Alert May 05, 2009

FRB Releases Terms for Commercial Mortgage-Backed Securities Eligible to Serve as Collateral under the Term Asset-Backed Securities Loan Facility

The FRB released the applicable terms for the use of cash (i.e., non-synthetic) commercial mortgage-backed securities (“CMBS”) as eligible collateral under the Term Asset-Backed Securities Loan Facility (“TALF”).  The TALF is a FRB program administered by the Federal Reserve Bank of New York (“FRBNY”) that is designed to restart the market for asset-backed securities (“ABS”).  To date, the TALF has garnered limited participation.  CMBS will be eligible as collateral for TALF loans starting in June 2009.  The FRB had previously stated that the TALF would be expanded to include CMBS, as discussed in the March 24, 2009 Alert.  The FRB further announced that securities backed by insurance premium finance loans will be eligible collateral under the TALF starting in June 2009. 

The FRB also authorized TALF loans with maturities of three years and five years.  Currently, all TALF loans have maturities of three years.  TALF loans with five-year maturities will be available for the June TALF funding to finance purchases of CMBS, ABS backed by student loans, and ABS backed by loans guaranteed by the Small Business Administration.  The FRB indicated that up to $100 billion of TALF loans could have five year maturities and that it will continue to evaluate that limit.  Some of the interest on collateral financed with a five-year loan may be diverted toward an accelerated repayment of the TALF loan, especially in the fourth and fifth years.

Only CMBS with the highest long-term investment-grade rating category issued on or after January 1, 2009 will be eligible as collateral for the TALF.  Eligible collateral will not include CMBS that obtains such credit ratings based on the benefit of a third-party guarantee or CMBS that a TALF CMBS-eligible rating agency has placed on review or watch for downgrade.  Credit ratings will be set by credit rating agencies to be chosen by the FRBNY.  The mortgage loans underlying eligible CMBS must have been originated on or after July 1, 2008 and be secured by a fee or leasehold interest in one or more income generating commercial properties located within the United States.  All mortgage loans must, among other things, be fixed-rate loans, and no mortgage loan may provide for interest-only payments during any part of its remaining term.  The pooling and servicing agreement and other agreements governing the issuance of the eligible CMBS and the servicing of its assets must contain certain provisions related to control, distributions and appraisals. 

As discussed above, each TALF loan secured by CMBS will have a three-year or five year maturity, at the election of the borrower.  Three-year TALF loans will bear interest at a fixed annual rate of 100 basis points over the 3-year Libor swap rate.  Five-year TALF loans are expected to bear interest at a fixed annual rate of 100 basis points over the 5-year Libor swap rate.  The collateral haircut for eligible CMBS with an average life of five years or less will be 15%.  For eligible CMBS with an average life beyond five years, collateral haircuts will increase by one percentage point for each additional year of average life beyond five years.  No eligible 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.  TALF borrowers must agree to refrain from exercising any voting, consent or waiver rights under the CMBS without the consent of the FRBNY.  The FRBNY is considering a process to permit interested issuers, through a process to be determined, to reserve prospective funding of TALF loans collateralized by new issue CMBS.  The FRBNY stated that if implemented, details of this process will be announced shortly.