On March 23, 2020, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced a wide array of actions intended to promote economic stability in light of the COVID-19 pandemic, including several different credit facilities.
The Federal Reserve announced as one of these credit facilities a renewal of the Term Asset-Backed Securities Loan Facility (“TALF”) and provided a preliminary term sheet. The TALF is designed to increase liquidity and credit availability by facilitating the issuance of certain asset-backed securities (“ABS”). The original TALF was established in 2008 as one of the Federal Reserve’s measures to stabilize the US economy during the 2008 financial crisis. Although the Federal Reserve will release detailed terms and conditions based off of the 2008 TALF, the preliminary term sheet broadly describes the mechanics of the new TALF program.
Under the new TALF, the Federal Reserve will lend to a special purpose vehicle (“SPV”). Additionally, the Treasury Department will make a $10 billion equity investment in the SPV. The SPV will make up to $100 billion of loans available to eligible borrowers that pledge eligible collateral and maintain an account relationship with a primary dealer that supports the operation of the TALF. Eligible borrowers include U.S. entities organized and existing under United States law (including entities that have a non-U.S. parent company) and U.S. branches of foreign banks.
Eligible collateral includes AAA-rated U.S. dollar denominated ABS issued on or after March 23, 2020 and backed by recently originated eligible consumer and small business loans. Eligible underlying loans include:
1) Auto loans and leases;
2) Student loans;
3) Credit card receivables (both consumer and corporate);
4) Equipment loans;
5) Floorplan loans;
6) Insurance premium finance loans;
7) Certain small business loans that are guaranteed by the Small Business Administration; or
8) Eligible servicing advance receivables.
To determine loan commitments, pledged eligible collateral will be valued and assigned a haircut according to a schedule based on the ABS collateral’s economic sector, its weighted average life, and historical volatility. Collateral substitutions during the term of a loan will generally not be allowed.
All loans extended under the TALF will be non-recourse, generally pre-payable, and have a term of three years. Interest rates will vary: for eligible ABS with underlying credit exposures without a government guaranty, the interest rate will be 100 basis points over the 2-year LIBOR swap rate for securities with a weighted average life of less than two years. For ABS collateral with a weighted average life of two years or greater, the interest rate will be 100 basis points over the 3-year LIBOR swap rate. Additionally, the SPV will assess an administrative fee equal to 10 basis points of the loan amount on the loan settlement date.
The Federal Reserve is still finalizing the new TALF program and will provide more information over the coming days. In the meantime, however, potential borrowers should refer to the Federal Reserve Bank of New York’s Frequently Asked Questions on the 2008 TALF, as the new TALF program will contain similar terms and conditions. Norton Rose Fulbright will continue to provide updates as additional information becomes available.