TALF Program Update: Master Loan And Security Agreement And Updated FAQs

• Published date: 16 June 2020
• Author: Mr Andrew Bettwy, Karen J. Garnett, Jeffrey A. Horwitz, Yuval Tal, Steven A. Fishman, Susan R. Goldfarb, Steven B. Leiser-Mitchell and Lauren Richburg
• Subject Matter: Accounting and Audit, Finance and Banking, Corporate/Commercial Law, Accounting Standards, Financial Services, M&A/Private Equity, Securities
• Law Firm: Proskauer Rose LLP

On May 20, 2020, the Federal Reserve Bank of New York (the "New York Fed") released the form of Master Loan and Security Agreement ("MLSA") that will govern loans issued under its Term Asset-Backed Loan Facility ("TALF") and published new Frequently Asked Questions ("FAQs") to provide additional clarity on the TALF program. Additional FAQs were published on May 26, 2020 and June 8, 2020. Together, the MLSA, the FAQs, and the previously released TALF Term Sheet constitute the current terms and conditions for the TALF program.

The first subscription date for TALF loans will be June 17, 2020, and the first loan closing date will be June 25, 2020. Subsequent subscription dates (each a "loan subscription date") will occur approximately twice per month on dates to be announced by the New York Fed. The initial benchmark rates will be set by the New York Fed one business day prior to a loan subscription date.

The following summarizes some of the key terms and conditions provided in the MLSA and program clarifications provided in the updated FAQs. For more information about the TALF program generally, see our previous client alerts here and here. You can view the full FAQs, including all updates, here, the MLSA here and the TALF Term Sheet here. Additional documents and forms with respect to the TALF program are included on the New York Fed's TALF website here.

FAQs: Matters Relating To TALF Loans

Many of the updated FAQs reflect terms and conditions outlined in the MLSA, while others provide guidance about how to apply those terms and conditions. Key additions to the FAQs in the recent updates include the following:

Borrower and Collateral Restrictions

• A U.S. business with any Material Investor (defined below) that is a foreign government is not eligible to borrow under the TALF. The updated FAQs clarify that a sovereign wealth fund is considered a foreign government for this purpose.
• "Material Investor" is defined as a person who owns, directly or indirectly, an interest in any class of securities of a borrower that is greater than or equal to a 10% interest in such outstanding class of securities The updated FAQs provide that borrowers and TALF Agents may rely on filings under Section 13 of the Securities Exchange Act of 1934 or the customer due diligence requirements under FinCEN rules (31 FR 1010.230), as applicable.
• For purposes of identifying a Material Investor, the updated FAQs include the following example of "indirect" ownership: If A owns 70% of B, and B owns 40% of the borrower, then B is a Material Investor (with 40% direct ownership in the borrower), and A is a Material Investor (with 28% of indirect ownership in the borrower).
• An eligible borrower may request multiple loans through multiple TALF Agents (as defined below), but a borrower may pledge only a single eligible ABS as collateral for any single loan (subject to certain exceptions for Small Business Administration ("SBA") loans).¹
• Collateral substitution during the term of the TALF loan is not permitted; however, if the collateral supporting a TALF loan is sold, the borrower may transfer and assign its TALF loan to another eligible borrower in accordance with the MLSA and with the prior consent of the New York Fed. The borrower must deliver to the New York Fed an Assignment and Assumption Agreement (in the form prescribed by the MLSA), and the collateral must remain eligible. No assignments will be consented to after September 30, 2020, unless extended by the Board of the Federal Reserve or the Treasury.
• ABS previously pledged as collateral for a TALF loan that have been released from the lien of the TALF loan, and continue to be eligible collateral, may be pledged for future TALF loans. Issuers of such ABS will not be required to resubmit data that had been previously submitted.
• The FAQs previously specified that eligible ABS issued by an existing master trust (established before March 23, 2020) to refinance existing ABS maturing prior to the TALF Termination Date (September 30, 2020) could be issued up to three months in advance of maturity of the refinanced ABS. The updated FAQs eliminate the three-month restriction and provide that the ABS being refinanced must have a maturity date on or after January 1, 2020.

The updated FAQs confirm that the compensation, stock repurchase, and capital distribution restrictions in Section 4003(c)(3)(A)(ii) of the CARES Act do not apply to borrowers in the TALF.

The TALF Term Sheet states that eligible collateral must have the highest available credit rating from at least two eligible nationally recognized statistical rating organizations ("NRSROs") and cannot have a credit rating below the highest investment‐grade rating category from an eligible NRSRO. The previous FAQs identified only three eligible NRSROs: Fitch Ratings, Inc., Moody's Investors Service, Inc., and S&P Global Ratings. The updated FAQs provide additional flexibility, expanding the list of eligible NRSROs to include DBRS, Inc. and Kroll Bond Rating Agency, Inc. but only to the extent the collateral also has a qualifying rating from Fitch Ratings, Inc., Moody's Investors Service, Inc., or S&P Global Ratings.

Collateral Purchases

The updated FAQs outline procedures for borrowing under the TALF when the borrower does not own the collateral on the date of the subscription (referred to as "New Acquisition Collateral"), allowing eligible borrowers to use a TALF loan to purchase the necessary collateral on the loan closing date. Generally:

• The borrower must identify the counterparty expected to deliver the newly-issued ABS to be pledged as collateral at the time of the loan subscription and must inform the TALF Agent by the subscription date of the CUSIP of the ABS it intends to deliver as collateral on the loan settlement date.
• The borrower must remit the margin (e., the amount of the haircut) to its TALF Agent.
• If the TALF Agent is not the delivering counterparty, the TALF Agent will forward the margin to the TALF SPV's account at the TALF Custodian in order for the issuer to receive the full purchase price of the security issue The delivering counterparty will deliver the ABS collateral to the Custodian against payment.

Neither the FAQs nor the MLSA specify when the borrower must remit the margin to its TALF Agent. Under the MLSA, the margin amount for any New Acquisition Collateral will be included in the confirmation notice provided by the Custodian to the TALF Agent two business days before the scheduled loan closing date, and the TALF Agent is required to deliver the margin prior to 8:30 a.m. on the loan closing date.

In addition to pledging New Acquisition Collateral, borrowers may pledge as collateral any eligible ABS purchased in primary or secondary market transactions up to 30 days before the TALF loan subscription date, as long as the ABS purchase transaction has a settlement date on or before the desired TALF loan subscription date. The proceeds of such purchase must be at least $1 million and the transaction must be conducted on an arm's-length basis, avoiding any financing, hedging or similar...