On Nov. 24, 2008, the Federal Reserve Board established the Term Asset-Backed Securities Loan Facility (“TALF”) program. Under the TALF program, the Federal Reserve Bank of New York (“FRB-NY”) will provide up to $200 billion in non-recourse financing to eligible owners of certain categories of asset-backed securities (“ABS”). The minimum size of a loan will be $10 million and have a term of three years. The TALF program is intended to increase credit availability by facilitating issuance of consumer and small business ABS at normal interest rate spreads. On Feb. 6, 2009, the FRB-NY released terms and conditions and answers to frequently asked questions, in connection with the TALF program. Below you will find more information about the TALF program.
Please note that an investor call with the FRB-NY is scheduled for Thursday, Feb. 12, 2009, at 3pm. The call-in number is 1-866-216-6835 (participant code: 296081). A selection of questions received in advance via email will be addressed by the FRB-NY during that call. Questions should be emailed to TALF@ny.frb.org.
A U.S. company that owns eligible collateral and maintains an account relationship with a primary dealer may borrow from the TALF program. For purposes of the TALF program, a U.S. company is any of the following:
(1) a business entity organized under the laws of the U.S. or a state or territory of the U.S. (“U.S. organized”) that conducts significant operations or activities in the U.S., including one that is owned by a non-U.S. entity and 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; or
(3) an investment fund that is U.S.-organized and is managed by an investment manager that has its principal place of business in the U.S.
For TALF purposes, an investment fund can be any type of pooled investment vehicle, including a hedge fund, a private equity fund, a mutual fund, or any vehicle that primarily invests in eligible collateral and borrows from the TALF program. Newly formed investment funds may also qualify.
However, a borrower may not be an entity that is controlled by a foreign government or is managed by an investment manager controlled by a foreign government. A foreign government controls a company if, among other things, the foreign government owns, controls or holds (with the power to vote) 25 percent or more of a class of voting securities of the company.
Eligible collateral includes ABS backed by auto loans and leases (including auto dealer floorplan loans), student loans (both federally guaranteed and private), credit card loans, and SBA-guaranteed small business loans to U.S. obligors. Eligible ABS must be cleared through the Depository Trust Company and, except for SBA Pool Certificates or Development Company Participation Certificates, must be issued on or after Jan. 1, 2009. The FRB-NY also has loan origination date restrictions relating to the underlying loans or refinancing date restrictions in the case of credit card ABS and auto dealer warehouse ABS, which are intended to limit TALF financing to recently originated loans. In addition, there is no minimum or maximum maturity limit for ABS, with the exception of auto loan ABS and credit card ABS, which cannot have an expected life greater than five years.
The ABS must have the highest long-term or short-term investment-grade rating from at least two rating agencies (and not have a lower credit rating from a major agency). (U.S. government guaranteed SBA loan pools are not required to have a rating.) Eligible collateral will not include ABS that have credit ratings based on the support of a third-party guarantee, or ABS that a major rating agency has placed on review or watch for downgrade. If ABS that was eligible for TALF financing is downgraded by a rating agency, this will not affect an existing TALF loan secured by that ABS; however, the ABS may not be used as collateral for any new TALF loans until it regains eligibility. Eligible collateral may not be backed by loans originated or securitized by the borrower or by an affiliate of the borrower. In addition, both the independent accountant for the sponsor and an executive officer of the sponsor must deliver certificates to the FRB-NY in order for the ABS to be eligible. The issuer and sponsor must also execute an undertaking to the FRB-NY indemnifying it from any losses it may suffer if such certifications are untrue.
How the TALF Program Works
The FRB-NY will announce monthly TALF loan subscription and settlement dates. On each subscription date, borrowers will be able to request only one floating-rate and one fixed-rate TALF loan (although each loan may finance multiple securities). An eligible borrower need not own the ABS on the subscription date. However, in order for the primary dealer and custodian to perform their due diligence, the borrower must inform the primary dealer by the subscription date of the CUSIP of the ABS it intends to deliver as collateral on the loan settlement date. The date that the TALF will commence operations will be announced later this month and the FRB-NY is expected to announce the terms for the initial subscription approximately two weeks before the initial subscription date. The TALF will cease making new loans on Dec. 31, 2009 (unless the TALF program is extended). In the newly-released “Frequently Asked Questions,” the FRB-NY provides more information regarding the settlement process.
