Financial Markets in Crisis: TALF Launched; Executive Compensation Restrictions Will Not Apply

March 4, 2009

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is closely tracking government responses to the turmoil that has catalyzed a dramatic and rapid reshaping of our capital and credit markets.

We are providing updates on key regulatory and legislative issues, as well as information on legal issues that we believe could prove useful as firms and other entities navigate these challenging times.

This update focuses on the launch of the Term Asset-Backed Securities Loan Facility ("TALF").

TALF in General

Yesterday, the Treasury Department and the Board of Governors of the Federal Reserve Bank jointly announced the launch date for the TALF.  The TALF is designed to stimulate the "securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities" ("ABS").  The goal of TALF is to increase lending to consumers and small businesses on more favorable terms by encouraging investment in highly-rated ABS.  Pursuant to the first phase of the TALF, the Federal Reserve Bank of New York will lend up to $200 billion to eligible borrowers with eligible collateral.  As announced on February 10, 2009, and discussed in our previous client alert, an expansion of TALF,  pursuant to which the Treasury and the Federal Reserve could lend up to $1 trillion and increase the types of eligible collateral, is under consideration and may be implemented in the future.

Change in Application of Executive Compensation Provisions

Under prior guidance for the program, a "sponsor" or "the applicable entity specified in forthcoming TALF certification documents" was to be subject to the onerous executive compensation restrictions passed as part of the American Recovery and Reinvestment Act.  Under the TALF, a "sponsor" is one who "organizes and initiates an asset-backed securities transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to the issuing entity."[1]  Each sponsor was to be responsible for certifying compliance on an annual basis.

Under the revised guidance issued yesterday, no executive compensation requirements apply to program participants, including sponsors, underwriters and borrowers.  This reversal appears to be based on concerns that the executive compensation requirements could chill participation in the program.  Indeed, the TALF’s revised "Frequently Asked Questions" document cites as the basis for the decision "the goals of the TALF and the desire to encourage market participants to stimulate credit formation and utilize the facility."

Facility:

Among the key terms of the facility are the following:

• Non-recourse
• 3 year term
• Interest payable monthly
• Interest rate is variable, based on the ABS securing the loan[2]
• May be prepaid in whole or in part without penalty
• Fully secured and no substitution of collateral
• Any remittance on eligible collateral must be used to reduce the principal of the TALF loan

The minimum amount of each loan is set at $10 million and there is no maximum amount.  The amount will be determined based on the value of the collateral pledged, minus the required haircut.  In order to encourage TALF loans  tobe repaid and protect the government from being overburdened with ABS, borrowers are required to take a "haircut" and will receive a loan equal to a predetermined portion of the value of the collateral as of the date of the loan.[3]  In the event that the a borrower defaults and the Federal Reserve repossesses the ABS collateral, it will be purchased at the value of the loan by a special purpose vehicle, which will be funded in part by $20 billion in TARP funds.

Eligible Collateral:

• U.S. dollar-denominated cash (i.e. not synthetic) ABS
• Credit rating in the highest long-term or short-term investment grade rating category from at least two national rating agencies
• Must not obtain such rating based on a third-party guarantee
• Must not be placed on watch for downgrade by a national rating agency
• Eligible small business ABS also include those guaranteed by the US government
• Underlying credit exposures must initially be:
• auto loans
• student loans
• credit card loans
• small business loans guaranteed by the SBA
• Eligible ABS must be issued on or after January 1, 2009 and underlying credit exposures must have been originated on or after October 1, 2007
• Eligible auto loan ABS and credit card ABS must have an average life of 5 years or less
• Eligible collateral for a particular borrower must not be backed by loans originated or securitized by the borrower or by an affiliate of the borrower

Eligible Borrowers:

• Any U.S. company that owns eligible collateral that maintains an account relationship with a primary dealer.
• U.S. company includes:
• Entities organized under the laws of the U.S. or a political subdivision that maintain significant operations or activities in the U.S.
• U.S. branch or agency of a foreign bank that maintains reserves with the Federal Reserve
• Investment fund that is U.S.-organized and managed by an investment manager that has its principal place of business in the U.S.
• U.S. company excludes an entity controlled by a foreign government or is managed by an investment manager controlled by a foreign government

Timing of TALF Loans

There will be monthly subscription and settlement dates upon which borrowers will be able to request one or more floating-rate and fixed-rate TALF loans by indicating the eligible collateral they wish to pledge. The key dates for the first two fundings are set forth below.  The program will continue until December 31, 2009, unless it is extended by the Board of Governors of the Federal Reserve. 

