Fed Updates Terms of TALF 2.0

On April 9, 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. The key changes include: updates to the definition of eligible borrower, additions to the types of eligible collateral, changes to loan pricing, and the release of the collateral haircut schedule. The full updated term sheet can be found here.

TALF 2.0 is a credit facility intended to support the asset-backed securities (“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 release outlining the initial term sheet of TALF 2.0 can be found here.

Update to Eligible Borrower Definition 

U.S. branches or agencies of foreign banks were removed from the eligibility criteria, and the definition of a “U.S. company” was modified to mean a company “created or organized in the United States or under the laws of the United States and that has significant operations in and a majority of its employees based in the United States.”

While this requirement was included in the text of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), this definition was not included in the initial term sheet of TALF 2.0, and the definition differs from the definition of “U.S. company” used in the TALF that was established following the 2008 financial crisis (“TALF 1.0”).

Under TALF 1.0, “U.S. company” expressly included investment funds organized in the United States and managed by investment managers that had their principal place of business located in the United States. As this prong has been removed from the current TALF 2.0 definition of “U.S. company,” it is not yet clear how the Fed will apply this definition to investment funds.

Additions to Accepted Collateral

Following input from market participants and investors, the Fed added commercial mortgage-backed securities (“CMBS”), leveraged loans and equipment leases (in addition to equipment loans which were included in the first release) to the list of eligible collateral. Contrary to other ABS, which are required to be issued on or after March 23, 2020, CMBS are only eligible if issued before March 23, 2020. Additionally, CMBS exposures must be to real property located in the United States or one of its territories. Collateralized loan obligations (“CLOs”) must be static to be eligible collateral. The term sheet goes on to clarify that single-asset single-borrower CMBS and commercial real estate CLOs will not be eligible collateral.

Changes to Loan Pricing

For CLOs, the interest rate will be 150 basis points above the 30-day average secured overnight financing rate.

For Small Business Administration (“SBA”) Pool Certificates, which have seen a spike in applications due to the Paycheck Protection Program of the CARES Act, the interest rate will be 75 basis points above the top of the federal funds target range.

For SBA Development Company Participation Certificates, the interest rate will be 75 basis points above the three year fed funds overnight index swap (“OIS”) rate.

For all other eligible ABS, the interest rate will be 125 basis points over the two year OIS rate for securities with a weighted average life of less than two years and 125 basis points over the three year OIS rate for securities with a weighted average life of two years or more. Previously, the quoted rates were 100 basis points over the two year and three year LIBOR swap rates, respectively.

Haircut Schedule

The haircut schedule is on page 3 of the updated term sheet and stays consistent with the 2008 TALF 1.0 haircut schedule.

Next Steps

Many hedge and private equity fund managers continue to analyze the opportunity and it is anticipated that managers will soon begin to structure and launch private funds that are specifically designed to pursue TALF 2.0 investment opportunities.