On May 19, 2009, the Federal Reserve Board 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").  This means that eligible CMBS may be purchased or sold through the TALF program, and marks the first addition of a legacy asset class to the list of eligible TALF collateral.

According to the Federal Reserve, the objective of this expansion is to create liquidity and help determine accurate prices for Legacy CMBS securities and, by doing so, stimulate the expansion of new credit and ease balance sheet pressures on banks and other institutions holding Legacy CMBS securities. 

To be eligible as collateral for TALF loans, the Legacy CMBS must meet the following criteria:
 

• The Legacy CMBS must have at least two triple-A ratings from DBRS, Fitch Ratings, Moody's Investor Service, Realpoint or Standard Poor's and must not have a rating below triple-A from any of these rating agencies.  Eligible collateral will not include Legacy CMBS that obtains a triple-A rating based on the benefit of a third-party guarantee.
• The Legacy CMBS must be senior in payment priority to all other interests in the underlying pool of commercial mortgages.
• The Legacy CMBS must entitle its holders to payments of principal and interest (that is, it must not be an interest-only or principal-only security). 
• The issuer of the Legacy CMBS must not be an agency or instrumentality of the United States or a government-sponsored enterprise. 

The general terms and conditions of the TALF program apply to TALF loans that are secured by Legacy CMBS, with the following modifications:    

• The Federal Reserve Board of New York (the "FRBNY") will have the right to reject any Legacy CMBS as TALF loan collateral based on its own risk assessment.   
• Each TALF loan secured by Legacy CMBS will have a three-year or five-year maturity, at the election of the borrower.  A three-year TALF loan will bear interest at a fixed rate per annum equal to 100 basis points over the 3-year LIBOR swap rate.  A five-year TALF loan will bear interest at a fixed rate per annum equal to 100 basis points over the 5-year LIBOR swap rate.  
• The TALF loan amount for Legacy CMBS will be the dollar purchase price of the Legacy CMBS less the base dollar haircut (from par).  The base dollar haircut for Legacy CMBS with an average life of five years or less will be 15% of par.  For Legacy 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.   
• A TALF borrower must agree not to exercise any voting, consent or waiver rights under Legacy CMBS without the consent of the FRBNY. 

The FRBNY may limit the volume of TALF loans secured by Legacy CMBS and is considering whether to allocate this volume via auction or other procedure.  The FRBNY is also in the process of establishing other requirements that will apply to Legacy CMBS.

For a complete term sheet for the expansion of the TALF to Legacy CMBS, please visit http://newyorkfed.org/markets/talf_cmbs_terms.html.  
 
This Client Alert is prepared for the general information of our clients and other interested persons. This Client Alert is not, and is not intended to be, comprehensive in nature. Due to the general nature of its content, this Client Alert is not and should not be regarded as legal advice.

Klehr Harrison has represented borrowers in several TALF transactions and, as part of that representation, has worked through issues with several of the principal banks that act as “dealers” on behalf of the New York Federal Reserve.  If you are interested in determining how you could participate in TALF, or if you have any questions about the TALF program, please contact any of the persons listed below:

Keith W. Kaplan, Esq.                                         Jon M. Katona, Esq.
215-569-4143                                                  215-569-4222
kkaplan@klehr.com                                            jkatona@klehr.com
 
Jon S. Robins, Esq.                                            Denise M. Day, Esq.
215-569-1689                                                  215-569-1597
jrobins@klehr.com                                             dday@klehr.com
 
Bradley A. Krouse, Esq.                                      Richard S. Roisman, Esq.
215-569-1598                                                  215-569-2930
bkrouse@klehr.com                                           rroisman@klehr.com
           
Stephan L. Cutler, Esq.
215-569-4199
scutler@klehr.com
 
 
CIRCULAR 230 NOTICE. Any advice expressed above as to tax matters was neither written nor intended by the sender or Klehr, Harrison, Harvey, Branzburg & Ellers LLP to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. The recipient may not and should not rely upon any advice expressed above for any purpose and should seek advice based on the recipient's particular circumstances from an independent tax advisor.