NY Fed Announces First Subscription and Closing Dates for TALF 2.0 and Provides Expanded FAQ Responses

On May 20, 2020, the Federal Reserve Bank of New York (the “New York Fed”) announced June 17, 2020 as the first subscription date and June 25, 2020 as the first closing date of the Term Asset-Backed Loan Facility (“TALF 2.0”). The Board of Governors of the Federal Reserve System first authorized TALF 2.0 on March 23, 2020, and have since released a series of updates to the term sheet, as discussed in our previous client alerts available here.

The New York Fed also expanded its list of Frequently Asked Questions (“FAQs”) on TALF 2.0, originally published on May 12, 2020, which can be found here, and a redline showing the changes can be found here. Additionally, the New York Fed released a list of the initial eligible TALF Agents (i.e., primary dealer financial institutions), which can be found here, and a copy of the Master Loan and Security Agreement (“MLSA”), which can be found here. The New York Fed’s full announcement can be found here.

Among the most important updates and takeaways from the New York Fed’s announcement and the expanded FAQs are the following:

• There will be approximately two loan subscription dates offered per month, and each will be open to all eligible asset-backed securities (“ABS”). The New York Fed will set the initial benchmark rate for a subscription one business day prior to the subscription date.
• TALF Agents will be require to, among other things, conduct KYC on its customers to be able to identify, verify and review information needed to satisfy requirements of the MLSA.
• The New York Fed has retained the Eligible Borrower attestation/certification that it is unable to secure adequate credit accommodations from other banking institutions. Notably, the New York Fed did not provide additional color on this requirements to guide participants on this requirements and deleted the reference to provision of future guidance.
• ABS cannot be principal-only or interest-only.
• Eligible borrowers may purchase an ABS that is issued up to 30 days before the desired subscription date as long as the settlement date is on or before such subscription date.
• Loans, loan guarantees and other investments made under Section 4003 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) are not eligible for TALF, but loans under the Paycheck Protection Program of the CARES Act are still eligible.
• The New York Fed can reject an ABS for any reason, even if such collateral meets the eligibility requirements.
• The minimum TALF loan amount is $5 million. The FAQs also specify that there is no maximum loan amount and there is no limit to the number of loans that a borrower may request.
• If a borrower defaults on a TALF loan, such borrower must deliver a Collateral Surrender and Acceptance Notice to the New York Fed or will be subject to full recourse. All collateral for that TALF loan must be surrendered.
• Borrowers must not enter into a credit hedge for the ABS collateral posted as security for the TALF loan. A credit hedge means a transaction or series of transactions that are intended to offset in whole or in part the credit risk associated with the collateral, including direct hedges, such as credit default swaps, and correlative hedges, such as short-selling the ABX index. A credit hedge does not include hedges on a borrower’s broader portfolio (which may include securities purchased with TALF loans), nor interest-rate hedges.

Next Steps

Given the rapidly approaching first subscription date of June 17^th, fund managers that plan to participate in TALF 2.0 should be working towards finalizing their analysis of the most effective fund structure through which to participate. In this regard, the New York Fed has clarified that:

• Investment funds that are created or organized in the United States and managed by an investment manager that is created or organized in the United States and has significant operations in and a majority of its employees based in the United States are eligible borrowers for purposes of the TALF.
• An investment fund includes (i) 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 (ii) any type of single-investor vehicle that is organized as a business entity or institution.
• An eligible investment fund includes funds that only invest in TALF-eligible ABS and only borrow from the TALF, as well as funds that invest in a mix of TALF-eligible ABS and other assets.
• A newly formed investment fund may borrow from the TALF as long as it satisfies all the eligible borrower requirements.

Fund documentation for any TALF fund will need to be closely tailored and customized to disclose the unique aspects of the TALF program and any attendant risks to investors. In addition, fund managers will also need to be mindful of potential investor sensitivities around the monthly public disclosure of the terms of TALF loans, including the disclosure of any “Material Investor” (i.e., a direct or indirect owner of 10% or more) in any borrower.