On June 8, 2020, the Federal Reserve Board (Fed) released updated Frequently Asked Questions (FAQs) updating those released by the Fed on May 26, 2020 (Prior FAQs)1 in respect of the Term Asset-Backed Securities Loan Facilities (TALF 2020), as well as updated forms of Issuer and Sponsor Certification as to TALF Eligibility for ABS; Form of Sponsor Indemnity Undertaking, Form of Auditor Attestation; Form of Management Report on Compliance, and Guidance for Accounting Firms in Determining TALF Collateral Eligibility for ABS2. The FAQs were largely the same as the Prior FAQs, with certain key clarifications, especially for collateralized loan obligations (CLOs). We discuss the key updates and clarifications below.3
Some Welcome News for CLOs. The Prior FAQs stated that eligible asset backed securities (ABS) must not be subject to an optional redemption (other than a customary clean-up redemption) that can be exercised (i) prior to three years after the disbursement date of any TALF loan secured by such ABS, or (ii) at any time when the Fed or the TALF special purpose vehicle owns such ABS (TALF Non-Call Period). The FAQs now explicitly provide that Eligible CLOs can be subject to an optional redemption so long as (i) the non-call period is at least one year after the issuance date of such CLO, and (ii) it is a condition precedent to the exercise of an optional redemption that the applicable class of notes being redeemed receives its full outstanding principal amount and accrued but unpaid interest.
These requirements should easily be met even in the context of a static CLO. In addition, CLOs typically only permit optional redemptions if the applicable notes are redeemed at par plus accrued interest. Although this is welcome news to CLO market participants, the practicality and accessibility of TALF 2020 for CLOs remains to be seen given the eligibility of only static CLOs, the applicable haircut percentages and interest rate and the requirement that the Fed consent to the exercise of all voting, consent, approval and direction rights in respect of the ABS securing a TALF loan.
Other Clarifications. The FAQs clarified that in order to identify “Material Investors”, TALF borrowers can rely on the beneficial ownership analysis conducted in connection with the reporting obligations under Section 13 of the Securities Exchange Act of 1934 or the customer due diligence requirements set forth in 31 CFR 1010.230, as applicable. In addition, the Prior FAQs had explicitly provided that in order to certify that a TALF borrower is unable to secure adequate credit accommodations from other banking institutions, a TALF borrower could rely on ABS spreads being elevated relative to normal market conditions. The FAQs clarify that a TALF borrower can consider primary or secondary market ABS spreads for such determination. Industry participants, however, remain very concerned with the practicality of obtaining the necessary information to provide such certification and risk associated therewith. We understand that a number of market participants and industry organizations are pursuing either further clarifications or a more objective standard.
Operational Aspects of the First Subscription Date. For the June 17, 2020 subscription date only, in respect of eligible ABS issued on or after March 23, 2020 and before May 22, 2020, the FAQS require that the CUSIP number and a copy of the final prospectus or offering document must be submitted by the issuer to the Fed by 3:00 p.m. on June 11, 2020, and all other documentation by 3:00 p.m. on June 15, 2020.
Next Steps. We are hopeful that the Fed will continue to heed constructive market feedback to the ends of both achieving the Fed’s stated objectives and providing an operationally feasible funding source for ABS market participants. The Fed reserved the right to update the FAQs from time to time, and further reserved that eligible ABS may be expanded later to other asset classes. It would seem from these statements that the Fed continues to be open to considering requests by industry participants and trade associations for more expansive terms and conditions than those set forth in the TALF 2020 term sheet and FAQs.
The foregoing is not an exhaustive summary, nor to does it purport to present all considerations relevant to TALF 2020. Seward & Kissel will continue to monitor TALF 2020 and keep clients apprised of any material developments. If you would like additional information about this or any other matter, or wish to discuss TALF 2020 further, please feel free to contact Greg B. Cioffi (cioffi@sewkis.com), Jeff Berman (bermanj@sewkis.com), or Abhijit Kurup (kurup@sewkis.com).
