The Federal Reserve Bank of New York (New York Fed) will make up to $200 billion of loans under the TALF. TALF loans will have a term of three years or, in certain cases, five years; will be non-recourse to the borrower; and will be fully secured by eligible ABS. The U.S. Treasury Department will provide $20 billion of credit protection to the Federal Reserve in connection with the TALF, as described below.
Eligible Collateral
Eligible collateral will include U.S. dollar-denominated cash (that is, not synthetic) ABS that are issued on or after January 1, 2009 (except for SBA Pool Certificates or Development Company Participation Certificates, which must have been issued on or after January 1, 2008 and commercial mortgage pass-through securities issued before January 1, 2009 (legacy CMBS)). Any ABS that are not legacy CMBS are referred to as "newly issued ABS". Eligible collateral will include only ABS that are cleared through the Depository Trust Company.
All or substantially all of the credit exposures underlying eligible ABS must be exposures that are (1) for newly issued ABS, originated by U.S.-organized entities or institutions or U.S. branches or agencies of foreign banks and (2) for all ABS, made to U.S.-domiciled obligors or, with respect to real property, located in the United States or one of its territories. The underlying credit exposures of eligible ABS must be auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, small business loans fully guaranteed as to principal and interest by the U.S. Small Business Administration, receivables related to residential mortgage servicing advances (servicing advance receivables) or commercial mortgage loans.
The set of permissible underlying credit exposures of eligible ABS may be expanded later to include non-Agency residential mortgages and/or other asset classes.
Eligible collateral for a particular borrower must not be backed by loans originated or securitized by the borrower or by an affiliate of the borrower. A borrower, however, is not restricted from using an SBA Pool Certificate or Development Company Participation Certificate as collateral for its TALF loan even if the underlying loans backing the SBA ABS were originated by such borrower or its affiliates, provided that the borrower has no knowledge that the loans were originated by it or its affiliates. A borrower, in all cases, is not permitted to collateralize a TALF loan with ABS that was securitized by the borrower or by an affiliate of the borrower.
A CMBS will not be eligible collateral for a particular borrower if that borrower, or any of its affiliates, is a borrower under a mortgage loan backing the CMBS unless that loan, and each other mortgage loan in the CMBS mortgage pool made to an affiliate of the TALF borrower, together constitute no more than 5% of the aggregate principal balance of the mortgage loans in the pool as of the subscription date.
An ABS backed by commercial and government fleet leases, rental fleet leases or floorplan loans will not be eligible collateral for a particular borrower, if that borrower, or any of its affiliates, is an obligor under a loan or lease backing the ABS, unless the aggregate principal balance of the loans or leases made to the TALF borrower and each of its affiliates in the pool backing the ABS together constitute no more than 10% of the aggregate principal balance of all of the loans and leases in the pool as of the subscription date. In the case of leases, the term "aggregate principal balance" refers to the securitization value of the leases in the pool.
An ABS will not be eligible collateral for a particular borrower if that borrower, or any of its affiliates, is the manufacturer, producer or seller of any products, or the provider of any services, the sale, provision, or lease of which is financed by the loans or leases in the pool supporting that ABS unless the loans or leases relating to such products or services constitute no more than 10% of the aggregate principal balance of the loans and leases in the pool supporting such ABS as of the issuance date of such ABS. For purposes of this requirement, products include financial products such as insurance, and services include education. In the case of leases, the term "aggregate principal balance" refers to the securitization value of the leases in the pool.
A newly issued ABS with a redemption option (other than pursuant to a customary clean-up call) is not eligible as collateral unless the ABS issuer has received acceptance of such redemption option from the New York Fed.
As of the TALF loan closing date for newly issued ABS (including newly issued CMBS) and as of the TALF loan subscription date for legacy CMBS, the ABS must have a credit rating in the highest long-term or, in the case of non-mortgage-backed ABS, the highest short-term investment-grade rating category from at least two eligible nationally recognized statistical rating organizations (NRSROs) and must not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. Eligible collateral will not include an ABS that obtains such credit ratings based on the benefit of a third-party guarantee or an ABS that an eligible NRSRO has placed on review or watch for downgrade. See the "Frequently Asked Questions" under "Credit Ratings" for further information regarding eligible NRSROs.
Eligible small business ABS include ABS that are, or for which all of the underlying credit exposures are, fully guaranteed by the full faith and credit of the U.S. government and are exempt from the rating agency requirements described above.
Further information on eligibility requirements for each category of ABS is provided below.
Risk Assessment
The New York Fed will perform a risk assessment of any ABS proposed as collateral for a TALF loan and will retain the right to reject any ABS, including CMBS, as TALF loan collateral based on this risk assessment. Further information on the risk assessment process for each type of ABS is provided below.
Any determination by the New York Fed, following its risk assessment, that proposed TALF-eligible collateral is acceptable is not investment advice, a recommendation to purchase securities or a guarantee of credit quality, and does not reflect any view by the New York Fed as to the value of such security. No potential TALF borrower should rely on such determination in connection with its purchase of any ABS. Further, the determination that an ABS meets the eligibility requirements of the TALF program continues to be the responsibility of the borrower and the TALF agent.
