TALF 2.0: Fed Revives Term Asset-Backed Loan Facility
On March 23, 2020, the Federal Reserve Board (the “Fed”) authorized the revival of its Term Asset-Backed Loan Facility (“TALF 2.0”) previously established following the 2008 financial crisis. 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. Under TALF 1.0, a number of hedge and private equity fund managers participated in the program to provide necessary liquidity to this important sector of the economy.
In its announcement of TALF 2.0, the Fed indicated that the program terms, conditions and documentation will be primarily based off of the terms used in connection with TALF 1.0. Like TALF 1.0, under TALF 2.0, the Federal Reserve Bank of New York will lend to a special purpose vehicle (“SPV”) on a recourse basis and the U.S. Department of Treasury will make a $10 billion equity investment in the SPV. The TALF 2.0 SPV will initially have up to $100 billion of three-year loans that are non-recourse to eligible borrowers and fully secured by eligible ABS collateral. A link to the Fed’s TALF 2.0 term sheet can be found here.
Under TALF 2.0, all U.S. entities that own eligible collateral and maintain an account relationship with a primary dealer are eligible to borrow. A U.S. company would include a U.S. entity organized under the laws of the United States (including such an entity that has a non-U.S. parent company), or a U.S. branch or agency of a foreign bank. While it is not entirely clear, non-U.S. fund managers that operate or establish U.S.-organized funds (or that have their principal place of business in the United States) should be able to participate in the program if the U.S. fund itself serves as the borrower under the program. Additional guidance from the Fed may be required in this regard.
Eligible collateral for the TALF 2.0 program must be U.S. dollar denominated ABS with the highest possible credit ratings from at least two rating agencies and must be issued on or after March 23, 2020. Eligible ABS must have underlying credit exposure to the following: (1) auto loans and leases; (2) student loans; (3) consumer and corporate credit card receivables; (4) equipment loans; (5) floorplan loans; (6) insurance premium finance loans; (7) small business loans guaranteed by the Small Business Administration; or (8) eligible serving advance receivables. Unless extended, credit extensions under TALF 2.0 will no longer be made after September 30, 2020.
In response to the announcement of TALF 2.0, many market participants have been requesting that the Fed further expand the universe of Eligible Collateral to also potentially include:
- Legacy ABS (ABS issued before March 23, 2020)
- Other newly created asset classes since 2008, including, but not limited to:
- Unsecured consumer loan ABS
- Transportation-related ABS, including those collateralized by containers, railway cars, aircrafts and other shipping assets
- Whole business securitizations
- Wireless device payment plan securitizations
- Solar loans and clean energy ABS
- Private label residential mortgage-backed securities (“RMBS”)
Applicable Haircuts to Eligible Collateral
The Fed will publish a schedule that calculated the value of eligible collateral by assigning a “haircut” based on sector, weighted average life and historic volatility. ABS not guaranteed by the government with a weighted average life of less than two years will have an interest rate that is 1% over the two-year LIBOR swap rate. Securities with a longer weight average life will have an interest rate that is 1% over the three-year LIBOR swap rate. The SPV will charge an administrative fee of 10 basis points of the loan amount.
Following the success of TALF 1.0, strong participation in the TALF 2.0 program by the investment fund community is expected. The TALF 1.0 program issued loans and loan extensions from March 2009 to June 2010. All TALF 1.0 program loans were eventually paid in full on or before their maturity dates. With the announcement of TALF 2.0., many hedge and private equity fund managers have started 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. As the Fed publishes additional details of the program over the coming weeks, we will continue to provide updates on these developments.
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