TALF 2.0 - Federal Reserve Expands TALF to Include CMBS and CLOs

On April 9, 2020, the Federal Reserve announced that it would be expanding the Term Asset-Backed Securities Loan Facility (TALF) to include triple-A-rated commercial mortgage-backed securities (CMBS) and static collateralized loan obligations (CLOs) as eligible collateral. This expansion is part of the Federal Reserve’s larger efforts to bolster the economy in the face of the coronavirus pandemic by providing up to an additional $2.3 trillion in loans.

Overview

TALF is a credit facility that was designed to help consumers and businesses by facilitating the issuance of credit in the form of asset-backed securities (ABS), and to promote the stability of the ABS market in general. Through TALF, the Federal Reserve has committed to extend on a non-recourse basis up to $100 billion in loans. Each loan will be fully secured by eligible ABS, including auto loans, student loans, credit card receivables and, now, certain CMBS and CLOs, which are discussed below.

Eligibility

TALF loans are available to any U.S. company that holds eligible collateral. In order to be eligible, CLOs must be issued on or after March 23, 2020, while CMBS must be issued before March 23, 2020. Each non-mortgage-backed ABS must carry the highest short-term investment rating from at least two eligible, nationally-recognized statistical rating organizations (NRSROs) and must not have an investment rating below the highest rating category from any eligible NRSRO. Eligible CMBS must have a triple-A rating. The underlying credit exposures for eligible ABS must have been originated by a U.S. company, and the issuer must be a U.S. company. For CMBS, the underlying credit exposures must be tied to real property located in the United States or a United States territory. At this time, commercial real estate CLOs and CMBS securities related to single-asset single-borrower (SASB) are not eligible, although the Federal Reserve has indicated it will be considering adding other asset classes to the facility or expanding the scope of existing asset classes in the future. Only static CLOs will be eligible collateral.

Terms and Conditions

Loans under TALF will be extended in amounts equal to the market value of the ABS, less a haircut in varying amounts detailed in the term sheet released by the Federal Reserve. Each loan will be for a term of three years and will be non-recourse to the borrower. Borrowers will have the option to prepay the loan in whole or in part, but generally will not be permitted to substitute collateral during the life of the loan. The Federal Reserve plans to offer these loans through the end of September 2020 unless the program is extended.

The Federal Reserve is expected to release more detailed terms and conditions in the coming days, which will be primarily based on the terms and conditions of TALF loans extended during the 2008 financial crisis.