Introduction
With the Term Asset-Backed Securities Loan Facility program (“TALF 2.0”) officially underway and open to investors, the Federal Reserve Bank of New York (the “FRBNY”) continues to modify the program, most recently granting an extension from its original September 30, 2020 expiration date to December 31, 2020. The Federal Reserve Board (the “Fed”) noted the “three-month extension will facilitate planning by potential facility participants and provide certainty that the facilities will continue to be available to help the economy recover from the COVID-19 pandemic.” Meanwhile, the FBRNY has continued to update the TALF 2.0 program with additional revisions since our June 18 Dechert OnPoint publication1 with further releases of the TALF 2.0 Frequently Asked Questions (“FAQs”) on July 20, July 23, July 27 and most recently on July 31 (collectively, the “Revised FAQs”). The frequency of the updates means that these are unlikely to be the last updates to the TALF 2.0 FAQs. In these most recent revisions, in addition to extending the life of the facility, the FRBNY has included updated requirements relating to new issue asset-backed securities (“ABS”) backed by Small Business Administration loans (“SBA ABS”), expanded the eligibility criteria for TALF Agents and confirmed that it will publicly disclose (i) the investment managers for each borrower organized as an investment fund and (ii) its determinations as to whether proposed collateral is eligible or ineligible.
TALF 2.0 So Far
TALF 2.0 has had a modest uptake to date. The data available for the subscription windows up to and including the July 21, 2020 subscription date2 noted that the total amount of TALF 2.0 loans that have been settled is approximately $1.62 billion, with approximately $1.96 billion having been initially requested. Of the total amount of TALF 2.0 loans settled for the initial windows, approximately 43% is collateralized by ABS backed by commercial mortgages, approximately 38% is collateralized by SBA ABS, approximately 13% is collateralized by ABS backed by student loans and approximately 7% is collateralized by ABS backed by premium finance receivables. The data available for the August 4, 2020 subscription date provides that an additional amount of approximately $646 million has since been requested. Notwithstanding the fact that demand for TALF 2.0 funds has been lower than initial expectations and there has been no uptake for asset classes such as auto, credit card, equipment, floorplan and CLOs, some market observers credit TALF 2.0 with having brought sufficient certainty to the ABS markets to enable those asset classes to self-stabilize faster than might otherwise have been expected.
Extension of TALF 2.0 Program
The most notable update to the Revised FAQs and TALF 2.0 program was the extension of the program through December 31, 2020. However, this extension is not coupled with any changes to the eligible asset classes, which many market participants have called on the Fed to expand. Additional subscription dates and further revisions to the FAQs are expected to be published as the FRBNY continues to review and evaluate the lending program in real-time.
Eligible ABS
Trade Settlements
The Revised FAQs clarify earlier guidance relating to ABS that a TALF 2.0 borrower already owns. The changes stipulate that if eligible ABS (except SBA ABS) are not issued on the same day as the borrowing, the ABS must have (i) been acquired within 30 days prior to the relevant loan subscription date (with the date of acquisition measured from the relevant pricing or trade date and not the settlement date) and (ii) settled prior to the applicable loan subscription date.
SBA ABS Subscription Date Requirements
The Revised FAQs permit new issue SBA ABS to include a trade date that is 45 days prior to the applicable loan subscription date. Unlike non-new issue SBA ABS or previously issued ABS purchased and settled prior to the subscription date, SBA ABS may be sold with variable issuance and settlement dates depending on applicable documentation requirements. A new issue SBA ABS can have a settlement date prior to the relevant TALF 2.0 loan settlement date (and such SBA ABS will be treated as issued and settled by the borrower on the TALF 2.0 loan settlement date). If the new issue SBA ABS settles before the TALF 2.0 loan settlement date, such SBA ABS must be delivered through the TALF Agent.
Valuation on Settlement Dates
The valuations for any ABS to be pledged as collateral that trade on the basis of an original principal amount and a factor will be established based on the most recent factor available as of the third (3rd) business day prior to the TALF 2.0 loan settlement date. If the value for the loan is determined after the record date for the collateral (and before the distribution date), the TALF 2.0 borrower (and not the TALF custodian) will receive such principal payment associated for the factor reduction on the distribution date.