The FRB-NY will have recourse only to the eligible collateral for repayment of its loan. The FRB-NY can not require the borrower to post additional margin based on a mark-to-market. The borrower will also not be permitted to substitute new collateral after the loan is made. However, the borrower will be permitted to prepay the loan at any time, without penalty. A borrower may also assign all of its obligations with respect to a TALF loan to another eligible borrower with the prior consent of the FRB-NY.
The FRB-NY states that it will retain the right to bring actions against a borrower for breaches of representations, warranties and covenants. The FRB-NY plans to release the form master loan and security agreement, under which TALF borrowings will be made later this week.
Haircuts and Rates
Haircuts. The FRB-NY will advance to each borrower a loan equal to the market value of the ABS less a haircut for that type of ABS. Preliminary haircuts are as follows. Haircuts will increase by one percentage point for each additional year of expected life beyond seven years.
Please click here to view table.
Mandatory Principal Payments. As payments are received on the eligible collateral, the principal collections will be applied to prepay the amount required to maintain the original haircut. After interest is paid to the FRB-NY, all other cash flow from the eligible collateral may be distributed to the equity holder in the borrower.
Rates. Borrowers will be able to choose either a fixed or floating interest rate on loans. Interest rates will be set two business days prior to each loan settlement date. The interest rate on TALF loans will be 1% over one-month LIBOR, or for fixed rate loans, 1% over the three-year LIBOR swap rate. A borrower has 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. In the event a borrower fails to pay required principal or interest on its TALF loan, the FRB-NY may enforce its rights in the collateral.
In addition, the FRB-NY will assess a non-recourse loan fee equal to five basis points of the loan amount at the inception of each loan transaction.
Role of the Primary Dealer
Each borrower must use a primary dealer, which will act as agent for the borrower, to access the TALF program and to deliver eligible collateral to the FRB-NY’s custodian bank. Among other duties, the primary dealer will: (1) collect from its customers the amount of each borrower’s fixed and/or floating rate loan request, the CUSIPs of the ABS the borrower expects to deliver and pledge against the loan, and the prospectuses and/or offering documents of the ABS expected to be pledged; (2) submit one aggregate loan request amount on behalf of its customers for a fixed rate TALF loan, and another for a floating rate TALF loan in the form and manner specified by the FRB-NY; (3) execute the master loan and security agreement as agent for the borrower; and (4) collect from its customers and deliver to the custodian the administrative fee and any applicable margin required to be delivered to the custodian on the loan settlement date.
Executive Compensation Requirements
In order for ABS to be eligible collateral for a TALF loan, the sponsor of the securitization that issues the ABS (or the applicable entity specified in forthcoming TALF certification documents) must be in compliance with the executive compensation requirements of the Emergency Economic Stabilization Act of 2008. Borrowers will not have to satisfy the executive compensation requirements.
Possible Expansion of the TALF Program
The FRB-NY has stated that it may make TALF financing available for residential mortgage-backed securities and commercial mortgage-backed securities. In addition, there has been widespread speculation that the Secretary of Treasury will expand TARP support for TALF (above the $20 billion already promised), both: (i) to increase the total amount of financing available under TALF above the $200 billion program size; and (ii) to provide TALF financing to purchasers of illiquid ABS currently held by U.S. financial institutions.
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The FRB-NY is finalizing details of the TALF program (as indicated by the investor call on Feb. 12, 2009), and more information (including the first date on which loan requests will be accepted) is expected soon. If you would like to review the “Frequently Asked Questions” and related answers published by the FRB-NY regarding the TALF program, please go to http://www.newyorkfed.org//markets/talf_faq.html.