Takeaways

The Federal Reserve will make available up to $100 billion of nonrecourse loans fully securitized by eligible asset-backed securities.
The TALF will initially make up to $100 billion in loans available to eligible borrowers.
This program is intended to allow large ABS holders to shift assets or reduce risk, freeing up capital for loans needed to support the economy during this crisis.

On March 23, the Federal Reserve announced a series of efforts to address ongoing financial uncertainty in the face of COVID-19. One such effort is the establishment of the new Term Asset-Backed Securities Loan Facility (the TALF) authorized by Section 13(3) of the Federal Reserve Act. The facility is designed to support the flow of credit to consumers and businesses through securitization. The TALF will enable the issuance of asset-backed securities (ABS), including securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration and other eligible assets.

The TALF will initially make up to $100 billion in loans available to eligible borrowers through a special purpose vehicle, with $10 billion in equity coming from the Department of the Treasury.

Under the TALF, holders of eligible AAA-rated ABS issued on or after March 23, 2020 and backed by newly and recently originated consumer and small business loans are eligible to borrow. The non-recourse loans have a term of three years and are fully securitized. Loan amounts are equal to the market value of the ABS minus a “haircut” linked to the perceived risk of the collateral. The haircut schedule and inform, available here, is consistent with the schedule used for the TALF established in 2008.

The TALF Program

Eligible Borrowers. All U.S. companies that own eligible collateral and that maintain a relationship with a primary dealer (i.e., a financial institution approved to trade securities with the federal government) are eligible to borrow under the TALF. A U.S. company 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 in and a majority of its employees based in the United States.”

Eligible Collateral. ABS with the following underlying credit exposures are eligible:

  1. Auto loans and leases
  2. Student loans
  3. Credit card receivables, both consumer and corporate
  4. Equipment loans and leases
  5. Floorplan loans
  6. Insurance premium finance loans
  7. Certain small business loans that are guaranteed by the Small Business Administration
  8. Leveraged loans
  9. Commercial mortgages

Eligible ABS must be issued on or after March 23, 2020. Ineligible collateral include, most notably, residential mortgages as well as commercial mortgage-backed securities issued on or after March 23, 2020. Also ineligible are ABS that bear interest payments that step up or step down to predetermined levels on specific dates and those with underlying credit exposures that are themselves cash ABS or synthetic ABS. The scope of covered collateral classes may be expanded in the future.

Terms and Conditions

  • Loans under the TALF have a term of three years and are fully securitized.
  • Information on pricing and rates is available here. More detailed information on pricing by collateral class will come with later detailed terms and conditions.
  • Borrowers will pay an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral.
  • Loans made under the TALF are pre-payable, but substitution of collateral during the term of the loan generally will not be allowed.
  • No new credit extensions will be made after September 30, 2020, unless the TALF is extended.
  • Additional terms and conditions will come at a later date and will be based off of those terms and conditions used for the 2008 TALF.
    Pillsbury’s experienced multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.
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