The Federal Reserve’s bid to ramp up the consumer debt market by encouraging securitization has run into trouble–investment banks are wary of participating and investors are staying clear. Now the Fed and Wall Street bankers are engaged in a last minute reworking of the Term Asset Loan Facility (TALF, illustrated here by Alf with Mr. T’s hair).
You can read the Wall Street Journal’s take on the difficulties of the TALF here. More importantly, here are the key changes the Fed is making to make the program more enticing, courtesy of Philip A. Gelston, Cravath, Swaine & Moore LLP.
KEY CHANGES FROM THE TALF RULES PREVIOUSLY ANNOUNCED
The updated terms and conditions and FAQs issued on March 3 modify a number of the TALF program rules announced in February 2009 and provide more detailed terms. Key changes from the rules announced in February are described below.
Elimination of Executive Compensation Restrictions
The February 2009 version of the TALF terms and conditions and FAQs required the ABS sponsors (but not the borrowers receiving financing under the TALF) to comply with the executive compensation restrictions established under the Emergency Economic stabilisation Act of 2008 (EESA), as amended by the American Recovery and Reinvestment Act of 2009. The updated TALF program rules do not require sponsors, underwriters or borrowers to comply with these EESA restrictions by virtue of their participation in the TALF.
Clarification of Borrowers’ Loan Repayment Obligations
The updated TALF program rules clarify the non-recourse nature of the loans by stating that in lieu of repaying the amounts outstanding on a TALF loan at the three-year maturity (or at any earlier time), the borrower may surrender the ABS collateral in full satisfaction of the loan.
Reduction in Certain Interest Rates and Haircuts
The updated TALF program rules contain a reduction in the interest rates and certain collateral haircuts for ABS backed by student loans guaranteed by the Federal government and ABS backed by small business loans guaranteed by the SBA.