TALF 2.0: Private Investment Funds as Eligible Borrowers

June 30, 2020

By Irina Gershengoren

As a result of the economic impact of COVID-19, in March 2020, the Federal Reserve established the Term Asset-Backed Securities Loan Facility (TALF), known as TALF 2.0, to support the flow of credit to consumers and businesses, similar to the one previously implemented by the Federal Reserve during 2008 financial crisis.  The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.

Under the TALF, the Federal Reserve will lend on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury will also make an equity investment in the Special Purpose Vehicle (SPV) established by the Federal Reserve for this facility.

The TALF is established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.

The first subscription date for TALF loans was June 17, 2020, and the first loan closing date was June 25, 2020.  There will be two TALF loan subscription dates per month, and each will be open to all eligible asset classes.  No new TALF loans will be made after September 30, 2020, unless the Board and the Secretary of the Treasury extend the facility.  Each TALF loan will have a three-year maturity.

The borrowers must use the loan proceeds to acquire or finance eligible ABS and must pledge that ABS to the TALF SPV as collateral for the loan. Under TALF 2.0 eligible borrowers include “investment funds.”

What is an "investment fund" for purposes of the TALF eligible borrower definition?

An investment fund includes (i) any type of pooled investment vehicle that is organized as a business entity or institution, including without limitation a hedge fund, a private equity fund, and a mutual fund, and (ii) any type of single-investor vehicle that is organized as a business entity or institution.

For a borrower organized as an investment fund, the investment manager must have significant operations in and a majority of its employees based in the United States. Additionally, the borrower has no “Material Investor” that is a foreign government. An eligible borrower must be a customer of a TALF Agent and will be required to have executed a customer agreement authorizing the TALF Agent, among other things, to execute the Master Loan and Security Agreement (MLSA) as agent for the borrower and to perform all actions required on their behalf.

What is a “Material Investor” and how can a Material Investor be identified? A Material Investor is an individual or entity that owns, directly or indirectly, 10% or more of any outstanding class of securities of an entity.

What is a TALF Agent?

A TALF Agent is a financial institution that is a party to the MLSA from time to time, individually and as agent for its borrower. The TALF Agents’ role in supporting the TALF is to serve as agents on behalf of their customers, the TALF borrowers.

Investment funds that borrow from TALF 2.0 will be highly leveraged and potentially subject to certain limitations on interest deductibility.

With ongoing changes in guidance, continue to monitor the Federal Reserve and New York Fed websites for revisions to previously released guidance and consult with legal and tax advisors.

Details about TALF 2.0 can be found in the

Federal Reserve's Term Sheet

New York Fed's FAQs  

MLSA

About Irina Gershengoren

Irina Gershengoren CPA, Partner in EisnerAmper's Financial Services Group, has expertise in partnerships/companies, private equity funds, hedge funds and fund of funds, and also works with investment advisors, BDCs and broker dealers.