The US Treasury Department and Federal Reserve Bank of New York recently released a new set of FAQs and a revised term sheet for the new Term Asset-Backed Securities Loan Facility (TALF) program, which is intended to address the liquidity crisis caused by the coronavirus (COVID-19) global pandemic through non-recourse lending collateralized by issuances of eligible asset-backed securities. The changes include clarifying that certain US-organized and managed investment funds will be permitted to borrow TALF loans, and adding a required borrower certification that it is otherwise “unable to secure adequate credit accommodations.”
The new TALF program was launched to encourage new consumer and small business lending by supporting issuance of eligible ABS. On May 12, 2019, Treasury and the Federal Reserve released FAQs and a revised term sheet for the TALF, which address a number of questions that have been of great interest to market participants, and also raise a number of new questions. These include:[1]
The most significant newly-announced details are reflected in the comparison table below. There are still some significant missing items, including:
Despite the new announcements, only the broad outlines of the new TALF program are available. Further, detailed terms and conditions, including a form of Master Loan and Security Agreement (MLSA), will follow, but still are expected to be broadly consistent with those of the original TALF program.[2] Except for legacy CMBS, loans under the new TALF program will be made only for ABS issued on or after March 23, 2020, and will not be made after September 30, 2020 (unless the program is extended).
The following table compares certain terms of the new TALF program, as announced to date, with those of the original TALF program at the time it ceased lending in 2010.
|
New TALF Program |
Original TALF Program |
|
|
Aggregate amount |
Up to $100 billion |
Up to $200 billion |
|
Asset classes |
Auto loans and leases
Student loans (including refinance loans)
Credit card receivables (both consumer and corporate)
Equipment loans and leases
Floorplan loans
Insurance premium finance loans
Certain small business loans that are guaranteed by the Small Business Administration
Leveraged loans (static CLOs only, no commercial real estate CLOs)[3]
Commercial mortgages (only if issued before March 23, 2020, no single asset CMBS, and credit exposures must be located in the US)
“Feasibility of adding other asset classes … will be considered in the future”
|
Auto loans and leases
Student loans
Credit card receivables (both consumer and corporate)
Equipment loans and leases
Floorplan loans
Insurance premium finance loans
Certain small business loans that were guaranteed by the Small Business Administration
Eligible servicing advance receivables
Commercial mortgages
|
|
Ratings requirements |
Highest long-term or (other than CMBS) short-term rating from at least two “eligible” rating agencies,which initially are limited to S&P, Moody's, and Fitch |
Highest long-term or (other than CMBS) short-term rating from at least two eligible rating agencies, which were limited to S&P, Moody’s, Fitch, and DBRS (and Realpoint for CMBS)
|
|
New issue or legacy ABS |
New issue only (only for ABS issued on after March 23, 2020), other than legacy CMBS (not eligible if issued on or after March 23, 2020)
|
New issue only, other than legacy CMBS
|
|
Age of receivables |
"All or substantially all” of the receivables must be “new issue,” other than for legacy CMBS Age cutoff date for all or substantially all of the pool assets generally is January 1, 2019 For legacy master trusts, eligible ABS generally must be issued to refinance existing ABS and in amount no greater than the maturing ABS. Issuers may refinance up to 30 days before the maturity of the refinanced ABS, but there is not yet any specified earliest date upon which ABS must have matured to be considered “refinanced.” These tests are applied at the sponsor level For master trusts established on or after March 23, 2020, age cutoff date for all or substantially all of the pool assets is January 1, 2020 “All or substantially all” generally means 95% or more of the dollar amount of the pool assets
|
Each eligible asset class had detailed time limits with respect to origination of receivables, with accommodations made for revolving master trusts
|
|
Eligible borrowers |
Each of the following that maintains an account relationship with a primary dealer:
A business entity created or organized in the US or under the laws of the US and that has significant operations and a majority of its employees based in the US For borrowers other than investment funds, US operations/employees tests are applied to the borrower and its consolidated subsidiaries (but not parent or sibling affiliates) For investment funds, US operations/employees tests are applied to the investment manager (alone, without taking into account its consolidated subsidiaries)
|
Each of the following that maintains an account relationship with a primary dealer:
A business entity organized under the laws of the US or a political subdivision or territory thereof that conducts significant operations or activities in the US (including such an entity that has a non-US parent company)
A US branch or agency of a foreign bank
