On May 20, 2020, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) published an expanded set of FAQ regarding the Term Asset-Backed Securities Loan Facility (“TALF 2.0”) as well as the form of Master Loan and Security Agreement (“MLSA”). The revised publications are in addition to the May 12, 2020, term sheet and FAQ. The first subscription date for TALF 2.0 loans will be June 17, 2020, and the first loan closing date will be June 25, 2020. The TALF 2.0 window is currently scheduled to close on September 30, 2020. It is expected that there will be two loan subscription dates per month. TALF 2.0 loans will have a duration of three years, must be in a minimum amount of $5 million and will be requested and made via authorized TALF 2.0 agent banks.
Loans under TALF 2.0 will be non-recourse to borrowers except for breaches of representations, warranties and covenants, as further specified in the MLSA and as discussed below.
Eligible borrower: Eligible borrowers include entities organized as limited liability companies, partnerships, banks, corporations, and business or other non-personal trusts. To be an eligible borrower the entity must satisfy all three of the following criteria: (i) be created or organized in the United States or under the laws of the United States, (ii) have significant operations in and a majority of its employees based in the United States, and (iii) maintain an account relationship with a primary dealer.
- Created or organized in the United States
The FAQ clarify that a US subsidiary or US branch or agency of a foreign bank would be considered to be created or organized in the United States. Such branch or agency must also satisfy all of the other relevant criteria to qualify as an eligible borrower.
The FAQ provide guidance on what constitutes “significant operations.” This includes the entity having greater than 50 percent of its consolidated assets in, annual consolidated net income generated in, annual consolidated net operating revenues generated in, or annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) generated in the United States as reflected in its most recent audited financial statements.
An entity will not be an eligible borrower under TALF 2.0 if any Material Investor is a foreign government. As applied to an investment fund, an investment fund’s investment manager must not have any Material Investors that are foreign governments. A “Material Investor” is a person who owns, directly or indirectly, 10 percent or more of any outstanding class of securities of an entity.
Investment funds that are created or organized in the United States and managed by an investment manager that is created or organized in the United States and has significant operations in and a majority of its employees based in the United States are eligible borrowers for purposes of TALF 2.0. An investment fund includes (i) any type of pooled investment vehicle that is organized as a business entity or institution, including without limitation a hedge fund, a private equity fund, and a mutual fund, and (ii) any type of single-investor vehicle that is organized as a business entity or institution. The FAQ clarify that an eligible investment fund includes both funds that only invest in TALF 2.0 eligible asset backed securities (“ABS”) and only borrow from the TALF 2.0, as well as funds that invest in a mix of TALF 2.0 eligible ABS and other assets. Newly formed funds are eligible borrowers if they meet all the relevant criteria.
The full list of eligible asset classes is set forth below:
- Auto loans and leases;
- Student loans;
- Credit card receivables (both consumer and corporate);
- Equipment loans and leases;
- Floorplan loans;
- Premium finance loans for property and casualty insurance;
- Certain small business loans that are guaranteed by the Small Business Administration (“SBA”);
- Leveraged loans; and
- Commercial mortgages.
Eligible collateral is limited to AAA tranches that are rated by two nationally recognized rating agencies (“NSROs”). Currently, S&P Global Ratings, Moody’s Investors Service Inc., and Fitch Ratings, Inc. are eligible NSROs. If the relevant ABS is downgraded following the disbursement of a TALF 2.0 loan, there is no impact on the loans secured by that ABS, and borrowers are not required to post any additional margin. However, the ABS may not be used as collateral for any new TALF 2.0 loans until it regains the required rating. Substitution of collateral is not permitted.
To be eligible ABS, all or substantially all of the underlying credit exposures must have been originated by a US company (except for collateralized loan obligations (“CLOs”)). With the exception of commercial mortgage back securities (“CMBS”), SBA Pool Certificates and Development Company Participation Certificates, the eligible asset-backed securities must be issued on or after March 23, 2020. SBA Pool Certificates and Development Company Participation Certificates must be issued on or after January 1, 2019. CMBS issued on or after March 23, 2020, will not be eligible. For CMBS, the underlying credit exposures must be to real property located in the United States or one of its territories. Single-asset single-borrower CMBS and commercial real estate collateralized loan obligations are not eligible collateral.
The FAQ contain a significant amount of additional detail regarding the various asset classes of eligible ABS. As currently drafted, it does not appear that TALF 2.0 will work for CLOs; however, relevant industry groups continue to work with the Federal Reserve to try to address this.
On a monthly basis the Federal Reserve will disclose information regarding each borrower, including the identity of each borrower and all of its Material Investors, the amount borrowed, the interest rate paid, and the types and amounts of ABS collateral pledged. A borrower must disclose to its TALF 2.0 agent any Material Investors as well as any person or entity that exercises “control” over the business (by way of ownership, voting or otherwise).
Representations and certifications
Each borrower will be required to certify that it is unable to secure adequate credit accommodations from other banking institutions and that it is not insolvent before obtaining any loans under TALF 2.0. This certification may be based on unusual economic conditions in the market or markets intended to be addressed by the TALF 2.0. Lack of adequate credit does not mean that no credit is available. Lending may be available, but at prices or on conditions that are inconsistent with a normal, well-functioning market. The accuracy of this certification is important, as a breach gives the lender recourse to the borrower, not just the posted collateral. It is unclear from the FAQ why such a certification is required and exactly how a borrower can be comfortable that it can make such certification.
Under the MLSA, each borrower makes a continuous representation that it is an eligible borrower, and a borrower is expected to have a mechanism for continuously monitoring its direct and indirect investors as long as the TALF 2.0 loan is outstanding. This includes monitoring of ownership; if any entity’s direct or indirect ownership interest in the borrower reaches the Material Investor threshold, the borrower must escalate such Material Investor to its TALF 2.0 agent for due diligence review.
In addition, eligible borrowers and issuers of eligible collateral will be subject to the conflicts of interest requirements of section 4019 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Broadly, section 4019(b) prohibits any business that is directly or indirectly owned by the president, administration officials, or members of Congress, and certain members of their immediate families, from receiving any CARES Act relief funds.
The loans are non-recourse to the borrower except to the extent that the borrower (i) is not an eligible borrower under TALF 2.0 (with eligibility determined on the basis of the criteria applicable to “eligible borrowers” in effect at the time such loan was borrowed or assumed) or (ii) breaches certain of the representations set out in Section 10 of the MLSA (including eligibility status, disclosure of Material Investors, prohibition on entry into credit hedges of the relevant obligations, its inability to secure adequate credit accommodations from other banking institutions and its solvency).
Rates and fees
Interest rates on loans made under TALF 2.0 differ depending on the eligible collateral pledged as security. For CLOs, the interest rate will be 150 basis points over the 30-day average secured overnight financing rate (“SOFR”). For SBA Pool Certificates (7(a) loans), the interest rate will be the top of the federal funds target range plus 75 basis points. For SBA Development Company Participation Certificates (504 loans), the interest rate will be 75 basis points over the three-year Fed funds overnight index swap (“OIS”) rate.
For all other eligible asset-backed securities with underlying credit exposures that do not have a government guarantee, the interest rate will be 125 basis points over the two-year OIS rate for securities with a weighted average life less than two years, or 125 basis points over the three-year OIS rate for securities with a weighted average life of two years or greater.
If you have any questions regarding these new requirements and their implications, please contact the author or your DLA Piper relationship attorney.
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This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.