A financial crisis-era program is being resurrected to fight the liquidity crisis caused by the global coronavirus (COVID-19) pandemic through lending collateralized by new issuances of asset-backed securities.
The US Department of the Treasury and the Federal Reserve Bank of New York (FRBNY) on Monday resurrected the Term Asset-Backed Securities Loan Facility (TALF) program to encourage new consumer and small business lending by supporting new issuance of asset-backed securities (ABS), in light of a liquidity crisis resulting from measures taken to stem the spread of the coronavirus (COVID-19) pandemic.[1]
The original TALF program was implemented in 2008 in the wake of the financial crisis, and made loans until 2010. Under TALF, the FRBNY made loans to holders of certain AAA-rated securities backed by newly and recently originated consumer and small business loans. Over the life of the program, all TALF loans were repaid in full at or before their maturity dates, and no collateral was surrendered.
To date, only the broad outlines of the new TALF program have been announced. Detailed terms and conditions will follow, but are expected to be broadly consistent with those of the original TALF program.[2] 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, with those of the original TALF program, as it was in place by the time the program ceased lending in 2010. There are a number of differences, including the omission of any specific reference to investment funds as eligible borrowers, the omission of commercial mortgage-backed securities (CMBS) as a permitted asset class, and the omission of floating interest rates. It is unknown at this time the extent to which differences are intentional or are simply a matter of “shorthand” in the term sheet.
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New TALF Program |
Original TALF Program |
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Aggregate amount |
Up to $100 billion |
Up to $200 billion |
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Asset classes |
Auto loans and leases Student loans Credit card receivables (both consumer and corporate) Equipment loans (commercial, governmental and rental fleet leases not specifically mentioned as included) Floorplan loans Insurance premium finance loans Certain small business loans that are guaranteed by the Small Business Administration Eligible servicing advance receivables “Feasibility of adding other asset classes…will be considered in the future”
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Auto loans and leases Student loans Credit card receivables (both consumer and corporate) Equipment loans (which specifically included commercial, governmental and rental fleet 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
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Ratings requirements |
Highest long-term or short-term rating from at least two “eligible” rating agencies, with eligible rating agencies not yet specified |
Highest long-term or short-term rating from at least two eligible rating agencies, which were limited to Moody’s, Standard & Poors, Fitch, and DBRS
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New issue or legacy ABS |
New issue only (only for ABS issued or after March 23, 2020) |
New issue only, other than legacy CMBS
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Age of receivables |
“All or substantially all” of the receivables must be “new issue” |
Each eligible asset class had detailed time limits with respect to origination of receivables, with accommodations made for revolving master trusts
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Eligible borrowers |
Each of the following that maintains an account relationship with a primary dealer: A business entity organized under the laws of the United States or a political subdivision or territory thereof (including such an entity that has a non-US parent company) A US branch or agency of a foreign bank |
Each of the following that maintains an account relationship with a primary dealer: A business entity organized under the laws of the United States or a political subdivision or territory thereof that conducts significant operations or activities in the United States (including such an entity that has a non-US parent company)
A U.S. 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 United States
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Prohibition on borrower-affiliated ABS |
Not announced |
ABS not permitted to be backed by loans originated or securitized by borrower or an affiliate of the borrower
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Loan term |
Three years |
Three years generally, five years for CMBS and certain SBA loans
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Loan amount |
Not announced |
Minimum $10 million, no maximum
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Haircuts on market value of ABS collateral |
Will be provided in the terms and conditions Will be based on asset class, weighted average life and historical volatility of the ABS Will be “roughly in line” with original TALF schedule |
Schedule of specific haircuts that varied by asset class and expected life of the ABS, ranging from 5% to 16%
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Recourse to borrower |
No, exceptions not announced |
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
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Pricing |
Fixed rate only announced Where pool assets do not have a government guarantee, 100 basis points over two-year LIBOR swap rate for securities with a weighted average life less than two years, or 100 basis points over three year LIBOR swap rate for securities with a weighted average life of two years or greater Other pricing terms to be announced |
Choice of fixed or floating Fixed rate generally was 100 basis points over three year LIBOR swap rate (SBA loans had only a 50 basis point spread) Floating rate generally was 100 basis points over one-month LIBOR (federally guaranteed student loans had only a 50 basis point spread, and certain SBA loans were 75 basis points over the Federal Funds Target Rate)
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Administrative fee |
Ten basis points on loan amount |
Five basis points on loan amount |
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Offering type |
Not announced |
Registered public ABS and Rule 144A ABS trading book-entry on DTC |
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Prepayment permitted |
Yes |
Yes |
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Collateral substitution permitted |
No |
No |
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Resecuritizations permitted |
No |
No |
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Synthetic ABS permitted |
No |
No |
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Borrowing procedures |
Not 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
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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Chicago
Patrick J. Lampe
Philip W. Russell
Jeffrey D. Weinstein
London
Julian Goodman
Theresa D. Kradjian
New York
Reed Auerbach
Harlyn Bohensky
Matthew Joseph
Keith Krasney
Steve Levitan
Philip Russell
Edmond Seferi
Washington, DC
Asa Herald
Cory E. Barry
Jeffrey Johnson
Mark R. Riccardi
Paul R. St. Lawrence
Charles Sweet
[2] The Structured Finance Association (SFA) has requested that the Department of the Treasury and the Federal Reserve make a number of changes to 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 new permitted asset classes. Read the SFA’s letter.