"TALF Expanded to Include Legacy CMBS
The Federal Reserve Board on Tuesday announced that, starting in July, certain high-quality commercial mortgage-backed securities issued before January 1, 2009 (legacy CMBS) will become eligible collateral under the Term Asset-Backed Securities Loan Facility (TALF).New term sheet for legacy CMBS is here; FAQs for legacy CMBS is here.
The CMBS market, which has financed approximately 20 percent of outstanding commercial mortgages, including mortgages on offices and multi-family residential, retail and industrial properties, came to a standstill in mid-2008. The extension of eligible TALF collateral to include legacy CMBS is intended to promote price discovery and liquidity for legacy CMBS. The resulting improvement in legacy CMBS markets should facilitate the issuance of newly issued CMBS, thereby helping borrowers finance new purchases of commercial properties or refinance existing commercial mortgages on better terms.
Here are the salient terms (on first glance):
1. AAA rating from at least two eligible rating agencies. Eligible rating agencies are Moody’s, S&P, Fitch, DBRS, and Realpoint.
2. Eligible CMBS must have been in the senior tranche at issuance (e.g., A-1 and A-2 classes are both "senior").
3. Haircuts: Base haircut of 15% for CMBS with an average life of five years or less. "For CMBS with average lives beyond five years, base dollar haircuts will increase by one percentage point of par for each additional year of average life beyond five years."
4. Maturity of TALF loans: Either 3 or 5 years, at the borrower's option.
5. Cost of funds: 3-year Libor swap rate +100bps (for 3-year TALF loans); 5-year Libor swap rate +100bps (for 5-year TALF loans).
6. Fed discretion: The Fed has a lot of discretion in determining whether to reject a legacy CMBS, based on factors such as historical losses, special servicing rights, and diversification of underlying collateral pool.
Here we go...