TALF 2.0 extended to 2020 and other updates | Dechert LLP
With the Term Asset-Backed Securities Loan Facility (“TALF 2.0“) officially open and open to investors, the Federal Reserve Bank of New York (the”FRBNY“) continues to modify the program, most recently granting an extension of its original expiration date from September 30, 2020 to December 31, 2020. The Federal Reserve Board (the”fed“) noted that” the three-month extension will make it easier for potential participants to plan the facilities and provide certainty that the facilities will continue to be available to help the economy recover from the COVID-19 pandemic. ” This time, the FBRNY has continued to update the TALF 2.0 program with additional revisions since our Dechert OnPoint publication of June 18.1 with other versions of the TALF 2.0 frequently asked questions (“Faq“) July 20, July 23, July 27, and more recently July 31 (collectively, the”Revised FAQ“). The frequency of updates means that these are unlikely to be the latest updates to the TALF 2.0 FAQ. In these most recent revisions, in addition to extending the life of the facility, the FRBNY included updated requirements for new issuance of asset-backed securities (“abs“) backed by loans from the Small Business Administration (“ABS ABS“), expanded the eligibility criteria for TALF agents and confirmed that it will publicly disclose (i) the investment managers for each borrower organized into investment funds and (ii) its determinations as to whether the collateral proposed is eligible or not.
TALF 2.0 so far
TALF 2.0 has seen modest adoption to date. Data available for subscription windows up to and including the subscription date of July 21, 20202 noted that the total amount of TALF 2.0 loans that have been settled is approximately $ 1.62 billion, of which approximately $ 1.96 billion was originally requested. Of the total amount of TALF 2.0 loans settled for the initial windows, around 43% are secured by ABS backed by commercial mortgages, around 38% are secured by SBA ABS, around 13% are secured by ABS backed by student loans and about 7% is secured by ABS-backed premium financing. Data available for the August 4, 2020 subscription date projects that an additional amount of approximately $ 646 million has since been requested. Despite the fact that demand for TALF 2.0 funds has been lower than initial expectations and there has been no adoption for asset classes such as automobiles, credit cards, equipment , floor plans and CLOs, some market watchers credit TALF 2.0 ABS markets to allow these asset classes to self-stabilize faster than expected.
Extension of the TALF 2.0 program
The most notable update to the revised FAQ and to the TALF 2.0 program was the extension of the program until December 31, 2020. However, this extension is not associated with any change in the eligible asset classes, only many market players have called on the Fed to expand. Additional subscription dates and other revisions to the FAQs are expected to be released as the FRBNY continues to review and evaluate the loan program in real time.
The revised FAQ clarifies previous ABS guidelines that a TALF 2.0 borrower already has. The changes stipulate that if the qualifying ABS (except SBA ABS) are not issued on the same day as the loan, the ABS must have (i) been acquired within 30 days prior to the subscription date of the loan. relevant loan (the acquisition date being measured from the relevant price or transaction date and not the settlement date) and (ii) settled before the applicable loan subscription date.
ABS SBA subscription date requirements
The revised FAQ allows new ABS SBA issues to include a trade date that is 45 days prior to the applicable loan underwriting date. Unlike non-new SBA ABS or previously issued ABS purchased and settled prior to the subscription date, SBA ABS can be sold with variable issue and settlement dates depending on applicable documentation requirements. A new issue of SBA ABS may 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 SBA ABS issue is settled before the TALF 2.0 loan settlement date, that SBA ABS must be delivered through the TALF Agent.
Valuation on Settlement Dates
The valuations of any ABS to be pledged as collateral which trades on the basis of an initial principal amount and a factor will be established on the basis of the most recent factor available on the third (3rd) business day before the settlement date. of the TALF 2.0 loan. If the value of the loan is determined after the collateral registration date (and before the distribution date), the TALF 2.0 borrower (and not the TALF custodian) will receive the principal payment associated with the reduction of the factor at the date of distribution.
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, that principal amount may be offset by the FRBNY, in its sole discretion, TALF 2.0. loan and applied as “master receipts” on the next payment date. If this principal amount is not known on the settlement date or if the FRBNY does not clear the principal amount, these amounts must be paid promptly (within three (3) business days of the distribution date) by the TALF borrower following receipt. In such scenarios, FRBNY reserves the right to adjust the determination of the collateral value at any time before the TALF 2.0 loan settlement date if it is anticipated that a significant amount of principal will be owed by the collateral. TALF borrower after the settlement date.
Public disclosure of warranty eligibility determinations
The revised FAQ provides that aggregated information relating to initial TALF 2.0 loan applications will be available on the TALF website on each subscription date, with all aggregated information relating to settled loans becoming available within one (1) day. business following each loan settlement date. In addition, any ABS that (i) the Fed deems eligible for TALF and (ii) that TALF borrowers offer but that FRBNY deems ineligible, will be reported on the TALF 2.0 website two (2) business days prior to each date. settlement. These determinations, however, are subject to change as qualifying ABS may be considered ineligible or ineligible ABS may become eligible for subsequent claims. FRBNY also reiterated in the revised FAQ that guarantees may be rejected at the discretion of FRBNY, for reasons unrelated to eligibility. Data available for subscription windows up to and including the subscription date of July 21, 20203 indicates that the FRBNY has not yet determined that a proposed TALF-eligible ABS is ineligible.
Extension of eligible TALF agents
On July 23, 2020, the Fed expanded the group of companies eligible to provide services under the TALF 2.0 program. The FAQ of July 23, 2020 extended the list of parties qualifying as TALF agents exclusively for primary dealers to include other dealers designated by the FRBNY. The selection of additional TALF agents will be at the discretion of FRBNY.
Public disclosure of the investment manager
The revised FAQ provides that in addition to publicly disclosing the identity of each “significant investor” of a borrower among other disclosures, the investment manager of each borrower organized into an investment fund will also be publicly disclosed on a monthly basis.
FRBNY continues to adjust the details of the TALF 2.0 program. While it’s no surprise that the program’s schedule 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 specific changes to particular asset classes and other issues related to both issuers and investors.