Steps to Take Now

Entities interested in borrowing funds through the TALF must have or establish a customer account with a primary dealer.  Primary dealers already have begun marketing TALF opportunities and will be able to provide information on the mechanics of how they will execute the program.

Sponsors interested in selling assets to an issuer and issuers interested in selling eligible ABS to a borrower might consider identifying transaction partners as soon as possible.  Primary dealers, as agents of borrowers, are likely to have the most visibility into the market for entities seeking to partner in TALF transactions.

Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, [email protected]) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group:

Public Policy Expertise
Mel Levine – Century City (310-557-8098, [email protected])
John F. Olson – Washington, D.C. (202-955-8522, [email protected])
Amy L. Goodman – Washington, D.C. (202-955-8653, [email protected])
Alan Platt – Washington, D.C. (202- 887-3660, [email protected])
Michael Bopp – Washington, D.C. (202-955-8256, [email protected])

Securities Law and Corporate Governance Expertise
Ronald O. Mueller – Washington, D.C. (202-955-8671, [email protected])
K. Susan Grafton – Washington, D.C. (202- 887-3554, [email protected])
Brian Lane – Washington, D.C. (202-887-3646, [email protected])
Lewis Ferguson – Washington, D.C. (202- 955-8249, [email protected])
Barry Goldsmith – Washington, D.C. (202- 955-8580, [email protected])
John H. Sturc – Washington, D.C. (202-955-8243, [email protected])
Dorothee Fischer-Appelt – London (+44 20 7071 4224, [email protected])
Alan Bannister – New York (212-351-2310, [email protected])
Adam H. Offenhartz – New York (212-351-3808, [email protected])
Mark K. Schonfeld – New York (212-351-2433, [email protected])

Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514, [email protected])
Christopher Bellini – Washington, D.C. (202- 887-3693, [email protected])
Amy Rudnick – Washington, D.C. (202-955-8210, [email protected])
Dhiya El-Saden – Los Angeles (213-229-7196, [email protected])
Rachel Couter – London (+44 20 7071 4217, [email protected])

Corporate Expertise
Howard Adler – Washington, D.C. (202- 955-8589, [email protected])
Richard Russo – Denver (303- 298-5715, [email protected])
Dennis Friedman – New York (212- 351-3900, [email protected])
Stephanie Tsacoumis – Washington, D.C. (202-955-8277, [email protected])
Robert Cunningham – New York (212-351-2308, [email protected])
Joerg Esdorn – New York (212-351-3851, [email protected])
Wayne P.J. McArdle – London (+44 20 7071 4237, [email protected])
Stewart McDowell – San Francisco (415-393-8322, [email protected])
C. William Thomas, Jr. – Washington, D.C. (202-887-3735, [email protected])

Private Equity Expertise
E. Michael Greaney – New York (212-351-4065, [email protected])

Private Investment Funds Expertise
Edward Sopher – New York (212-351-3918, [email protected])
Jennifer Bellah Maguire – Los Angeles (213-229-7986, [email protected])

Real Estate Expertise
Jesse Sharf – Century City (310-552-8512, [email protected])
Alan Samson – London (+44 20 7071 4222, [email protected])
Andrew Levy – New York (212-351-4037, [email protected])
Fred Pillon – San Francisco (415-393-8241, [email protected])
Dennis Arnold – Los Angeles (213-229-7864, [email protected])
Michael F. Sfregola – Los Angeles (213-229-7558, [email protected])
Andrew Lance – New York (212-351-3871, [email protected])
Eric M. Feuerstein – New York (212-351-2323, [email protected])
David J. Furman – New York (212-351-3992, [email protected])

Crisis Management Expertise
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804, [email protected])

Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969, [email protected])
David M. Feldman – New York (212-351-2366, [email protected])
Oscar Garza – Orange County (949-451-3849, [email protected])
Craig H. Millet – Orange County (949-451-3986, [email protected])
Thomas M. Budd – London (+44 20 7071 4234, [email protected])
Gregory A. Campbell – London (+44 20 7071 4236, [email protected])
Janet M. Weiss – New York (212-351-3988, [email protected])
Matthew J. Williams – New York (212-351-2322, [email protected])
J. Eric Wise – New York (212-351-2620, [email protected])

Tax Law Expertise
Arthur D. Pasternak – Washington, D.C. (202-955-8582, [email protected])
Paul Issler – Los Angeles (213-229-7763, [email protected])

Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385, [email protected])
Charles F. Feldman – New York (212-351-3908, [email protected])
Michael J. Collins – Washington, D.C. (202-887-3551, [email protected])
Sean C. Feller – Los Angeles (213-229-7579, [email protected])
Amber Busuttil Mullen – Los Angeles (213-229-7023, [email protected]) 

© 2009 Gibson, Dunn & Crutcher LLP

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