An investment fund that is US-organized, and managed by an investment manager that has its principal place of business in the US
|
| Monitoring and disclosure of material investors in borrower |
The identity of “material investors” in a borrower will be required to be monitored and disclosed to the Federal Reserve on an ongoing basis Federal Reserve will make that information public “Material investor” is any person who owns, directly or indirectly, 10% or more of any outstanding class of securities of an entity |
Not required |
|
Prohibition on borrower-affiliated ABS |
Eligible ABS may not be backed by loans originated or securitized by borrower or an affiliate of the borrower Borrower or its affiliates may not be manufacturer, producer, or seller of products, or provider of services, which are financed by pool assets, unless they make up no more than 10% of the aggregate principal balance of the pool assets Strict limits on borrower or its affiliates being an obligor on certain pool assets – no more than 5% of the aggregate principal balance of the pool assets for commercial loans backing eligible CMBS, no more than 10% of the aggregate principal balance of the pool assets for floorplan loans or fleet leases backing eligible ABS, and no more than 4% of the aggregate principal balance of the pool assets for leverage loans backing eligible CLOs |
Eligible ABS may not be backed by loans originated or securitized by borrower or an affiliate of the borrower Borrower or its affiliates could not be manufacturer, producer, or seller of products, or provider of services, which are financed by pool assets, unless they make up no more than 10% of the aggregate principal balance of the pool assets Strict limits on borrower or its affiliates being an obligor on certain pool assets – no more than 5% of the aggregate principal balance of the pool assets for commercial loans backing eligible CMBS, and no more than 10% of the aggregate principal balance of the pool assets for floorplan loans or fleet leases backing eligible ABS
|
| Prohibition on foreign government affiliation of borrower |
Neither borrower, nor an investment manager of a fund borrower, may have a material investor that is a foreign government |
Borrower generally could not be controlled by a foreign government or is managed by an investment manager that is controlled by a foreign government Exceptions were a US branch or agency of a foreign bank (other than a foreign central bank) that maintained reserves with a Federal Reserve Bank, or a US insured depository institution |
| Borrowing against already-owned eligible ABS |
Only permitted if ABS were acquired in arms-length secondary market transactions within 30 days prior to loan subscription date, except for legacy CMBS |
Permitted |
|
Loan term |
Three years |
Three years generally, five years for CMBS and certain SBA loans
|
|
Loan amount |
Not announced |
Minimum $10 million, no maximum
|
|
Haircuts on market value of ABS collateral |
Schedule of specific haircuts that vary by asset class and expected life of the ABS:
Auto, prime retail lease: 10% to 14%
Auto, prime retail loan: 6% to 10%
Auto, subprime retail loan: 9% to 13%
Auto, motorcycle and other RVs: 7% to 11%
Auto, commercial and government fleet: 9% to 13%
Auto, rental fleet: 12% to 16%
Credit card, prime: 5% to 8%
Credit card, subprime: 6% to 10%
Equipment, loan and lease: 5% to 9%
Floorplan, auto: 12% to 16%
Floorplan, non-auto: 11% to 15%
Premium finance, property and casualty: 5% to 8%
SBA loans: 5% to 6%
Student loans, private: 8% to 14%
Student loans, government guaranteed: 5% to 6%
Leverage loans, static CLOS: 20% to 22%
Commercial mortgages, legacy CMBS: 15%
Auto, credit card, equipment, floorplan, and premium finance cannot exceed 5-year average life
For all other ABS with average lives of more than 5 years, haircuts increase 1% for each additional year (or portion thereof), but average life cannot exceed 5 years
|
Schedule of specific haircuts that varied by asset class and expected life of the ABS:
Auto, prime retail lease: 10% to 14%
Auto, prime retail loan: 6% to 10%
Auto, subprime retail loan: 9-13%
Auto, motorcycle and RVs: 7-11%
Auto, commercial and government fleet: 9% to 13%
Auto, rental fleet: 12% to 16%
Credit card, prime: 5% to 8%
Credit card, subprime: 6% to 10%
Equipment, loan and lease: 5% to 9%
Floorplan, auto: 12% to 16%
Floorplan, non-auto: 11% to 15%
Premium finance, property and casualty: 5% to 8%
Servicing advances, residential mortgages: 12% to 16%
SBA loans: 5% to 6%
Student loans, private: 8% to 14%
Student loans, government guaranteed: 5% to 6%
Commercial mortgages, new-issue CMBS: 15%
Commercial mortgages, legacy CMBS: 15% (based on lesser of dollar purchaser price on trade date or market price on subscription date)
For ABS benefitting from a substantial government guarantee, with average lives of more than 5 years, haircuts increased 1% for every two additional years (or portion thereof)
For all other ABS with average lives of more than 5 years, haircuts increased by 1% for each additional year (or portion thereof)
|
|
Recourse to borrower |
Generally, no, but may become recourse if borrower breaches certain representations, warranties, or covenants, as further specified in the MLSA |
Generally, no, but could become recourse if:
Borrower failed to be eligible Collateral eligibility representation was inaccurate Certain other representations were breached Borrower failed to properly surrender collateral to custodian at or before maturity
