The Term Asset-Backed Securities Loan Facility
On November 24, 2008, the Federal Reserve Board announced the Term Asset-Backed Securities Loan Facility (TALF), a Federal Reserve credit facility authorized under section 13(3) of the Federal Reserve Act, which is designed to encourage lending to consumers and small businesses by providing non-recourse loans to participants who currently own certain credit card, student, auto and similar asset-backed securities (ABS) to issue new ABS. The goal is to reinvigorate the ABS market, which is expected to stimulate lending to small businesses and consumers.
How TALF Works
Every month (See Key Dates below), the Federal Reserve Bank of New York (New York Fed) will accept applications from primary dealers acting on behalf of eligible borrowers who own qualifying collateral for three-year TALF loans to help fund the purchase of additional ABS. Leverage available to each borrower will be an amount equal to the lesser of the par or market value of the pledged ABS minus a haircut, which is essentially risk capital determined by the class of collateral and the degree of risk associated with the collateral. Alternatively, when the pledged ABS has a market value above par, the New York Fed will lend an amount equal to the market value — subject to a cap of 110 percent of par value — minus a haircut ranging from 5% to 16%, and the borrower will periodically prepay a portion of the loan. Initial collateral haircuts are as follows:
|
ABS Average Life (years) |
||||||||
|
Sector |
Subsector |
0-1 |
>1-2 |
>2-3 |
>3-4 |
>4-5 |
>5-6 |
>6-7 |
|
Auto |
Prime retail lease |
10% |
11% |
12% |
13% |
14% |
|
|
|
Auto |
Prime retail loan |
6% |
7% |
8% |
9% |
10% |
|
|
|
Auto |
Subprime retail loan |
9% |
10% |
11% |
12% |
13% |
|
|
|
Auto |
Motorcycle/other recreational vehicles |
7% |
8% |
9% |
10% |
11% |
|
|
|
Auto |
Commercial and government fleets |
9% |
10% |
11% |
12% |
13% |
|
|
|
Auto |
Rental fleets |
12% |
13% |
14% |
15% |
16% |
|
|
|
Credit Card |
Prime |
5% |
5% |
6% |
7% |
8% |
|
|
|
Credit Card |
Subprime |
6% |
7% |
8% |
9% |
10% |
|
|
|
Equipment |
Loans and leases |
5% |
6% |
7% |
8% |
9% |
|
|
|
Floorplan |
Auto |
12% |
13% |
14% |
15% |
16% |
|
|
|
Floorplan |
Non-auto |
11% |
12% |
13% |
14% |
15% |
|
|
|
Servicing Advances |
Residential mortgage |
12% |
13% |
14% |
15% |
16% |
|
|
|
Small Business |
SBA loans |
5% |
5% |
5% |
5% |
5% |
6% |
6% |
|
Student Loan |
Private |
8% |
9% |
10% |
11% |
12% |
13% |
14% |
|
Student Loan |
Gov’t guaranteed |
5% |
5% |
5% |
5% |
5% |
6% |
6% |
In the event the borrower does not repay the TALF loan, the New York Fed will enforce its rights in the collateral and sell the collateral to a special purpose vehicle (SPV) established specifically for the purpose of managing such assets. Using funds allocated from the Troubled Assets Relief Program (TARP), the Treasury will purchase $20 billion of subordinated debt in the SPV created by the New York Fed.
|
Sample Investment Under the Term Asset-Backed Securities Loan Facility |
|
Step 1: The New York Fed announces the subscription date for the upcoming TALF funding. Step 2: An eligible borrower becomes a customer of a primary dealer by executing a customer agreement authorizing the primary dealer, among other things, to execute the master loan and security agreement (MLSA) as agent for the borrower and to perform all actions required on their behalf. Step 3: The primary dealer will collect from the eligible borrower the amount of the borrower’s loan request(s), the interest rate format corresponding to the type of collateral pledged (fixed or floating), the CUSIPs of the ABS the borrower expects to deliver and pledge to the New York Fed and the prospectuses and/or offering documents of the ABS expected to be pledged. Step 4: On the subscription date, the primary dealer will submit this information to the New York Fed’s custodial agent for review and will also submit to the New York Fed the aggregate loans request amount for all its customers by rate type and asset class. Step 5: On the loan settlement date, the borrower or its agent will deliver against payment the ABS collateral, administrative fee and applicable margin to the New York Fed’s settlement account at the custodian. |
General TALF Terms and Conditions
- Loans have a term of 3 years (interest payable monthly), are non-recourse to the borrower, and will not be subject to mark-to-market or re-margining requirements.
