On Friday, the Federal Reserve issued new guidance on the Term Asset-Backed Securities Loan Facility (TALF), including additional terms and conditions, a new term sheet and a revised list of frequently asked questions and answers detailing the procedural and operational aspects of the program. The Federal Reserve previously released revised terms and conditions for the TALF in December. The TALF was authorized by the Federal Reserve on November 24, 2008, and was created “to increase credit availability and support economic activity by facilitating the issuance of ABS collateralized by certain consumer and small business loans.”
Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion to eligible owners of “certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans.” The FRBNY will issue non-recourse three-year loans (with interest payable monthly) fully secured by eligible ABS. The Federal Reserve has stated that the loans “will not be subject to mark-to-market or re-margining requirements.”
The Federal Reserve’s additional terms and conditions “include a revised definition of eligible borrowers and additional specifications regarding eligible ABS collateral.” Under the revised eligible borrower definition, “[a]ny U.S. company that owns eligible collateral may borrow from the TALF, provided the company maintains an account relationship with the primary dealer.” For purposes of the TALF, an eligible U.S. company includes an entity that was organized under the laws of the United States or a political subdivision or territory thereof, and “conducts significant operations or activities in the United States (regardless of whether any such entity has a parent company that is not U.S. organized).”
Additional specifications regarding eligible collateral include the requirement that the underlying credit exposures of eligible ABS must initially originate from auto loans (including retail loans and leases relating to cars, light-duty trucks, recreational vehicles and motorcycles and auto dealer floorplan loans), student loans (including federally guaranteed student loans and private loans), credit card loans or small business loans (fully guaranteed by the U.S. Small Business Administration) and have been cleared by the Depository Trust Company.
The Federal Reserve has also indicated that the present “permissible underlying credit exposures of eligible ABS may be expanded later to include commercial mortgages, non-Agency residential mortgages, and/or other asset classes.” The additional terms and conditions also outline the initial haircut schedule for each asset type and protocol related to the monthly allocation of TALF loan subscriptions and settlement dates.
The revised list of frequently asked questions further clarifies some of the important procedural and operational aspects of the program. Pursuant to the TALF, on a fixed day each month an eligible borrower will be permitted to request up to two TALF loans of either fixed or floating rate. The TALF loans will then be disbursed to the borrower subject to the FRBNY’s receipt of eligible collateral, an administrative fee and margin, if applicable.
Although the Federal Reserve expects the initial subscription date under the TALF to be announced later this month, there is widespread speculation that when Treasury announces the next phase of the bailout plan tomorrow, additional eligible asset classes may be added to the TALF. However, it is possible that the Federal Reserve may move ahead with the first allocation of TALF loans and then revise the program accordingly to reflect any changes. The TALF is scheduled to terminate on December 31, 2009; however, the Federal Reserve retains the discretion to extend its term.