Standard & Poor’s (S&P) recently released a criteria report addressing the inclusion of debt guaranteed by the FDIC under its Temporary Liquidity Guarantee Program (TLGP) as defeasance collateral in commercial mortgage backed securities (CMBS) transactions. Pursuant to the TLGP, the FDIC is guaranteeing senior unsecured debt issued between October 14, 2008, and June 30, 2009 (TLGP Debt), through the earlier of the term of the TLGP Debt or June 30, 2012. TLGP Debt qualifies as "government securities" for purposes of the 1940 Act and REMIC regulations. Although TLGP Debt is backed by the full faith and credit of the government, it is not a direct obligation of the government, which complicates its use as defeasance collateral in lieu of U.S. Treasury securities.
S&P has taken the position that TLGP Debt can be used as defeasance collateral in CMBS transactions with AAA tranches, provided the risk inherent in utilizing TLGP Debt is mitigated through the fulfillment of numerous requirements, including, but not limited to:
- a servicer must waive its right to collect interest on advances made on behalf of substitute borrowers holding TLGP Debt;
- a servicer must collect for trust expenses incurred in making a payment demand on the FDIC; and
- a servicer’s errors and omissions policy must be expanded to cover losses to a CMBS trust due to the servicer’s failure to make a demand for payment within a 60-day period after a payment default by an institution issuing TLGP Debt.