- There is no limit on the amount of loans a borrower may request, subject to the minimum loan requirement of $10 million, with no maximum.
- Eligible borrower must be a U.S. company that owns eligible collateral and maintains an account relationship with a primary dealer. U.S. company includes:
- Any business entity or institution organized under U.S. laws or a political subdivision or territory thereof that conducts operations or activities in the U.S., including any U.S.-organized subsidiary of a foreign parent so long as such entity conducts significant operations or activities in the U.S. and is not directly or indirectly controlled by a foreign government.
- A U.S. branch or agency of a foreign bank that maintains reserves with a Federal Reserve Bank.
- An investment fund that is U.S.-organized and managed by an investment manager that has its principal place of business in the U.S., including a U.S.-organized investment fund subsidiary of a foreign entity so long as such entity is not directly or indirectly controlled by a foreign government and the investment manager is not directly or indirectly controlled by a foreign government.
- Eligible collateral includes AAA-rated (i) auto loans, (ii) student loans, (iii) credit card loans, (iv) equipment loans, (v) floorplan loans, (vi) small business loans fully guaranteed as to principal and interest by the U.S. Small Business Administration and (vii) receivables related to residential mortgage servicing advances. All collateral must be issued on or after January 1, 2009. Eligible collateral does not include ABS that obtain AAA-rated credit ratings based on a third-party guarantee or ABS placed on review or watch for downgrade by a nationally recognized ratings organization.
- An administrative fee of 5 basis points of the loan amount will be assessed on the settlement date.
- Recently imposed executive compensation restrictions will not be imposed on TALF sponsors, underwriters and borrowers should they participate in TALF.
In order to provide more insight into the TALF and respond to common concerns regarding the program, Chairman Bernanke released a joint statement with William C. Dudley, the President of the New York Fed on April 7. The text of the Joint Response to the Congressional Oversight Panel’s inquiry into the TALF can be found here.
Expansion of TALF – The Public-Private Investment Program
On March 23, 2009, the Treasury – in conjunction with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve – announced the initial details of its Public-Private Investment Program, intended to partner public and private funding to the troubled real estate-related assets that helped spur the current financial crisis. While the program has two components, the TALF was expanded by the Legacy Securities Program which is expected to include commercial mortgage backed securities (CMBS) and residential mortgage backed securities (RMBS) issued prior to 2009 with a rating of AAA by two or more nationally recognized ratings organizations at origination. This expansion can lead to an increase in lending of up to $1 trillion. For more information regarding the Legacy Securities Program, please refer to our advisory that can be found here.
Key Dates
The New York Fed will announce TALF loan subscription and settlement dates on the first Tuesday of every month through December 2009, unless the TALF is extended. The first offering of TALF funding closed on March 19, with a modest $1.9 billion in auto loans and $2.8 billion in credit card loans being requested. The second offering of TALF funding closed on April 7, resulting in $1.7 billion requested between auto and credit card loans. Interest rates applicable to the second offering of TALF were as follows:
| Sector |
Subsector |
Fixed |
Floating |
|
Auto |
|
2.8725 |
1.46938 |
|
Credit Card |
|
2.8725 |
1.46938 |
|
Equipment |
|
2.8725 |
1.46938 |
|
Floorplan |
|
2.8725 |
1.46938 |
|
Servicing Advances |
Residential mortgages |
2.8725 |
1.46938 |
|
Small Business |
SBA loans 7(a) loans |
NA |
1.000 |
While the date and details of the next TALF funding have not been released, interested borrowers may obtain a pre-certification review by the New York Fed in advance of the next subscription date by having their primary dealer submit their name and details.
The Master Loan and Security Agreement and other forms that apply to TALF loans can be downloaded at http://www.newyorkfed.org/markets/talf_docs.html.
Troutman Sanders Role
Troutman Sanders has already assembled an experienced multi-disciplinary team to guide clients through the TALF, as well as other programs established as part of Treasury’s Financial Stability Plan. We look forward to assisting existing clients and new clients with opportunities that have been created through the TALF.
Please continue to check our website, as we will continue to follow developments related to the TALF and to update this advisory with additional relevant information as soon as it is released.
CONTACTS
Michael Leichtling
212.704.625
Jake Lutz
804.697.1490
Miles A. Borden
212.704.6161
Robert A. Friedman
212.704.6048
Rory S. Clark
212.704.6056