(Editor’s Note: For earlier posts on this Forum on the Federal Reserve’s proposed Term Asset-Backed Securities Loan Facility (TALF), including an early reform proposal by Lucian Bebchuk, please see here and here.)
On March 3, 2009, the U.S. Treasury Department and the Federal Reserve announced the formal launch of the Term Asset-Backed Securities Loan Facility (TALF). The TALF provides government financing to private investors for the purchase of certain AAA-rated asset-backed securities (ABS), with the objective of making credit more readily available to consumers and small businesses. The TALF program may be attractive to a broad range of investors because it provides non-recourse financing with favorable interest rates and limited downside risk.
The Federal Reserve first announced the creation of the TALF on November 25, 2008. In connection with the formal launch of the TALF, the Treasury Department and the Federal Reserve have issued updated terms and conditions and frequently asked questions (FAQs) which modify certain of the previously announced rules.
This memo provides a brief overview of the TALF and the key changes announced on March 3 and provides a road map for investors considering participating in the TALF. Appendix A provides an indicative timeline for the April TALF funding.
The Federal Reserve has authorized the Federal Reserve Bank of New York (FRBNY) to lend up to $200 billion (subject to an increase to up to $1 trillion as part of the Obama administration’s Financial Stability Plan announced on February 10, 2009) to eligible borrowers (described below) to finance investments in eligible ABS, which currently are certain AAA-rated securities backed by new and recently originated auto loans, student loans, credit card loans or small business loans fully guaranteed by the Small Business Administration (SBA). Under the TALF, the FRBNY will offer to eligible borrowers on a monthly basis three-year, non-recourse loans in an amount equal to the value of the eligible ABS purchased or owned by the borrower, less a collateral haircut of between 5-16% of their value depending on their type and expected life. The TALF loans must be fully secured by the ABS financed by the loan.
The interest rate on TALF loans will equal the three-year LIBOR swap rate plus 100 basis points for fixed-rate ABS and one-month LIBOR plus 100 basis points for floating-rate ABS (in each case, other than loans secured by ABS backed by student loans guaranteed by the Federal government and ABS backed by small business loans guaranteed by the SBA, which will have lower interest rates). Borrowers may request TALF loans in minimum amounts of $10 million and may pledge any combination of eligible ABS as collateral for a single TALF loan (as long as all the pledged ABS for a single loan are either fixed rate or floating rate securities). In addition, borrowers must pay to the FRBNY an administrative fee equal to 5 basis points of the loan amount.
Subscriptions for the initial round of funding from the TALF will be accepted on March 17, 2009, with the first closing to occur on March 25, 2009. The Federal Reserve will announce the details of the second round of funding on March 24, 2009. Subscriptions for the second round will be accepted on April 7, 2009, with the closing to occur on April 14, 2009. Thereafter, the FRBNY will offer new TALF funding on a monthly basis through at least December 2009.
KEY CHANGES FROM THE TALF RULES PREVIOUSLY ANNOUNCED
The updated terms and conditions and FAQs issued on March 3 modify a number of the TALF program rules announced in February 2009 and provide more detailed terms. Key changes from the rules announced in February are described below.
Elimination of Executive Compensation Restrictions
The February 2009 version of the TALF terms and conditions and FAQs required the ABS sponsors (but not the borrowers receiving financing under the TALF) to comply with the executive compensation restrictions established under the Emergency Economic Stabilization Act of 2008 (EESA), as amended by the American Recovery and Reinvestment Act of 2009. The updated TALF program rules do not require sponsors, underwriters or borrowers to comply with these EESA restrictions by virtue of their participation in the TALF.
Clarification of Borrowers’ Loan Repayment Obligations
The updated TALF program rules clarify the non-recourse nature of the loans by stating that in lieu of repaying the amounts outstanding on a TALF loan at the three-year maturity (or at any earlier time), the borrower may surrender the ABS collateral in full satisfaction of the loan.
Reduction in Certain Interest Rates and Haircuts
The updated TALF program rules contain a reduction in the interest rates and certain collateral haircuts for ABS backed by student loans guaranteed by the Federal government and ABS backed by small business loans guaranteed by the SBA.
An investor considering subscribing for TALF funds first should evaluate (1) whether it would be an eligible borrower under the TALF and (2) the types of ABS that are eligible to be used as collateral for a TALF loan.
Any U.S. company that maintains a relationship with a primary dealer may become a borrower under the TALF. For purposes of the TALF, an entity is a U.S. company if it is:
• a business entity or institution organized under the laws of the United States (or any of its states or territories) that conducts significant operations or activities in the United States, including any U.S.-organized subsidiaries of the entity;
- a U.S.-organized operating subsidiary of a foreign entity will be eligible if (1) the subsidiary conducts significant operations or activities in the United States and (2) the subsidiary is not directly or indirectly controlled by a foreign government;
• a U.S. branch or agency of a foreign bank (other than a foreign central bank or bank directly or indirectly controlled by a foreign government) that maintains reserves with a Federal Reserve Bank; or
• an investment fund organized under the laws of the United States (or any of its states or territories) that is managed by an investment manager that has its principal place of business in the United States, including an investment fund satisfying the foregoing which is a subsidiary of a foreign entity;
- an investment fund is not eligible if the investment fund or the investment fund’s investment manager is directly or indirectly controlled by a foreign government;
- investment funds include any pooled investment vehicle, such as a hedge fund, private equity fund or mutual fund, or any other vehicle that invests primarily or exclusively in eligible collateral and borrows from the TALF, and may be newly formed for the purpose of participating in the TALF.
