At a glance
The Treasury and Federal Reserve recently announced the Term Asset-Backed Securities Loan Facility (TALF) to increase credit availability for consumers and businesses by facilitating the issuance of asset-backed securities (ABS). Under the TALF program, eligible borrowers will be able to obtain a non-recourse loan from the Federal Reserve Bank of New York (FRBNY), secured by eligible ABS collateral.
The non-recourse nature of the FRBNY loan limits investors' exposure to losses on the ABS collateral. The TALF program may, therefore, provide investors with a source of liquidity not available elsewhere in the current market, at potentially favorable interest rates. Investors in the TALF should carefully evaluate the provisions of the program to determine the appropriate accounting.
The ABS market has historically provided the liquidity for a significant portion of consumer credit and small business loans in the United States. This market began to be severely impacted in the spring of 2020 in connection with the economic disruptions related to COVID-19. At the same time, interest rate spreads on AAA-rated tranches of ABS rose to a level not seen since the 2008-2009 financial crisis, reflecting a lack of investor confidence due to reduced liquidity and the increased uncertainty associated with future market performance.
In March 2020, the Federal Reserve authorized the TALF program to help meet the credit needs of consumers and businesses by facilitating the issuance of ABS and improving the market conditions for ABS more generally. The TALF serves as a funding backstop to facilitate the issuance of eligible ABS. Market participants have dubbed this TALF 2.0 given the similarities of TALF to the Term Asset-Backed Securities Loan Facility that was established in March 2009.
The FRBNY is providing up to $100 billion initially (in the form of term loans) to eligible owners of the highest rating category ABS securities. The ABS securities must be backed by specific loan types, including automobile loans, credit card loans, student loans, floorplan loans, equipment loans, or certain small business loans guaranteed by the Small Business Administration. Both the ABS securities and their underlying credit exposures must be issued/originated after a specified date (see definition of Eligible collateral
In April 2020, the FRBNY expanded eligible collateral to include (i) the highest rating category tranches of outstanding commercial mortgage-backed securities (CMBS), and (ii) newly issued, static collateralized loan obligations (CLOs).
The first subscription date for TALF loans is June 17, 2020 and the first loan closing date will be June 25, 2020. Subscriptions for TALF loans will be accepted through September 30, 2020, but that date may be extended by the Federal Reserve.