On April 9, 2020, the Federal Reserve released an updated term sheet for the Term Asset-Backed Securities Loan Facility (“TALF”). Eligible borrowers under TALF (“Eligible Borrowers”) must now be U.S. companies that own eligible collateral and maintain an account relationship with a primary dealer. A “U.S. company” now is defined as a business that is created or organized in the United States or under the laws of the United States and that has significant operations, and a majority of its employees, based in the United States.
Additionally, the updated term sheet expanded the classes of eligible collateral to include static collateralized loan obligations (“CLO”)( that is, managed CLOs with reinvestment features are not eligible collateral), and legacy commercial mortgage-backed securities (“CMBS”) issued prior to March 23, 2020. Eligible CMBS must be related to real property located in the United States or one of its territories. By limiting eligible CLO collateral to static CLOs and limiting eligible CMBS collateral to legacy CMBS, the Federal Reserve did not go as far with those two asset types as many were hoping.
The Federal Reserve also noted that it may consider adding new asset classes as eligible collateral in the future, and published a haircut schedule with the updated term sheet that described the assets that would count as eligible collateral at less than 100% of the value of the asset, which schedule is consistent with the haircut schedule used for the TALF established in 2008.
The Federal Reserve also published updated pricing terms. The interest rate for CLOs will be 150 basis points over the 30-day average secured overnight financing rate (“SOFR”). By referencing SOFR, the Federal Reserve appears to be endorsing SOFR as the replacement rate for LIBOR. For SBA Pool Certificates (7(a) loans), the interest rate will be the top of the federal funds target range plus 75 basis points. For SBA Development Company Participation Certificates (504 loans), the interest rate will be 75 basis points over the 3-year fed funds overnight index swap (“OIS”) rate.
For all other eligible asset-backed securities with underlying credit exposures that do not have a government guarantee, the interest rate will be 125 basis points over the 2-year OIS rate for securities with a weighted average life less than two years, or 125 basis points over the 3-year OIS rate for securities with a weighted average life of two years or greater.
There are some notable problems that the Federal Reserve will have to fix in an updated TALF term sheet:
- First, the change in the “Eligible Borrower” definition – particularly the change in the definition of “U.S. company” – will make it difficult for many issuers to utilize the TALF and will likely exclude countless investment funds.
- Second, the updated term sheet deleted “eligible servicing advance receivables” from the eligible collateral definition. At this point it is unclear whether eligible servicing advance receivables will be eligible for relief under a separate program.
- Third, it is unclear what the Federal Reserve means by “newly issued” when referring to underlying credit exposures. Although not explicitly stated, it is possible that this means asset-backed securities issued on or after March 23, 2020.
Industry sources believe eligible collateral will be expanded to include non-agency residential mortgage-backed securities and personal installment loans. They also note that it is unlikely the Federal Reserve will expand eligible collateral beyond AAA-rated asset-backed securities. Industry sources further note that credit risk transfer (“CRT”) bonds are unlikely to get any relief from the Federal Reserve due to the requirement that eligible collateral be AAA-rated. Further, it is not clear that the Federal Housing Finance Administration is committed to saving the CRT bond market.
The Federal Reserve currently is working on a frequently asked questions page for the TALF.
The U.S. financial regulatory agencies have each established webpages dedicated to the COVID-19 pandemic. In addition, Norton Rose Fulbright has established a webpage focused on the COVID-19 pandemic, offering a wide variety of information and training resources.