TALF UPDATE: Federal Reserve Bank of New York Releases Terms and Conditions and FAQs for TALF CMBS and Revised TALF FAQs
May 1, 2009
This afternoon, the Federal Reserve Bank of New York (FRBNY) released Frequently Asked Questions (FAQ) and Terms and Conditions for the Term Asset-Backed Securities Loan Facility (TALF) for commercial mortgage-backed securities (CMBS). The FRBNY also released a revised FAQ for the already operating TALF for asset-backed securities (ABS). Please find the releases below.
TALF CMBS TALF CMBS Terms and Conditions & TALF CMBS FAQs
The initial CMBS subscription date will be sometime in late June and will subsequently occur in the latter part of each month. The TALF CMBS will function similarly to the already operating facility for ABS backed by various types of eligible collateral, which includes, but is not limited to, credit cards, student loans and auto loans.
“Eligible collateral” for the TALF CMBS will be those CMBS that, as of the TALF loan closing date, have a credit rating in the highest long-term investment-grade rating category from the required number of TALF CMBS-eligible rating agencies and must not have a credit rating below the highest investment-grade rating category from any TALF CMBS-eligible rating agency. The FRBNY is currently reviewing all rating agencies that have expressed an interest in rating TALF-financed CMBS.
The pledged CMBS must evidence an interest in a trust fund consisting of fully-funded, first-priority mortgage loans that are current in payment at the time of securitization, and not other CMBS, other securities or interest rate swap or cap instruments or other hedging instruments. The FRBNY expects collateral pools to be diversified with respect to loan size, geography, property type, borrower sponsorship and other characteristics, but will consider CMBS backed by non-diversified collateral on a case-by-case basis.
The security for each mortgage loan must include a mortgage or similar instrument on a fee or leasehold interest in one or more income-generating commercial properties located in the United States or one of its territories originated on or after July 1, 2008.
Each TALF loan secured by a CMBS will have a three-year maturity or five-year maturity, at the election of the borrower. A three-year TALF loan will bear interest at a fixed rate per annum equal to 100 basis points over the 3-year Libor swap rate. A five-year TALF loan is expected to bear interest at a fixed rate per annum equal to 100 basis points over the 5-year Libor swap rate.
The collateral haircut for each CMBS with an average life of five years or less will be 15%. For CMBS with average lives beyond five years, collateral haircuts will increase by one percentage point for each additional year of average life beyond five years. No CMBS may have an average life beyond ten years.
Any remittance of principal on the CMBS must be used immediately to reduce the principal amount of the TALF loan in proportion to the TALF advance rate. In addition, for a five-year TALF loan, the excess, in any TALF loan year, of CMBS interest distributions over TALF loan interest payable will be remitted to the TALF borrower only until such excess equals 25% (10% in the fourth loan year and 5% in the fifth loan year) of the haircut amount, and the remainder of such excess will be applied to TALF loan principal.
Finally, the release indicates that the FRBNY is considering a process to permit interested issuers to reserve prospective funding of TALF loans collateralized by new issue CMBS. Though not yet finalized, the process will permit a potential issuer to reserve funding by paying a monthly reservation fee. If implemented, details of this process will be announced shortly.
In this morning’s Wall Street Journal, it was reported that the $700 billion CMBS market has rallied in the past month on hopes that the TALF would be used to restart the market. According to the article, yields on AAA-rated CMBS bonds have fallen to about 10% from 12%.
Revised TALF FAQ TALF FAQs
The revised FAQ highlighted two items. First, insurance premium finance ABS will become an eligible asset class in the June TALF operation. Eligible insurance premium finance loans will include loans used to finance premiums for property and casualty insurance but will not include deferred payment obligations acquired from insurance companies. The issuer of the ABS must acquire ownership of each premium finance loan in its entirety and the securitization must include a back-up servicer obligated to service the loans upon the resignation or termination of the initial servicer. Premium finance ABS cannot have a greater average life than five years. The FAQs will be more fully updated for the June 2009 subscription to reflect the addition of premium finance ABS as eligible collateral.
The revised FAQ also revealed that that there will be an optional five-year maturity, at the borrower’s election, for SBA and student loan-backed ABS.
Written by Matthew B. Kulkin