|
|
Pricing |
Floating or floating specified for specific asset classes
Fixed rate, generally, for ABS without government guarantee: 125 basis points over two-year OIS rate for average life less than two years, 125 basis points over three-year OIS rate for average life two years or more
Floating rate, SBA Pool Certificates: 75 basis points over top of federal funds target range
Fixed rate, SBA Development Company Participation Certificates: 75 basis points over three-year OIS rate
Floating rate, CLOs: 150 basis points over 30-day average SOFR
Other pricing terms to be announced
|
Choice of fixed or floating
Floating rate, generally, for ABS without government guarantee: 100 basis points over one-month LIBOR
Floating rate, federally guaranteed student loans: 50 basis points over one-month LIBOR
Floating rate, private student loans with prime-based coupon: higher of 1% and prime rate minus 175 basis points
Floating Rate, SBA Pool Certificates: 75 basis points over federal funds target rate
Fixed rate three-year loans, generally: 100 basis points over one-year LIBOR swap rate for average life less than one year, 100 basis points over two-year LIBOR swap rate for average life more than one but less than two years, 100 basis points over three-year LIBOR swap rate for average life two years or more
Fixed Rate, SBA Development Company Participation Certificates: 50 basis points over three-year LIBOR swap rate for three-year loans, 50 basis points over five-year LIBOR swap rate for five year loans
Fixed rate, CMBS: 100 basis points over three-year LIBOR swap rate for three-year loans, 100 basis points over five-year LIBOR swap rate for five-year loans
|
|
Administrative fee |
10 basis points on loan amount |
5 basis points on loan amount |
|
Offering type |
Registered public ABS and Rule 144A ABS trading book-entry on DTC |
Registered public ABS and Rule 144A ABS trading book-entry on DTC |
|
Prepayment permitted |
Yes |
Yes
|
|
Collateral substitution permitted |
No, even for CLOs (which must be static) |
No |
| Prefunding permitted | No | No |
|
Resecuritizations permitted |
No |
No |
|
Synthetic ABS permitted |
No |
No
|
|
Additional corporate restrictions: |
Section 4019 of the CARES Act, which restricts lending to any business that is directly or indirectly owned by the president, senior executive branch officials, or members of Congress (or certain of their immediate family members) Fed has stated that TALF will not impose any requirements on borrowers with respect to employee compensation, distribution of dividends, or any other corporate decision[4] |
As announced, would have imposed executive compensation limits, but these were removed before implementation |
|
Borrowing procedures |
Announced borrowing procedures include: Borrower must certify that it is unable to secure adequate credit accommodations from other banking institutions. According to the agencies, this does not necessarily mean that borrower cannot obtain other financing, just that prices or conditions that are available are “inconsistent with a normal, well-functioning market” Required issuer certifications and further required borrower certifications to be announced later Limited borrowing dates, specifics not yet announced Other borrowing procedures not yet announced |
Borrowing procedures included:
Specified certifications in the offering documents, including that the ABS are eligible collateral Accountants’ attestation that the sponsor’s assertion that the ABS are “eligible collateral” is fairly stated in all material respects Limited pricing and settlement dates
|
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. Find resources on how to cope with the post-pandemic reality on our NOW. NORMAL. NEXT. page and our COVID-19 page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts, and download our biweekly COVID-19 Legal Issue Compendium.
If you have any questions or would like more information on the issues discussed in this LawFlash, please the contact one of the authors, Charles A. Sweet or Reed D. Auerbach, or any of the following other Morgan Lewis lawyers:
Chicago
Patrick J. Lampe
Philip W. Russell
Jeffrey D. Weinstein
London
Julian Goodman
Theresa D. Kradjian
New York
Reed D. Auerbach
Harlyn D. Bohensky
Matthew P. Joseph
Keith L. Krasney
Steve Levitan
Philip W. Russell
Edmond Seferi
Washington, DC
Asa J. Herald
Cory E. Barry
Jeffrey R. Johnson
Mark R. Riccardi
Paul R. St. Lawrence
Charles A. Sweet
[1] See the FAQs and the updated term sheet for the new TALF program, which originally was announced on March 23, 2020. See also the prior updated term sheet and the original term sheet for the new TALF program.
[2] The Structured Finance Association (SFA) has requested that the US Department of the Treasury and the Federal Reserve make a number of changes to the TALF to accommodate the unique needs resulting from the economic dislocation brought on by the COVID-19 pandemic, including allowing legacy ABS to serve as collateral for TALF loans and adding a number of other new permitted asset classes. Read the SFA’s letter.
[3] The FAQs also provide a number of specific eligibility criteria for the leveraged loans that back eligible CLOs.
[4] See the Federal Reserve’s March 29, 2020, report to Congress on the new TALF program.