On June 8, 2020, the Federal Reserve Bank of New York (“FRBNY”) published revised FAQs and three updated transaction documents for the Term Asset-Backed Securities Loan Facility (“TALF”). The three documents are the (i) Form of Issuer and Sponsor Certification as to TALF Eligibility for ABS, the Form of Indemnity Undertaking for ABS; (ii) the Form of Auditor Attestation, the Form of Management Report on Compliance; and (iii) Guidance for Accounting Firms in Determining TALF Collateral Eligibility for ABS. The term sheets have not changed. The additional documentation, guidance, and clarifications include the following:
- Redemption options. The rules on redemption options are more lenient for collateralized loan obligations (“CLOs”). The FAQs previously allowed a redemption option in a newly issued ABS only if the option could be exercised no earlier than three years after the disbursement date of the loan secured by the ABS (other than a customary clean-up call) or at any time when the ABS is owned by the FRBNY or TALF II LLC (the “SPV”). The revised FAQs carve out collateralized loan obligations; a redemption option for a CLO that can be exercised no earlier than one year after the issuance date does not affect the CLO’s eligibility, provided that the exercise is subject to a condition that the eligible CLOs and any pari passu class(es) of the securitization are redeemed at their full outstanding principal amount plus any accrued interest outstanding. The lender may exercise the option even if the CLOs are owned by the FRBNY or the SPV.
- Maturity dates. The documents clarify that most classes of existing ABS are eligible only if they mature before the TALF termination debt (presently, Sept. 30, 2020) and after January 1, 2020.
- Junior AAA-rated ABS tranches. Generally, junior AAA-rated ABS tranches are not eligible collateral. The revised FAQs provide that, for the purpose of this restriction, money market eligible tranches for auto loan and equipment loan securitizations are not considered senior to other AAA-rated securities in those transactions.
- Auto loan ABS. Auto loan ABS with any revolving feature must have all of the features of a revolving master trust in order to qualify as eligible collateral.
- Timing. The FAQs also cover various timing issues. For the June 17 subscription date, ABS may be priced no earlier than June 15. ABS priced earlier would be eligible for later subscriptions.
- Issuer and Sponsor Certification. A borrower must provide an Issuer and Sponsor Certification as to TALF Eligibility for ABS. For newly issued ABS, the certification must be included in prospectus or offering document.
- Material investor. A borrower is required to identify all “material investors” for the purpose of Federal Reserve disclosures. The FAQs explain that a borrower may rely on the beneficial ownership analysis conducted in connection with reporting obligations under the securities laws. Indirect ownership through another investor is the product of an investor’s percentage ownership in that investor multiplied by the holding company’s percentage ownership in the borrower.
- Sovereign wealth funds. A sovereign wealth fund is considered a foreign government under the TALF and therefore ineligible as a borrower.