Eligible Borrowers
Any U.S. company that owns eligible collateral may borrow from the TALF provided the company maintains an account relationship with a TALF Agent. An entity is a U.S. company if it is (1) a business entity or institution that is organized under the laws of the United States or a political subdivision or territory thereof (U.S.-organized) and conducts significant operations or activities in the United States, including any U.S.-organized subsidiary of such an entity; (2) a U.S. branch or agency of a foreign bank (other than a foreign central bank) that maintains reserves with a Federal Reserve Bank; (3) a U.S. insured depository institution; or (4) an investment fund that is U.S.-organized and managed by an investment manager that has its principal place of business in the United States. An entity that satisfies any one of the requirements above is a U.S. company regardless of whether it is controlled by, or managed by, a company that is not U.S.-organized. Notwithstanding the foregoing, a U.S. company excludes any entity, other than those described in clauses (2) and (3) above, that is controlled by a foreign government or is managed by an investment manager, other than those described in clauses (2) and (3) above, that is controlled by a foreign government.
A financing subsidiary of a Public-Private Investment Fund (PPIF) established pursuant to the Legacy Securities Public-Private Investment Program may be an eligible borrower (an “Eligible PPIF Borrower”) only with respect to legacy CMBS and only if the PPIF is receiving Treasury-supplied debt financing equal to or less than 50 percent of the PPIF’s total equity (including private and Treasury-supplied equity) and satisfies all other borrower eligibility requirements.
Transaction Structure and Pricing
Credit extensions under the TALF will be in the form of non-recourse loans secured by eligible collateral. Each TALF loan will have a three-year maturity, except that TALF loans secured by SBA Pool Certificates, SBA Development Company Participation Certificates or ABS backed by student loans or commercial mortgage loans will have a five-year maturity if the borrower so elects. Interest on TALF loans will be payable monthly. TALF loans will not be subject to mark-to-market or re-margining requirements.
TALF loans will be pre-payable in whole or in part at the option of the borrower, but substitution of collateral during the term of the loan generally will not be allowed. Unless otherwise provided in the Master Loan and Security Agreement (MLSA), any remittance of principal on eligible collateral must be used immediately to reduce the principal amount of the TALF loan in proportion to the loan's original haircut (e.g., if the original haircut was 10 percent, 90 percent of any remittance of principal must immediately be repaid to the New York Fed). In addition, for collateral priced at a premium to par the borrower will make an additional principal payment calculated to adjust for the average reversion of market value toward par value as the ABS matures. Also, for five-year TALF loans (which will be available for loans secured by SBA ABS or ABS backed by student loans or commercial mortgage loans), the excess of interest and any other distributions (excluding principal distributions) on the ABS over TALF loan interest payable (such amount, "net carry") will be remitted to the TALF borrower only until net carry equals 25% per annum of the original haircut amount in the first three loan years, 10% in the fourth loan year, and 5% in the fifth loan year, and the remainder of such net carry will be applied to TALF loan principal. For a three-year TALF loan for legacy CMBS, such net carry will be remitted to the borrower in each loan year until it equals 30% per annum of the original haircut amount, with the remainder applied to loan principal. The New York Fed will assess an administrative fee equal to 10 basis points of the loan amount on the settlement date for non-mortgage-backed ABS collateral, and 20 basis points for CMBS collateral.
Further information on transaction structure and pricing for TALF loans secured by each category of ABS is provided below and in the MLSA.
Voting
A TALF borrower must agree not to exercise or refrain from exercising any voting, consent or waiver rights under an ABS without the consent of the New York Fed.
Allocation
The New York Fed will announce monthly TALF loan subscription and settlement dates for TALF loans to be secured by each category of ABS. On each subscription date, borrowers will be able to request one or more floating-rate and one or more fixed-rate TALF loans by indicating for each loan the eligible ABS collateral they expect to pledge, the desired loan amount, the desired interest rate format (fixed or floating), and desired loan maturity, subject to any limitations on the types of interest rates or loan maturities specified in the eligibility requirements for each category of ABS. Loan proceeds will be disbursed to the borrower, contingent on receipt by the New York Fed's custodian bank of the eligible ABS collateral. The minimum size for each TALF loan will be $10 million.
The New York Fed reserves the right to reject any request for a loan, in whole or in part, in its discretion.
Roles of TALF Agents and Custodian Bank
Each borrower must use a TALF Agent, which will act as agent for the borrower, to access the TALF and must deliver eligible collateral to the New York Fed's custodian bank.
Role of the U.S. Treasury Department
The New York Fed will create a special purpose vehicle (SPV) to purchase and manage any assets received by the New York Fed in connection with any TALF loans. The New York Fed will enter into a forward purchase agreement with the SPV under which the SPV will commit, for a fee, to purchase all assets securing a TALF loan that are received by the New York Fed at a price equal to the TALF loan amount plus accrued but unpaid interest. The U.S. Treasury's Troubled Asset Relief Program (TARP) will purchase subordinated debt issued by the SPV to finance the first $20 billion of asset purchases. If more than $20 billion in assets are purchased by the SPV, the New York Fed will lend additional funds to the SPV to finance such additional purchases. The New York Fed's loan to the SPV will be senior to the TARP subordinated loan and secured by all the assets of the SPV.
Termination Date
The facility will cease making TALF loans collateralized by newly issued CMBS on June 30, 2010, and TALF loans collateralized by other TALF-eligible newly issued and legacy ABS on March 31, 2010, unless the Board of Governors extends the facility.