The Revised FAQs further provide that when the TALF 2.0 settlement date occurs on or after the date on which the principal amount can be determined by an updated factor, such principal amount may be netted by the FRBNY, in its sole discretion, from the TALF 2.0 loan proceeds and applied as “Principal Receipts” on the subsequent payment date. If such principal amount is not known on the settlement date or the FRBNY does not net the principal amount, such amounts must be promptly paid (within three (3) business days after the distribution date) by the TALF borrower following receipt thereof. In such scenarios, the FRBNY reserves the right to adjust the determination of the collateral value at any time prior to the TALF 2.0 loan settlement date if it is expected that a significant amount of principal will be owed by the TALF borrower following the settlement date.
Public Disclosure of Collateral Eligibility Determinations
The Revised FAQs provide that the aggregate information relating to initial TALF 2.0 loan requests will be available on the TALF website on each subscription date, with any aggregate information relating to settled loans becoming available within one (1) business day of each loan settlement date. Furthermore, all ABS that (i) the Fed deems is TALF-eligible and (ii) TALF borrowers propose but the FRBNY determines to be ineligible, will be reported on the TALF 2.0 website two (2) business days prior to each settlement date. These determinations, however, are subject to change as eligible ABS may be deemed ineligible or ineligible ABS may become eligible for subsequent requests. The FRBNY also reiterated in the Revised FAQs that collateral may be rejected at the FRBNY’s discretion, for reasons unrelated to eligibility. The data available for the subscription windows up to and including the July 21, 2020 subscription date3 indicates that the FRBNY has not yet made a determination that any proposed TALF eligible ABS is ineligible.
Expansion of Eligible TALF Agents
On July 23, 2020, the Fed broadened the group of firms eligible to provide services in the TALF 2.0 program. The July 23, 2020 FAQs expanded the list of parties qualifying as TALF Agents from exclusively primary dealers to include other dealers designated by the FRBNY. The selection of additional TALF agents will remain subject to the FRBNY’s discretion.
Public Disclosure of the Investment Manager
The Revised FAQs provide that, in addition to publicly disclosing the identity of each “Material Investor” of a borrower among other disclosures, the investment manager for each borrower organized as an investment fund will also be publicly disclosed on a monthly basis.
Conclusion
The FRBNY continues to adjust the details of the TALF 2.0 program. While it is unsurprising that the program timeline has been extended, it will likely be a welcome announcement for most market participants. Dechert will continue to monitor all developments relating to TALF 2.0, and will continue to provide in depth analysis on the specific changes to particular asset classes and other issues relating to both issuers and investors.
Footnotes
1) See full description of the Fed’s announcement of the TALF program, in the March 2020 Dechert OnPoint - Federal Reserve Establishes Term Asset-Backed Securities Loan Facility (TALF); see also, Dechert’s commentary on the April Term Sheet, in the April 2020 Dechert OnPoint - Federal Reserve Releases Updated Term Sheet on the Term Asset-Backed Securities Loan Facility (TALF); see also, Dechert’s commentary on the May Term Sheet and the Frequently Asked Questions, in the May 2020 Dechert OnPoints - Federal Reserve Further Revises Term Sheet and Releases FAQ for the Term Asset-Backed Securities Loan Facility (TALF 2.0) and Federal Reserve Announces First Subscription Date of June 17, 2020 for the Term Asset-Backed Securities Loan Facility, Further Revises FAQs and Releases Master Loan and Security Agreement; see also Dechert’s commentary on the revised June FAQs in the June 2020 Dechert OnPoints FRBNY Further Revises TALF 2.0 FAQs; SEC Issues No-Action Relief for Registered Fund and BDC Participants and FRBNY, Yet Again, Revises the TALF 2.0 Frequently Asked Questions
2) https://www.newyorkfed.org/markets/term-asset-backed-securities-loan-facility/term-asset-backed-securities-loan-facility-rates
3) https://www.newyorkfed.org/markets/term-asset-backed-securities-loan-facility/term-asset-backed-securities-loan-facility-rates
