On December 19, 2008, the Federal Reserve Board (“FRB”) announced revised terms and conditions to the Term Asset-Backed Securities Loan Facility (“TALF”). The FRB first announced plans for the TALF on November 25, 2008, with the intent of helping to meet the credit needs of households and small businesses by encouraging investors to purchase newly issued asset-backed securities (“ABS”) backed by student loans, auto loans, credit card loans and small business loans guaranteed by the Small Business Administration (“SBA”). The ABS market has historically funded a substantial share of consumer credit and small business loans, but in recent months new ABS issuance has declined dramatically, posing challenges to the availability of credit to consumers and small businesses and contributing to a further weakening of U.S. economic activity.

Summary of Revised Terms and Conditions

The following is a summary of the revised terms and conditions, including clarifications, to the TALF announced by the FRB on December 19:

• Lending under the TALF is expected to commence in February 2009.
• TALF loans will now have a term of three years, extended from one year.
• The minimum size for each TALF loan will be $10 million.
• Borrowers will be able to choose either a fixed or floating interest rate on TALF loans, with interest rates set in advance by the Federal Reserve Bank of New York (“FRBNY”).
• Eligible borrowers must use a primary dealer, who will act as agent for the borrower, to access the TALF.
• Eligible collateral must now be ABS that is issued on or after January 1, 2009 and:
  • All or substantially all underlying auto loans must have been originated on or after October 1, 2007;
    • For TALF purposes, auto loans include retail loans and leases relating to cars, light trucks or motorcycles, and auto dealer floorplan loans;
  • All or substantially all underlying SBA-guaranteed loans must have been originated on or after January 1, 2008;
  • All or substantially all underlying student loans must have had a first disbursement date on or after May 1, 2007;
    • For TALF purposes, student loans include federally guaranteed student loans, including consolidation loans, and private student loans; and
  • Eligible collateral that is credit card ABS must be issued to refinance existing credit card ABS maturing in 2009 and must be issued in amounts no greater than the amount of the maturing ABS.

Revised TALF Program

Under the TALF, the FRBNY will lend up to $200 billion on a non-recourse basis to holders of “eligible collateral” (as more fully described below)- backed by newly and recently originated consumer and small business loans. The FRBNY will offer loans under the TALF on a fixed day each month, awarded to “eligible borrowers” (as described below). Eligible borrowers will access the TALF through primary dealers, who will act as agents for the borrowers. Primary dealers will be expected to collect, aggregate, and submit loan requests on behalf of their customers, similar to the role they perform at Treasury auctions. They will also be expected to pre-screen the collateral for TALF eligibility. Loan requests must include the desired loan amount, the eligible collateral to be pledged, and the desired interest rate format, either fixed or floating, with floating-rate loans based on a spread over LIBOR. Interest rates will be set by the FRBNY and will be announced in advance of each monthly subscription date. The principal amount of each TALF loan will be based on the market value of the eligible collateral less a collateral haircut established by the FRBNY for each class of eligible collateral based on the collateral’s risk and maturity date. Haircuts will also be announced in advance of each monthly subscription date.

Each TALF loan will have a minimum loan size of $10 million and a term of three years. Interest will be payable monthly and any remittance of principal on eligible collateral must be used immediately to reduce the principal amount of the TALF loan. Prepayment will be allowed. TALF loans will not be subject to mark-to-market or re-margining requirements, and substitution of collateral during the term of the loan will not be allowed. A non-recourse loan fee will be assessed by the FRBNY at the inception of each loan transaction. Disbursement of loan proceeds will contingent on receipt by the FRBNY’s designated custodian bank of the eligible collateral.

The TALF is expected to commence lending in February 2009. Unless the FRB extends the facility, TALF loans will be made through December 31, 2009.

Eligible Collateral

TALF loans must be secured by “eligible collateral”, which are subject to the following requirements:

• The collateral must be U.S. dollar-denominated cash (not synthetic) ABS with a long-term credit rating of “AAA” (or its equivalent) from two or more major nationally recognized statistical rating organizations (“NRSROs”), and must not have a long-term credit rating of below “AAA” (or its equivalent) from any major NRSRO.
• The collateral must be issued on or after January 1, 2009, and all or substantially all of the underlying credit exposures must have been issued after certain specified dates, depending on the nature of such credit exposures, as indicated in the summary above.
• The collateral must be backed by newly or recently originated auto loans, student loans, credit card loans or small business loans guaranteed by the SBA. The underlying credit exposures must not include exposures that are themselves ABS (i.e. eligible collateral cannot be CDOs or re-securitizations). The FRB has indicated that eligible collateral under the TALF may be later expanded to include ABS backed by commercial mortgage loans, non-agency residential mortgage loans or other asset classes.
• Originators of the credit exposures underlying the ABS (or, in the case of SBA-guaranteed loans, the ABS sponsor) must have agreed to comply with, or already be subject to, the executive compensation requirements in Section 111(b) of the Emergency Economic Stabilization Act of 2008.
• The collateral for a potential borrower under the TALF cannot be backed by loans originated or securitized by the borrower or by an affiliate of the borrower.

Eligible Borrowers

All U.S. companies that own eligible collateral may participate in the TALF, provided they maintain an account relationship with a primary dealer. Under the program guidelines, a “U.S. company” is a business entity or institution that is organized under the laws of the United States or a political subdivision or territory thereof (including such an entity that has a parent that is a non-U.S. company), or a U.S. branch or agency of a foreign bank.

The FRB is still evaluating whether U.S.-based investors that are organized outside the United States or invest through a non-U.S. vehicle may qualify as eligible borrowers under the TALF.

TALF SPE

The FRBNY will create a special purpose entity (“SPE”) to purchase and manage eligible collateral received by the FRBNY in connection with any TALF loans. The SPE, pursuant to a forward purchase contract with the FRBNY, will commit to purchase any eligible collateral securing a TALF loan received by the FRBNY at a price equal to the amount of the TALF loan plus accrued but unpaid interest.

The U.S. Treasury Department, under the Troubled Asset Relief Program, will provide credit protection to the FRBNY by purchasing subordinated debt issued by the SPE to finance the first $20 billion of eligible collateral purchases made by the SPE. Eligible collateral purchases made by the SPE in excess of $20 billion will be financed by the FRBNY, and such loans will be senior to the debt purchased by the U.S. Treasury Department.

Seward & Kissel TALF Task Force

Seward & Kissel LLP has created a multidisciplinary TALF Task Force to advise clients on all aspects of the TALF program. For more information, please contact one of the members of the Seward & Kissel TALF Task Force, listed below.