On May 12, 2020, the Federal Reserve (Fed) published updates to the term sheet for the Term Asset-Backed Securities Loan Facility (the TALF), and FAQs regarding the TALF, including additional details regarding borrower and collateral eligibility.

Eligible Borrowers

The revised term sheet includes some significant clarifications regarding borrower eligibility criteria, and what is meant by the requirement that an eligible borrower have “significant operations in and a majority of its employees based in the United States.”  This requirement had previously caused market participants to question whether investment funds, which typically do not have employees, could be eligible borrowers.

The FAQs provide clarification that a borrower may be an investment fund so long as the investment manager for such investment fund has significant operations in and a majority of its employees based in the United States.  The FAQs provide a non-exhaustive definition and examples of what constitutes significant operations in the United States.

If a borrower is not an investment fund, the borrower (on a consolidated basis, i.e., together with its consolidated subsidiaries but excluding any parent company or sister affiliate) must have significant operations in and a majority of its employees based in the United States.

Like other participants in CARES Act programs, borrowers under the TALF will be required to certify to the Fed that they are unable to secure adequate credit accommodations from other banking institutions.  The FAQs clarify that borrowers do not need to determine that no credit is available.   The Fed believes that a determination that lending at prices or conditions that are inconsistent with a normal functioning market could support the certification.

Eligible Assets and Credit Ratings

No new asset classes were added to the TALF since the prior version of the term sheet.  Eligible ABS must still have a credit rating in the highest long-term, or, if no long-term rating is available, the highest short-term investment-grade rating category from at least two eligible nationally recognized statistical rating organizations (NRSROs), which, for purposes of the TALF, are currently limited to S&P, Moody’s and Fitch.  The FAQs state that the Fed may consider including other NRSROs under the TALF.

Public Disclosure

The FAQs highlight that the Fed intends to provide public disclosures on a monthly basis regarding the TALF, which will include information identifying each TALF borrower, each other participant in the TALF and each “Material Investor” of a borrower – defined as any person who owns, directly or indirectly, 10 percent or more of any outstanding class of securities of an entity.

What isn’t covered in the FAQs?

The FAQs state that further information will be forthcoming as to when the TALF will become operational.  The FAQs do not answer all questions, and the Fed will need to provide further details before the TALF is operational, including the schedule of borrowing dates and other mechanics for borrowings and requirements for collateral reviews, ABS issuer certifications and auditor assurances, all of which are not covered in the FAQs and are expected to be provided by the Fed in forthcoming publications.

An eligible borrower will be required to have executed a customer agreement with a “TALF Agent”, currently limited to the primary dealers for the Fed, authorizing the TALF Agent to execute the Master Loan and Security Agreement (MLSA) as agent for the borrower.  The FAQs state that the MLSA will provide further details on the requirements that apply to entities seeking to borrow under the TALF.  The Fed has not released the MLSA.