November 27, 2008
Authored by: Bryan Cave
On November 25, 2008, Treasury and the Federal Reserve announced the creation of the Term Asset-Backed Securities Loan Facility (“TALF”). The intent of TALF is to assist the credit markets in meeting the needs of consumers and small businesses by facilitating the issuance of, and improving the market for, asset-backed securities (“ABS”). To fulfill this intent, the Federal Reserve Bank of New York (“FRBNY”) will provide up to $200 billion for non-recourse loans that are fully secured by eligible ABS. Treasury will use funds from TARP to provide $20 billion in credit protection to the FRBNY.
Collateral eligible for a TALF loan includes dollar-denominated, ABS that not only must receive the highest possible long-term investment rating from at least two nationally recognized ratings agencies but also cannot be rated by any rating agency below the highest possible long-term rating. Newly or recently originated auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration must comprise all or substantially all of the credit exposure underlying the ABS. The underlying credit exposure cannot include exposures that are themselves cash or synthetic ABS.
The term of a TALF loan will be one year with interest payable monthly, but the term can be extended if appropriate. The collateral cannot be substituted during the term of the loan, and each class of eligible collateral will be subject to a haircut, to be determined by the FRBNY, based on the price volatility of each class. A TALF borrower must immediately apply any remittance of principal or interest on the collateral to the interest due on, or principal of, the TALF loan. TALF loans will not be subject to mark-to-market or re-margining requirements.
The FRBNY will offer a fixed amount of TALF loans each month in competitive, sealed-bid auctions. A bidder must indicate the amount of credit desired and the interest rate spread over one-year OIS, with the FRBNY setting the minimum spread. A bid pledging certain potentially high-risk ABS will be subject to greater scrutiny. At the inception of each TALF loan, the FRBNY will assess a non-recourse loan fee.
Eligible borrowers under TALF include any natural person who is a U.S. citizen, any entity organized within the U.S., and any U.S. branch of a foreign bank. TALF borrowers must have agreed to comply with, or must already be subject to, the executive compensation limitations set forth under section 111(b) of the Emergency Economic Stabilization Act of 2008. Further, borrowers must use a primary dealer as an agent and must deliver the eligible collateral to a clearing bank.
Treasury and the Federal Reserve contemplate expanding the eligible collateral to include commercial mortgage-backed securities, non-agency guaranteed residential mortgage-backed securities, or other asset classes. The Federal Reserve also reserves the right to adjust, consistent with the intent of TALF, the terms and conditions of TALF, including the size, pricing, loan maturity, and asset and borrower eligibility requirements.
Unless the Federal Reserve decides to extend TALF, no new loans will be made after December 31, 2009.
Treasury’s press release on TALF can be found here.
Secretary Paulson’s remarks on TALF can be found here.
The TALF term sheet can be found here.