Has the government handed over a pot of gold in its quest to revive the financing markets?  The Term Asset-Backed Lending Facility (TALF) program may be just that for the financial institutions and funds that play in the market, and for the law firms and accounting firms that advise them.  Last week, the Fed detailed its TALF program, intended to facilitate the issuance of asset-backed securities (ABS). The broad goal of the program is to jump start at least one component of the flailing credit markets.  If the FDIC’s Temporary Liquidity Guarantee Program is any indication, government-guaranteed debt may prove a successful driver of financing. Regardless of the ultimate success of this effort, the program comes replete with reporting and disclosure requirements and restrictions that will create new opportunities for a variety of professionals.  In the coming months, attorneys, accountants and other professionals should pay particular attention to TALF as a source of opportunity – and possible liability for the less-than-diligent.

Here’s a bit of background on how TALF is designed to work, for those of you who lost track of the details in the flurry of government bailout programs:  The facility was announced in November and detailed last week and moves the government from the role of regulator to the role of hungry, active investor.  The Federal Reserve Bank of New York (FRBNY), via a Special Purpose Vehicle (SPV), will manage and oversee the program, making up to $200 billion in non-recourse, fully-secured loans for three-year terms to holders of AAA-rated ABS.  Subscriptions for funding will first be accepted on March 17.  The funds will be distributed starting March 25 and fundings will occur monthly through December 2009 (or longer if the Federal Reserve Board chooses to extend the facility).  The Treasury Department will initially purchase $20 billion of debt from the SPV with TARP funds. 

TALF is still evolving, which may provide fodder for attorneys and interested financial players.  The program was originally designed to drive transactions and shore up investor confidence in the market for bonds backed by auto loans, student loans, credit cards and small business loans.  Though coverage has been detailed only for four areas of lending generally considered to be “safe”, there is speculation that the Fed and the Treasury may expand the program. According to an interagency release, the Treasury Department and the Fed have agreed to increase the size of the TALF from $200 billion to as much as $1 trillion. At this time, the Treasury Department and Federal Reserve are analyzing the appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS).  They are also evaluating a number of other types of AAA-rated newly issued ABS for possible acceptance under the expanded program, possibly to include collateralized debt obligations and corporate-loan investment vehicles.

Other notable highlights of the plan are as follows:

• TALF loans will not be subject to mark-to-market or re-margining requirements.
• U.S. subsidiaries of foreign entities may qualify as eligible borrowers.
• The interest rates and the losses that investors must absorb in case the loans go sour (known as “haircuts”) for small business and student loans are lower now than originally contemplated by regulators.  In order to boost the appeal of TALF, the Fed in recent weeks lowered these rates.
• The executive compensation rules that apply to banks that accept bailout money will not apply to TALF participants – a change sure to raise a few eyebrows among corporate governance reformists.  (Some investors had reportedly stated that they would not participate in the program due to the compensation restrictions.)

Consumers and lenders that issue consumer loans are clearly poised to benefit from the program. Perhaps surprisingly, it has also been enthusiastically embraced by a number of hedge funds and private-equity firms.  Why? The program allows large investors, including hedge funds, private-equity firms and other investment vehicles, so long as they meet the borrower eligibility requirements, to apply for the cheap loans.

TALF, like any good regulatory directive, imposes certain reporting and disclosure requirements on participants, which will place greater burdens on the lawyers, accountants and other professionals involved with these transactions.  Among the requirements:

• Both the issuer and the sponsor must provide a disclosure in a prospectus or other offering document stating that the ABS is eligible collateral under the TALF;
• The sponsor’s accountant must be a nationally recognized certified public accounting firm registered with the Public Company Accounting Oversight Board;
• The sponsor’s accountant must provide a signed certification indicating that the ABS is TALF-eligible;
• Certification that all or substantially all (defined as at least 95% of the dollar amount) of the credit exposures underlying the securities are exposures to U.S.-domiciled obligors; and
• The sponsor must execute and deliver an undertaking to the FRBNY indemnifying it from any losses it may suffer if such certifications are untrue. Indemnity should be delivered to the FRBNY no later than four days prior to the TALF loan settlement date.

Going forward, players would be wise to be transparent with the SEC and investors about the impact of TALF on their own business and industry as a whole.  A range of companies have already disclosed TALF-related issues.  Real estate investment trust (REIT) Crystal Rivers Capital expresses in its 10-K that it is cautiously optimistic that government programs, such as TALF, will have some positive impact on the overall housing market. American River Bankshares, a bank holding company, details the TALF program as recent regulatory development that may have a significant impact. In the coming weeks, more and more companies and investors will likely disclosure TALF benefits, particularly after the first round of funds is disbursed.  These will serve as an example for companies considering applying further down the line that will face similar disclosure issues.

Some companies are even specifically disclosing in SEC filings their hope to benefit from the TALF in the future. Prior to last week’s announcement, companies in troubled industries, including CIT Group, Ford, Harley Davidson, and American Express, disclosed their desires to benefit from the TALF program.  More recently, RAIT Financial Trust reported that it is “hopeful the Treasury Department will include commercial real estate in the 2009 TALF program” in order to provide “much needed” liquidity in the commercial real estate market.

TALF seems set to drive a good deal more securitization work. Though uncertainty remains as to how this latest government attempt to drive lending activity will play out, from the perspective of TALF securitization, acceptable lending vehicles and structures are narrowly defined, as discussed above.  This gives rise to the need for stringent reporting and due diligence by TALF players and hopeful onlookers.

Published: March 10, 2009