On November 25, 2008, the Board of Governors of the Federal Reserve System (Federal Reserve Board) announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a financial relief program designed to free up the asset-backed securities (ABS) market. The Federal Reserve Bank of New York (FRBNY) will provide nonrecourse funding to any eligible borrower owning eligible collateral. On a fixed day each month, borrowers will be able to request one or more three-year TALF loans. Loan proceeds, reflecting the “haircut” applicable to different classes of eligible collateral, will be disbursed to the borrower, contingent on receipt by the FRBNY's custodian bank of the eligible collateral and a nonrecourse loan fee equal to five basis points of the loan amount.
On March 3, 2009, the Federal Reserve Board released updated TALF documentation and announced procedures and deadlines for the first monthly round of TALF funding. Subscriptions are due to the FRBNY by March 17, 2009, and the corresponding settlement date will be March 25, 2009. These loans will mature on March 26, 2012, and may be prepaid in full or part at any time without penalty.
The following is an overview of the first monthly round of TALF funding.
The ABS markets and the goals of the TALF are described in a five-page white paper published by the U.S. Department of the Treasury (Treasury) on March 3, 2009. Foley also summarized the TALF in a previous alert dated January 23, 2009 (http://www.foley.com/publications/pub_detail.aspx?pubid=5642). Some of the TALF terms and conditions have changed since that analysis. Among other things, the executive-compensation restrictions of the Emergency Economic Stabilization Act of 2008 (EESA) will no longer be applicable to any TALF sponsors, underwriters, or borrowers as a result of their participation in the TALF program. The FRBNY and the Treasury also are considering expanding the TALF program in the future to encompass additional types of ABS.
The details of the TALF (particularly regarding the eligibility and pricing for certain classes of ABS) are complex, and parties considering TALF participation should examine the FRBNY’s Web site, which contains the updated Term Sheet (http://www.newyorkfed.org/markets/talf_terms.html) and an extensive list of frequently asked questions (FAQs) (http://www.newyorkfed.org/markets/talf_faq.html).
Haircuts and Rates for Borrowers
The announced haircuts for the first round of funding range from five percent to 14 percent (subject to increase), based on the type of collateral and the expected life of the ABS. The announced interest rates for auto, credit card, and private student-loan ABS are three-year LIBOR plus 100 basis points (for fixed-rate loans), and one-month LIBOR plus 100 basis points (for floating-rate loans). Rates are 25 to 50 basis points lower for government-guaranteed SBA and student-loan ABS.
Application and Funding Documentation and Procedures
In order to participate in the first round of TALF funding, an owner of eligible collateral must be a U.S. company (as defined in the Term Sheet) and must maintain an account relationship with one or more of the FRBNY’s primary dealers (listed at http://www.newyorkfed.org/markets/pridealers_current.html), which are banks and securities brokerages that trade in U.S. government securities with the Federal Reserve System. The FRBNY will expect primary dealers to collect, aggregate, and submit loan requests on behalf of their customers and pre-screen the proposed ABS collateral for TALF eligibility. Each primary dealer, the FRBNY, and the FRBNY’s custodian (but not the borrower) will be party to a Master Loan and Security Agreement (MLSA) (http://www.newyorkfed.org/markets/talf_docs.html). The customer agreement between the primary dealer and a prospective TALF borrower must include the terms set forth in Appendix 2 of the MLSA.
The eligible ABS must be cleared through the Depository Trust Company and must comply with category-specific date restrictions regarding ABS issuance and the origination of the underlying credit exposures. The prospectus or other offering document of the ABS must contain a certification by the issuer and sponsor (in the form (http://www.newyorkfed.org/markets/Form_Certification_TALF_Eligibility.pdf) provided by the FRBNY) that the ABS is TALF-eligible. A similar form (http://www.ny.frb.org/markets/TALFAuditorAttestationForm.pdf) of certification is also required from a nationally recognized accounting firm retained by the sponsor of the ABS. The sponsor (or, if the sponsor is a special purpose vehicle, the sponsor’s direct or indirect ultimate parent) must deliver to the FRBNY an undertaking indemnifying the FRBNY from any losses suffered if such certifications are untrue.
Prior to the first subscription date of March 17, 2009, each primary dealer will collect loan requests from prospective eligible borrowers. Each loan request must specify the amount requested, the interest-rate format (fixed or floating), and the CUSIP numbers and prospectuses or other offering documents corresponding to the pledged ABS. The minimum loan amount is $10 million; there is no specified maximum. A borrower may request an unlimited number of loans at each monthly subscription and may pledge any combination of eligible ABS as collateral for a single loan. However, fixed-rate ABS must be pledged against a fixed-rate loan, and floating-rate ABS must be pledged against a floating-rate loan.
On the subscription date of March 17, 2009, each primary dealer will submit the above-described information to the FRBNY’s custodian. At least two business days before the settlement date of March 26, 2009, the custodian will provide primary dealers with confirmation of each borrower’s loan amount and the ABS expected to be delivered on the settlement date. The confirmation also will indicate the administrative fee (equal to five basis points of the loan amount) and the haircut to be collected by the primary dealer and paid on the settlement date of March 25, 2009.
A prospective borrower may subscribe for ABS that it does not yet own. However, if the borrower fails to deliver the specified ABS collateral on the settlement date, the corresponding portion of the loan will be cancelled and the administrative fee will not be refunded.
The dates provided above relate only to the first funding of the TALF program. The FRBNY has announced that the subscription date for the second funding will be April 7, 2009, with a corresponding settlement date of April 14, 2009. Future subscription dates will be on the first Tuesday of each month. The FRBNY will cease making TALF loans on December 31, 2009, unless the program is extended.
Potential Future Coverage of Additional ABS Categories
The Treasury white paper indicates that additional categories of ABS (backed by rental, commercial, and governmental fleet leases, and by small-ticket, heavy equipment, and agricultural loans and leases) are expected to be eligible for the April 2009 funding of the TALF. Consideration also is being given to expanding the program to encompass commercial and residential mortgage-backed securities, collateralized loan and debt obligations, and other types of ABS that are not currently eligible.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.
If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:
Stephen B. Waller
Patricia J. Lane