyorkfed.org/medialibrary/media/markets/talfdocs/talf-aup-clo.pdf.
The following information must be included in the prospectus for the ABS:[15]
These requirements do not apply to eligible ABS issued on or after March 23, 2020 and before May 22, 2020.
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] so long as, consistent with the FAQ, (a) the borrower acquires the ABS in an arm’s length primary or secondary market transaction within 30 days prior to the subsequent loan subscription date, with the date of acquisition measured from the relevant pricing or trade date, and (b) the acquisition has a settlement date prior to the subsequent loan subscription date. 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.
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.