Avantisteam Decides “TALF 2.0”: A Primer for TALF-eligible Asset-backed Securit... - Jonathan Cartu CPA Accounting Firm - Tax Accountants
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Avantisteam Decides “TALF 2.0”: A Primer for TALF-eligible Asset-backed Securit…

“TALF 2.0”: A Primer for TALF-eligible Asset-backed Securit...

Avantisteam Decides “TALF 2.0”: A Primer for TALF-eligible Asset-backed Securit…


[co-author: Daniel Goldstein]

“TALF 2.0”: TALF is Back.

In March 2020, the Federal Reserve (the “Fed”) announced that it would re-establish the Term Asset-Backed Securities Loan Facility (“TALF”) program, a market stabilization tool that was developed and last used by the Fed during the 2008 financial crisis to support the flow of credit to consumers and small businesses by facilitating the issuance of certain types of asset-backed securities (“ABS”). The new version of TALF (“TALF 2.0”), which is established under Section 13(3) of the Federal Reserve Act and administered by the Federal Reserve Bank of New York (“FRBNY”), is part of a broader effort by the Fed to use its emergency lending authority to counteract the negative economic impact of the coronavirus pandemic, but is the only component of that effort focused directly on the ABS market. While TALF 2.0 is similar in many ways to the original TALF, there are also some significant differences.[1]

This alert serves as a primer for issuers of ABS (and other ABS market participants) that may be interested in understanding some of the key criteria that will determine whether an ABS is TALF-eligible, as well as some of the obligations and responsibilities that would be imposed on an ABS issuer should it choose to issue ABS under the program. It assumes that the reader is familiar with TALF’s basics. Any reader who is not familiar with the basics, however, should know beforehand (at the very least) that, under TALF, the FRBNY will lend to TALF II LLC, a special-purpose vehicle established by the Fed and the U.S. Department of the Treasury (the “TALF SPV Lender”)[2], which in turn will make non-recourse loans to eligible borrowers.[3] Each borrower will be obligated to use the proceeds of its loan to acquire or finance eligible ABS that are considered to be newly issued (or, more accurately, sufficiently recently issued) under the terms of TALF and also will be obligated to pledge its ABS to the TALF SPV Lender to secure the repayment of its loan. Underlying TALF is the expectation that TALF, ultimately, will support credit availability to, and thereby prop up, consumers and businesses, the financial obligations of which will be securitized through the TALF-eligible ABS having “more normal interest rate spreads” through the COVID-related crisis.

Orrick will continue to follow developments in the Fed’s implementation of TALF 2.0 and will periodically update this alert, along with its other TALF 2.0 alerts, as additional information becomes available.

Which types of ABS can be TALF-eligible ABS?

Only Certain Asset Classes Allowed. Not any ABS is, or will be, a TALF-eligible ABS. Only nine types of ABS (designated by underlying asset class) are eligible as collateral under TALF. These include ABS secured by the following types of assets, but only to the extent that they satisfy all of TALF’s other criteria:

  • Auto loans and leases
  • Student loans
  • Credit card receivables (both consumer and corporate)
  • Equipment loans and leases
  • Floorplan loans
  • Insurance premium finance loans
  • Certain types of Small Business Administration-guaranteed loans
  • Leverage loans (certain types of static CLOs)
  • Commercial mortgages (certain types of CMBS)

Stringent Ratings Requirements and No Synthetics. According to the Fed’s terms, each TALF-eligible ABS must be a U.S. dollar denominated, cash ABS (that is, not a synthetic ABS), and must (A) have a credit rating in the highest long‐term or, if no long‐term rating is available, the highest short‐term, investment-grade rating category from at least two eligible nationally recognized statistical rating organizations (“NRSROs”) and (B) not have a credit rating below the highest investment‐grade rating category from an eligible NRSRO. Currently, the only NRSROs recognized by TALF are Fitch, Moody’s and S&P, at least one of which must provide a required rating, as well as DBRS and Kroll, either of which may provide a “second” required rating.

The ABS Must Be Newly Issued. All eligible ABS other than CMBS, Small Business Administration (“SBA”) Pool Certificates, and Development Company Participation Certificates must be issued on or after March 23, 2020. CMBS issued on or after March 23, 2020, will not be eligible. SBA Pool Certificates or Development Company Participation Certificates must be issued on or after January 1, 2019.

The Underlying Assets Must Also Be Newly Issued. A “new issuance” requirement will apply to the underlying assets in the securitization, too. All or substantially all (i.e., at least 95% of the principal balance) of the underlying assets, which TALF refers to as the “credit exposures,” must be originated or issued on or after certain prescribed dates that, as set forth in the chart below, vary according to asset class.[4] For underlying assets that are in the form of loans drawn under an existing arrangement to extend credit, the origination dates of the underlying assets are the dates on which the loans were drawn or funded, not the date on which the arrangement for the extension of credit itself was put in place. The FAQ cites as examples floorplan lines of credit or loans secured by leases to rental car companies. In those instances, the origination dates would be the dates on which individual draws were made under the credit facilities, not the date on which the credit facilities themselves closed and became effective.

Underlying Credit Exposure

Origination Date Requirement

Auto Loan Receivables; Credit Card Receivables; Floor Plan Receivables; and Premium Finance Receivables

  • For auto ABS issued by non-revolving trusts—on or after January 1, 2019
  • For ABS issued by existing revolving or master trusts—no origination date requirement but the ABS is only permitted if issued to refinance existing ABS of the same category maturing[5] prior to September 30, 2020 (i.e., the scheduled termination date of TALF 2.0, after which no further credit extensions will be made (the “TALF Termination Date”)) in amounts no greater than the amount of the maturing ABS.[6]The new ABS may refinance ABS that mature on or prior to the TALF Termination Date up to three months in advance (the FAQ[7] is not clear as to whether this should be interpreted as three months in advance of the maturity of the maturing ABS or three months in advance of the TALF Termination Date).
  • For ABS issued by master trusts established on or after March 23, 2020—on or after January 1, 2020.

Equipment Receivables

  • On or after January 1, 2019.

Leveraged Loans

  • Must be originated (or refinanced) on or after January 1, 2019.

Student Loans

  • Must be originated (or refinanced) on or after January 1,…

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