As part of the Financial Stability Plan, the Department of the Treasury and the Federal Reserve Board announced on Tuesday, March 3, 2009 the launch of the Term Asset-Backed Securities Loan Facility ("TALF"), a component of the Consumer and Business Lending Initiative. Pursuant to this announcement, the Federal Reserve Bank of New York ("FRBNY") will lend up to $200 billion to eligible owners of certain AAA-rated Asset-backed securities ("ABS") backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans. Subscriptions for funding in March will be accepted on March 17, 2009 and funded on March 25, 2009. The program will hold monthly fundings at least through December 2009, which date can be extended by the Federal Reserve Board. For the April funding (April 7 being the date subscriptions are recorded and April 14 being the funding date), it is anticipated that ABS backed by rental, commercial and government vehicle leases, and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible collateral. Other types of securities still under consideration for future fundings include private label residential mortgage-backed securities and CLOs, CDOs and ABS backed by non-auto floorplan loans and mortgage-service advances. The announcement contained revised terms and conditions for the facility (including a reduction in the interest rates and collateral "haircuts" for loans secured by asset-backed securities guaranteed by the Small Business Administration) and a revised set of frequently asked questions. For our prior discussion of TALF, see http://www.proskauer.com/news_publications/client_alerts/content/2009_02_13/.

The following are some highlights of the newly announced terms to the program:

Eligible Borrowers And Collateral

An eligible investment fund (as borrower) includes funds that only invest in TALF-eligible ABS and only borrow from the TALF, as well as funds that invest in a mix of TALF-eligible ABS and other assets.

Eligible collateral includes U.S. dollar-denominated cash ABS that have a credit rating in the highest long or short-term investment-grade rating category from two or more major nationally recognized statistical rating organizations (NRSROs) and do not have a credit rating below the highest investment-grade rating category from a major NRSRO. For purposes of determining TALF-eligible ABS, the rating agencies are Fitch, Moody's, and Standard & Poor's. The Federal Reserve Board will review periodically its use of NRSROs for the purpose of determining TALF-eligible ABS.

Operational Mechanics

The announcement detailed what happens if a TALF-financed ABS incurs a principal loss.

If the borrower does not make such payments, the FRBNY will enforce its rights to the collateral and the borrower will forfeit its haircut amount. If a borrower does not repay outstanding principal and interest on its loan, the borrower may in lieu of repayment surrender the collateral to the FRBNY by delivering a Collateral Surrender and Acceptance Notice with respect to the TALF loan. If a borrower fails to deliver the Collateral Surrender and Acceptance Notice by the maturity date, the FRBNY may exercise recourse rights directly against the borrower.

Haircuts And Rates

Loan amounts will be based on the lesser of market or par value of the pledged ABS, less the haircut. However, if market value exceeds par, then the lendable amount can be equal to the market value (subject to a cap of 110% of par value) less the haircut, and the borrower will amortize the amount lent above par value based on a formula which takes into account the expected weighted average life of the ABS collateral. In general, the floating interest rate on borrowings will be 100 basis points over 1month LIBOR and the fixed rate will be 100 basis points over the 3year LIBOR swap rates. However, the floating interest rate on TALF loans backed by collateral having a government guarantee has a lower spread.

For ABS benefitting from a substantial government guarantee with average lives beyond five years, haircuts will increase by one percentage point for every two additional years of average life beyond five years. For all other ABS with average lives beyond five years, haircuts will increase by one percentage point for each additional year of average life beyond five years.

Role Of Primary Dealers

An eligible borrower must be a customer of a primary dealer and must have executed a customer agreement authorizing the primary dealer, among other things, to execute the master loan and security agreement (MLSA) as agent for the borrower and to perform all actions required on its behalf. The MLSA contains further details on the requirements that will apply to entities seeking to borrow under the TALF. The MLSA can be viewed at: http://www.newyorkfed.org/markets/MLSA_030309.pdf.

The primary dealers are responsible for managing any tax withholding and reporting obligations for their customers.

To assist in reconciling and distributing aggregate monthly interest payments to investors, the primary dealer, at each payment distribution, will receive information regarding the gross principal and interest amount paid by the ABS collateral, as well as the principal and interest amount to be remitted to the borrower. If an interest deficiency exists, the net interest and/or principal will be used to offset that deficiency and the primary dealer will be notified.

There are no special bankruptcy protections for the borrower if the primary dealer should declare bankruptcy following its receipt of principal and interest from the custodian (the FRBNY is using BNY Mellon as custodian), but prior to disbursement to the borrower. Once funds or collateral are transferred by the custodian to a primary dealer or at the direction of the primary dealer, neither the custodian nor the FRBNY has any obligation to account for whether the funds or collateral are transferred to the borrower.

The SEC has granted a limited exemption from the prohibition on arranging certain credit under Section 11(d)(1) for those primary dealers arranging TALF financing from the FRBNY on new issues of non exempted securities where such dealers may have been, within the preceding 30 days, a "member of a selling syndicate or group" in respect of the distribution of the new issue. This exemption is limited to the arranging prohibitions of Section 11(d)(1), and does not relieve primary dealers from any applicable limitations on direct extensions of credit by them.

Executive Compensation Restrictions Eliminated

Executive compensation limits for TALF sponsors, underwriters and borrowers that participate in the TALF have been eliminated.

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