TALF UPDATE: New York Federal Reserve Bank Announces May 5th, TALF Operation: Two New Interest Rates

April 22, 2009

Earlier today, the Federal Reserve Bank of New York (FRBNY) issued revised Frequently Asked Questions (FAQ) and Terms and Conditions for the Term Asset-Backed Securities Loan Facility (TALF) (links below). The releases supplement the information distrubted on April 3rd.

In the FAQ, the FRBNY clarified that U.S.-domiciled obligors includes those who are domiciled in a U.S. political subdivision or territory and that zero-coupon asset-backed securities (ABS) are not eligible as TALF collateral.

The FAQ also indicated that assertions as to TALF eligibility of the ABS should be made to the FRBNY as of the date of the “black” (final) prospectus or offering memorandum. If that is not possible, it should be made as of the date of the “red” (preliminary) prospectus or offering memorandum.

In addition, the FRBNY announced two new interest rates for certain loans secured by ABS with weighted average lives to maturity (WALM) of less than two years (see link below). The new rates will be based on one- and two-year London interbank offered (Libor) swap rates, resulting in a better match to the duration of the underlying ABS collateral. The new interest rates apply to fixed-rate TALF loans secured by ABS that do not benefit from a government guarantee. The interest rate for TALF loans secured by ABS with a WALM of less than one year will be the one-year Libor swap rate plus 100 basis points. The interest rate for loans secured by ABS with a WALM of one year or more but less than two years will be the two-year Libor swap rate plus 100 basis points. The interest rate on loans secured by ABS with a WALM of two years or more will continue to be the three-year Libor swap rate plus 100 basis points.

The TALF completed its first round of operations in March, lending $4.7 billion to purchasers of securities from three eligible transactions (one backed by credit cards, two backed by auto loans). The April operations resulted in the lending of $1.7 billion to purchasers of securities; $811 million was used to purchase auto loan ABS and $897 million was applied towards credit card ABS. Subscriptions for the May funding will be accepted on May 5, and the loans will settle on May 12.

Earlier this week, FRNBY President William Dudley admitted that TALF had gotten “a relatively slow start.” According to media reports, officials are considering whether to offer investors in commercial real-estate securities loans of as long as five years to make the program more appealing. But the loans would become less attractive the longer they run to encourage investors to seek other financing as the economy recovers.

As always, we will keep you posted with any new TALF developments. Please contact me with any questions.

Written by Matthew Kulkin