Among the flurry of recent US government assistance programs and policy reactions to the COVID-19 pandemic, on March 23, the Federal Reserve (the Fed) dusted off a previously successful market intervention program in the form of the Term Asset-Backed Securities Loan Facility (TALF). The latest iteration of the program (what we call TALF 2.0) will be of specific interest to credit managers.

While TALF 2.0 is not yet up and running, and program specifics continue to be ironed out,   using lessons from the original program in 2008, it is anticipated that a wide variety of credit managers will look to participate in the launch of dedicated funds focused on TALF covered securities. The opportunity, however, won’t remain open forever.

What is it?

TALF was first established in 2008. As its name suggests, the program is designed to maintain consumer access to business and consumer loans by providing a trusted source of liquidity for certain types of newly issued asset-backed securities (ABS) backed by such loans. 

Here’s how it works: The Fed will create a special purpose vehicle (SPV) to facilitate loans to each participating borrower. The TALF SPV initially will make up to $100 billion of loans available to the market. The loans will have a term of three years, will be nonrecourse to the borrower, and will be fully secured by eligible ABS. The original TALF program, which was largely considered a success by most market constituents, paid all loans in full on or before their maturity dates.

For ABS investors, it’s instructive to look back to 2008 for indications of how it will work today. ABS investors under TALF 1.0 received loans directly from the Fed to invest in ABS. They then pledged that ABS as collateral for the Fed loan. The Fed generated guaranteed liquidity results in the continued issuance of ABS and direct loan origination, a much-needed financial device to grease the wheels of the real economy.

Under the original TALF program, a number of hedge and private equity fund managers participated in the program to provide necessary liquidity to this important sector of the economy. It stands to reason that many will participate in TALF 2.0.

Key Market Observations from TALF 1.0.  Historically, managers and investors who got in early saw very good returns. It’s uncertain whether the market dynamics will play out the same way for TALF 2.0, but the key variables to watch are the timing of fund launches and secondary market spreads. The original TALF lent itself well to private, closed-end Delaware structures and to credit managers with specific experience in the securitization market. However, it is possible for open-ended private funds to gain exposure to TALF assets through the use of SPV entities with side pockets.

Fed term sheet: some minor strings attached  

TALF 2.0 has a set of terms and conditions laid out in its term sheet. The term sheet was originally published on March 23 and updated on April 9. The Fed has also expressed its commitment to ongoing consideration of the feasibility of adding other asset classes to TALF 2.0 program. As such, all program parameters remain open to revision, but are largely like those of the original program, and include:

TALF 2.0: Opportunity Knocks but Only for a Short Time Terms -

The eligible underlying asset classes contained in TALF 2.0 are substantively in line with TALF 1.0.). There continues to be a flurry of vocal industry calls for expansion of TALF 2.0 to include other asset classes. There are also suggestions that the Fed should allow more flexibility on maximum loan maturity dates – a key learning gleaned from the original TALF.

A link to the latest Fed’s TALF 2.0 term sheet can be found here.

Past performance does not guarantee future results. 

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally.  This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. Pursuant to information regarding the provision of applicable services or products by BBH, please note the following:Brown Brothers Harriman Fund Administration Services (Ireland) Limited and Brown Brothers Harriman Trustee Services (Ireland) Limited are regulated by the Central Bank of Ireland,Brown Brothers Harriman Investor Services Limited is authorised and regulated by the Financial Conduct Authority, Brown Brothers Harriman (Luxembourg) S.C.A is regulated by the Commission de Surveillance du Secteur Financier All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2020. All rights reserved. IS-06094-2020-04-13