A foreign government “controls” an entity if it owns or can vote 25% or more of a class of voting securities of the entity. An eligible borrower may invest in other assets in addition to ABS or conduct other business.
• Basic Requirements. Eligible ABS must:
- be issued on or after January 1, 2009 (except in limited circumstances) and satisfy timing rules for the underlying credit exposures;
- be U.S. dollar-denominated;
- be cash ABS (not synthetic);
- be either (1) rated in the highest long-term or short-term rating category by at least two major nationally recognized statistical rating organizations (NRSROs) and without a credit rating below the highest category from any major NRSRO or (2) backed by a pool of SBA-guaranteed small business loans;
- be cleared through the Depository Trust Company;
- if auto loan ABS or credit card ABS, have an average life of no more than five years; and
- be backed by obligations at least 95% of which would be owed by U.S.-domiciled obligors.
• Currently Eligible Asset Classes for March Funding. In addition to satisfying the basic requirements, for the March funding, eligible ABS must be backed only by auto loans, student loans, credit card loans or SBA-guaranteed loans.
• Future Expansion of Eligible Asset Classes. The Treasury Department and the Federal Reserve anticipate that ABS backed by rental, commercial and government vehicle fleet leases, and ABS backed by small ticket equipment, heavy equipment and agricultural equipment loans and leases, will be eligible for the April funding of the TALF. Further expansion of the eligible asset classes is under consideration by the Treasury Department and the Federal Reserve. Additional asset classes under consideration include commercial mortgage-backed securities, non-agency (i.e., private label) residential mortgage-backed securities and collateralized loan and debt obligations.
ROAD MAP FOR BORROWERS
An eligible borrower that wishes to participate in the TALF program must take the actions set forth below prior to receiving TALF funding. Please see Appendix A for an indicative timeline for the April TALF funding.
Prior to the Subscription Date 
The borrower must complete the following items:
• Review the Terms Announced by the Federal Reserve. The Federal Reserve will periodically review and, if it deems appropriate, adjust the TALF interest rates and haircuts for new loans, consistent with the policy objectives of the TALF.
• Execute a Customer Agreement with a Primary Dealer. Each borrower receiving financing under the TALF must use a primary dealer to act as its agent for the program. The customer agreement will authorize the primary dealer to, among other things, execute the Master Loan and Security Agreement (the form of which has been made available) with the FRBNY on behalf of the borrower and perform all actions required on the borrower’s behalf with respect to the TALF loan.
• Provide Information for the TALF Loan Request. Each prospective borrower must submit the following information to its primary dealer:
- the amount of the loan request(s);
- the interest rate format (i.e., fixed or floating);
- the CUSIP numbers of the ABS to be pledged as collateral;
- the prospectuses and/or offering documents of the ABS to be pledged as collateral; and
- if the ABS to be pledged as collateral are to be issued in a new issuance closing on the same day as the TALF loan settlement date, the identity of the counterparty expected to deliver the ABS to be pledged as collateral.
On the Subscription Date
The primary dealer will submit the above information to the FRBNY’s custodian for review.
Four Business Days Prior to the Loan Settlement Date 
If the ABS to be pledged as collateral are to be issued in a new issuance closing on the same day as the TALF loan settlement date, no less than four business days prior to the loan settlement date, the borrower must take the following steps:
• submit final prospectuses and/or offering documents (including the corresponding accountant’s report) to the FRBNY’s custodian; and
• notify the FRBNY and its custodian of any change in loan amount in the event the borrower is allocated less than expected of the new ABS issue.
Two Business Days Prior to the Loan Settlement Date
The FRBNY’s custodian will send to the primary dealer a confirmation listing the borrower’s loan amount, applicable interest rate and the ABS expected to be delivered as collateral on the loan settlement date. The confirmation also will include the administrative fee and applicable haircut amount (i.e., the amount the borrower is required to fund above the TALF loan amount to purchase the ABS) to be collected by the primary dealer and paid on the loan settlement date.
Loan Settlement Date
The borrower will deliver against payment the ABS collateral, administrative fee and applicable haircut amount to the FRBNY’s settlement account at the custodian.
 The Federal Reserve has announced the following subscription dates for 2009: March 17, April 7, May 5, June 2, July 7, August 4, September 1, October 6, November 3 and December 1.
 If the borrower is to purchase a new issuance of ABS, the prospectuses and/or offering documents submitted on the subscription date may be preliminary.
 The Federal Reserve has announced the following loan settlement dates: March 25, 2009 and April 14, 2009. Future loan settlement dates will be announced by the Federal Reserve.