Fed Announces More Updates to TALF 2.0 and New List of FAQs
On May 12, 2020, the Federal Reserve Board (the “Fed”) updated its term sheet of the Term Asset-Backed Loan Facility (“TALF 2.0”) that it authorized on March 23, 2020 and updated on April 9, 2020. The full updated term sheet can be found here. The Fed also released a list of frequently asked questions (“FAQs”) that provides more detail on the TALF 2.0 program and can be found here.
For fund managers that currently invest in asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”) or other TALF 2.0-eligible assets, it may be a favorable, leveraged option to explore.
TALF 2.0 is a credit facility intended to support the ABS markets for consumers and businesses by creating a new source of stable funding for investors to purchase eligible ABS backed by consumer and business loans. Our first client alert outlining the initial term sheet of TALF 2.0 can be found here and our follow up outlining the first set of changes to the term sheet can be found here.
The Fed has still not provided information on when TALF 2.0 will be operational, but it establishes September 30, 2020 as the termination date for the facility, unless extended.
Updated Term Sheet
The key changes to the term sheet include:
- All newly issued ABS except for collateralized loan obligations (“CLOs”) must be originated by U.S.-organized entities, which includes U.S. branches and agencies of foreign banks (collectively, “U.S. Lenders”).
- CLOs must have a lead or co-lead arranger that is a U.S. Lender.
- All ABS must be to U.S.-domiciled obligors, or located in the United States for real estate assets.
- SBA Pool Certificates and Development Company Participation Certificates must be issued on or after January 1, 2019. Other than these and CMBS, all eligible ABS must still be issued on or after March 23, 2020.
- For eligible collateral, insurance premium finance loans have been confined to property and casualty insurance premium finance loans only.
- The interest rates for eligible ABS did not change, but these rates will now also be applied to eligible ABS that have a government guarantee.
New FAQ List
The FAQs provide some key clarifications and details on the terms of the TALF 2.0 program, including some highly anticipated guidance on how investment funds may be eligible to participate:
- In order to be eligible borrowers, investments funds1 (including newly created funds) must (1) be created or organized in the United States, and (2) be managed by a U.S. investment manager that has significant operations2 in and a majority of its employees based in the United States. Additionally, the investment manager of an investment fund must not have any Material Investors that are foreign governments.
- The Fed will provide monthly public disclosures that will (1) identify borrowers and other participants in TALF 2.0, including persons who own, directly or indirectly, 10 percent or more of any outstanding class of securities of an entity that is a borrower or a participant (“Material Investors”), (2) disclose the amount borrowed, interest rates, types and amounts of ABS collateral for each borrower, and (3) report costs, revenues and fees for TALF 2.0. TALF 2.0 balance sheets will be released weekly.
- U.S. businesses and U.S. investment managers with any Material Investor that is a foreign government may not borrow under TALF 2.0.
- Eligible investment funds may invest in a mix of TALF 2.0 ABS and other assets, and newly formed investment funds may borrow from TALF 2.0.
- Borrower representations are continuous, so a borrower must constantly monitor its direct and indirect investors (in particular, whether it has any Material Investors) to ensure that it remains eligible while the loan is outstanding.
- Borrowers may not exercise voting rights under ABS that is used as eligible collateral without the consent of the Fed.
- If an ABS is downgraded by an NRSRO, it becomes ineligible for use as new collateral but no additional margin is required to be posted.
- The advance rate is determined by the base value minus the base dollar haircut set forth in the FAQ. The base value is equal to the least of (1) the dollar purchase price on the applicable trade date, (2) the market price as of the subscription date, and (3) a value based on the Fed’s collateral review, provided that the base value shall not be greater than par.
With the publication of the updated term sheet and the clarity provided by the FAQs on the eligibility criteria for investment funds, we expect many U.S. managers to begin increasing the pace of preparation for a dedicated TALF 2.0 vehicle to be ready once the Fed provides a go-live date. We will continue to provide updates as they become available.
1 An investment fund includes (1) any type of pooled investment vehicle that is organized as a business entity or institution, including without limitation a hedge fund, a private equity fund and a mutual fund, and (2) any type of single-investor vehicle that is organized as a business entity or institution.
2 “Significant operations in the United States” will generally include (but not limited to) an investment manager that has greater than 50 percent of its consolidated assets in, annual consolidated net income generated in, annual consolidated net operating revenues generated in, or annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) generated in the United States as reflected in its most recent audited financial statements.