Article by
James M. Broderick 
,
Andrew C. Sucoff ,
Gilbert G. Menna ,
Jacob A. Warden and
Adam N. Weisenberg
In Goodwin Procter's February 13, 2009 Real Estate Capital Markets Advisor, we presented our thoughts on the newly announced expansion of the federal government's Term Asset-Backed Securities Loan Facility ("TALF") to include commercial mortgage-backed securities ("CMBS"). In Goodwin Procter's March 26, 2009 Real Estate Capital Markets Advisor, we presented our thoughts on the Obama administration's newly announced Public Private Investment Program ("PPIP"). In this Advisor, we address recent developments in both the TALF and PPIP.
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FRBNY Announces Initial Terms For TALF-Eligible CMBS
On May 1, 2009, the Federal Reserve Bank of New York ("FRBNY") announced the initial terms for its planned expansion of the TALF to include recently issued CMBS. As we discussed in both the February and March Advisors, the TALF is a $1 trillion program that was established in an effort to help restart the securitization market by providing favorable financing to purchasers of asset-backed securities ("ABS"). The TALF is a joint program between the U.S. Treasury ("Treasury") and the Federal Reserve, but principally administered by the FRBNY. Initially, investors could only access the TALF by pledging certain types of newly issued AAA-rated asset-backed securities: principally auto, student, credit card, small business and equipment loans, as well as certain residential mortgage servicing advances. However, as we discussed in the March Advisor, both Treasury and the Federal Reserve anticipated that the TALF would be extended to CMBS by mid- to late 2009.
FRBNY has announced that certain newly issued CMBS will be TALF-eligible beginning in late June,1 subject to the following qualifications: (i) the CMBS must have been issued on or after January 1, 2009; (ii) the CMBS must evidence an interest in a trust fund consisting of fully funded, first-priority, fixed-rate, amortizing mortgage loans, that are secured by a fee or leasehold interest in one or more income-generating commercial properties located within United States, that are current in payment at the time of securitization, and that were originated on or after July 1, 2008; (iii) the applicable pooling and servicing agreement and other agreements governing the issuance of the eligible CMBS and the servicing of their respective assets must contain certain provisions related to control, distributions and appraisals; and (iv) the CMBS must have the highest available long-term investment-grade rating category (with specific credit rating agencies to be chosen by FRBNY at a later date). FRBNY is also considering a process to permit interested issuers, through a process to be determined, to reserve prospective funding of TALF loans collateralized by newly issued CMBS.
As we anticipated in the March Advisor, FRBNY has also attempted to accommodate CMBS investors by extending the maximum term of TALF loans. Currently, all TALF loans have maturities of three years (creating a potential mismatch with CMBS, which typically have a ten-year term). Beginning in June,2 however, FRBNY will allow borrowers to elect either a three- or five-year term for certain TALF loans. This election will be available not only for loans secured by CMBS, but also for loans secured by small business and student loan-backed ABS. FRBNY has indicated that up to $100 billion of TALF loans could have five-year maturities (although this is subject to further review by the Federal Reserve Board).
The basic terms of CMBS TALF loans are as follows. Three-year CMBS TALF loans will bear interest at a fixed annual rate of 100 basis points over the three-year Libor swap rate. Five-year CMBS TALF loans are expected to bear interest at a fixed annual rate of 100 basis points over the five-year Libor swap rate. The collateral "haircut" for CMBS with an average life of five years or less will be 15%. For CMBS with an average life beyond five years, the collateral haircut will increase by one percentage point for each additional year of average life beyond five years. No eligible CMBS may have an average life beyond 10 years.
CMBS TALF borrowers will also be subject to certain restrictions on repayment and control. First, any remittance of principal (and, for five-year TALF loans, a portion of any remittance of interest)3 on the CMBS must be used immediately to reduce the principal amount of the TALF loan in proportion to the TALF advance rate. Second, TALF borrowers must agree to refrain from exercising any voting, consent or waiver rights under the CMBS without the consent of FRBNY.
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Pilot Sale for PPIP Legacy Loans Program
On April 23, 2009, speaking at a financial reform conference, FDIC Chairman Sheila Bair indicated that the FDIC tentatively is planning to conduct an approximately $1 billion pilot sale under the PPIP Legacy Loans Program ("LLP").4 As we discussed in the March Advisor, the proposed LLP is a joint program established by Treasury and the FDIC to enable domestic banks and savings institutions to sell pools of distressed loans in portfolio auctions run by the FDIC. Although Treasury and the FDIC have presented an overview of the LLP, many specifics of the LLP remain to be determined. The FDIC has received public comments on the LLP, submitted on or prior to April 10, 2009, by real estate investors and other interested parties, including Goodwin Procter.
Neither the FDIC nor Treasury has provided further substantive details on the LLP since Chairman Bair's speech. However, there is some indication that the agencies are reconsidering the originally proposed LLP structure. As we discussed in the March Advisor, the U.S. government originally anticipated that the equity portion of LLP funds would be provided in a joint venture between private investors and Treasury, with up to 50% of equity funded by Treasury (using funds from the Troubled Assets Relief Program ("TARP")). This structure reduced the investment borne by private investors, but also raised many questions. Private investors were particularly concerned that the application of TARP matching funds would lead to executive compensation restrictions being applied to some LLP participants, including sponsors.
In response to these concerns, anonymous sources (as reported by Bloomberg on April 30, 2009)5 have indicated that the LLP may be revised to eliminate any equity participation by Treasury and thereby eliminate concerns about TARP's executive compensation restrictions, although the FDIC and Treasury are still discussing the program and no final decision has been made. The Bloomberg report also indicates that the proposed Treasury warrant requirement may nonetheless remain part of the LLP, with triggers for such warrants to be set by the FDIC.
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We will continue to follow developments and will provide more information as available.
Footnotes
1. FRBNY has not announced the specific initial CMBS subscription date, but has indicated that the subscription and settlement cycle for CMBS will occur in the latter part of each month (whereas the cycle for non-CMBS TALF-asset classes will remain in the beginning of the month).
2. FRBNY has not clarified whether, with respect to non-CMBS TALF assets, the phrase "in June" refers to the TALF cycle scheduled to begin on May 19, 2009 (which would close on June 2, 2009 and disburse on June 9, 2009) or the TALF cycle scheduled to begin on June 23, 2009 (which would close on July 7, 2009 and disburse on July 14, 2009).
3. For a five-year TALF loan, the excess, in any TALF loan year, of CMBS interest distributions over TALF loan interest payable will be remitted to the TALF borrower only until such excess equals 25% (10% in the fourth loan year and 5% in the fifth loan year) of the haircut amount, and the remainder of such excess will be applied to TALF loan principal. (See, the FRBNY "Term Asset-Backed Securities Loan Facility (CMBS): Terms and Conditions," effective May 1, 2009.)
4. See, Karey Wutkowski, "FDIC's Bair: Banks, housing past crisis stage" Reuters, April 23, 2009.
5. See, Rebecca Christie, "FDIC May Let Investors Buy Toxic Assets Without Treasury Stake", Bloomberg, April 30, 2009.
Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.
This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2009 Goodwin Procter LLP. All rights reserved.
