The Term Asset-Backed Securities Loan Facility (TALF) is a government-backed lending facility designed to restore credit availability to consumers and businesses by facilitating loans to investors to purchase certain highly rated asset-backed securities (ABS). The Federal Reserve Bank of New York, charged with administering TALF, continues to update its TALF guidance, most recently announcing revised TALF documents on August 4, 2009. This alert summarizes “Ten Things to Know” about the TALF program.

  1. Overview of TALF. The TALF program was designed to increase credit availability to consumers and businesses by facilitating non-recourse term loans used to purchase certain AAA-rated ABS. The loans are collateralized by the acquired ABS. Eligible borrowers are required to pay a “haircut” to the New York Fed ranging from 5 to 16 percent of the loan amount.
  2. Eligible Borrowers. An eligible borrower includes any U.S. company, such as corporations, partnerships, limited liability companies, insurance companies, banks and business or other non-personal trusts, that owns eligible collateral. U.S. branches of foreign firms may borrow from TALF, so long as they otherwise qualify as eligible borrowers. Investment funds may qualify as eligible borrowers if they are managed by an investment manager with its principal place of business in the U.S. and are not controlled by, or managed by an investment manager controlled by, a foreign government.
  3. Eligible Collateral. Eligible collateral includes certain types of AAA-rated ABS cleared through the Depository Trust Company, such as ABS with underlying exposures of auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, small business loans guaranteed by the U.S. Small Business Administration, residential mortgage servicing advance receivables and commercial mortgage loans.
  4. Loan Amount and Interest. The minimum TALF loan amount is currently $10 million. Most loans have a three-year maturity, although the borrower can elect that certain loans have a five-year maturity. Interest rates are set each month one day prior to the subscription date and vary based on the type of ABS collateral. Interest rates generally are calculated as a certain number of basis points from certain standard rates, depending on the type of ABS collateral.
  5. Non-recourse and Exceptions. TALF loans are generally non-recourse. There are, however, certain recourse exceptions for breaches of representations, warranties or covenants. For example, the loan may effectively become recourse if a borrower misrepresents its status as an “eligible borrower” or the eligibility of its collateral.
  6. Haircuts. Eligible borrowers must have a minimum amount of risk capital – or “haircut” – at stake in the loan. Eligible borrowers may borrow the lesser of the par or market value of the ABS collateral, minus a “haircut” currently ranging from 5 to 16 percent of the loan amount, depending on the type and average life of the ABS collateral. The New York Fed has published the current haircut schedule at http://www.newyorkfed. org/markets/talf_faq.html.
  7. How the Loan Works. An eligible borrower must contract with a primary dealer prior to borrowing from TALF. The primary dealer functions as an agent of the eligible borrower. The New York Fed has published a list of primary dealers at http://www. newyorkfed.org/markets/pridealers_current.html. An eligible borrower must notify its primary dealer of its loan request prior to each subscription date, as announced by the New York Fed from time to time. Thereafter, on the subscription date, the primary dealer provides certain information about an eligible borrower’s request to the TALF custodian. On the settlement date, which generally has been seven days from the subscription date, an eligible borrower or its agent will deliver the ABS collateral, the haircut amount and an administrative fee of 10 basis points of the loan amount for non-mortgaged-backed ABS collateral and 20 basis points for CMBS collateral. An eligible borrower should have “every expectation of financing” if it posts eligible non-mortgage backed ABS collateral. In the case of commercial mortgaged backed ABS, however, the New York Fed may reject the collateral based on its risk assessment. The New York Fed may not fund a TALF request in certain other instances as well, and thus eligible borrowers are encouraged to contact the New York Fed with any questions about eligible collateral in advance of making a TALF request.
  8. Risks. TALF is a new program and its terms may change. Failure to follow the TALF rules may result in the loan becoming recourse. In addition, eligible borrowers are subject to the risk of insolvency of their primary dealers and should select and monitor their primary dealer relationships. Eligible borrowers also should consider consulting with their financial and legal advisors before borrowing from TALF.
  9. Executive Compensation. The New York Fed currently asserts that executive compensation restrictions will not apply to eligible borrowers based on borrowing from the TALF program. TALF is a new program, however, and its terms may change.
  10. Termination Date. TALF will cease making loans on December 31, 2009, unless the facility is otherwise extended.