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.
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:
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.
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