The current expansion of TALF to CMBS will be for AAA rated securities issued on or after January 1, 2009. Industry players anticipate, however, that the TALF program will be expanded further to include legacy assets (securities issued prior to January 1, 2009), as has been previously indicated by policymakers. The Federal Reserve expects the initial CMBS subscription date to be in late June, with the specific date to be announced shortly.
One major change being made to the terms of the TALF loans in connection with the expansion of the program to include CMBS as eligible collateral is that borrowers will be able to select either a three-year term loan, which is the current term limit, or a five-year term loan. This change is an accommodation to the longer-term nature of commercial mortgage lending. In addition to the increase in the length of the loan term, the Federal Reserve has published initial terms and conditions of the TALF loans to be backed by CMBS. A three-year TALF loan will bear interest at a fixed rate per annum equal to 100 basis points over the three-year LIBOR swap rate and five-year loans are expected to bear interest at a fixed rate per annum equal to 100 basis points over the five-year LIBOR swap rate. The collateral haircut amounts for TALF loans backed by CMBS will be 15% for CMBS with an average life of five years or less, to be increased by one percentage point for each additional year of average life beyond five years, i.e. the amount of the TALF loan will not exceed 85% of the lesser of par value or market value, which is determined by the TALF custodian based on pricing data.
The Federal Reserve’s initial terms and conditions for TALF loans backed by CMBS place strict requirements on the eligible CMBS collateral and the mortgage loans underlying the eligible CMBS. Some of the significant criteria for the underlying mortgage loans include the requirement that each loan must have been originated on or after July 1, 2008, must be fixed rate loans and may not allow interest-only payments during any part of its remaining term. Additionally, the loans must have been underwritten on the basis of then current, in-place, stabilized and recurring net operating income and then-current property appraisals. In addition to the requirement that the CMBS have a credit rating in the highest long-term investment-grade rating category, the Federal Reserve will generally require that collateral pools be diversified with respect to loan size, geography, property type and borrower sponsorship. The Federal Reserve plans to hire collateral monitors to evaluate the collateral and exclude specific loans from pools or reject CMBS as TALF loan collateral based on its risk assessment.
The leverage that will be provided by this initial expansion of TALF to buyers of AAA-rated CMBS is intended to increase credit capacity and result in lenders being willing to make high-quality loans to borrowers.
For a complete term sheet for the expansion of the TALF to CMBS, please visit http://www.newyorkfed.org/markets/talf_cmbs_terms.html.
We will continue to monitor the developments related to the expansion of the TALF program and will issue further updates as significant events transpire.
This Client Alert is prepared for the general information of our clients and other interested persons. This Client Alert is not, and is not intended to be, comprehensive in nature. Due to the general nature of its content, this Client Alert is not and should not be regarded as legal advice.
If you have any questions related to the TALF program and/or its impact, please feel free to contact:
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