Solar securitizations and the Federal Reserve
The New York Federal Reserve Bank confirmed informally by email in late May that it is not prepared to use one of its new lending windows to maintain liquidity in private debt markets to finance asset-backed bonds backed by consumer solar loans and leases, despite extensive lobbying efforts by industry trade groups.
Nevertheless, the New York Federal Reserve at the same time confirmed that commercial solar loans and leases will be considered eligible collateral for borrowing directly.
The particular Federal Reserve window is called the TALF program. TALF stands for the “term asset-backed loan facility.”
Fed lending through this window will be available for terms of up to three years at rates that are 125 basis points over the overnight swap rate. The window will open for borrowing in mid-June.
Anyone borrowing through TALF will have to be able to check off a number of boxes.
Each eligible borrower must certify that it is unable to secure adequate credit accommodations from other banking institutions and that it is not insolvent.
In making this certification, an eligible borrower may rely on unusual economic conditions in the asset-backed securities market or markets intended to be addressed by TALF. Adequate credit does not mean that no credit is available, but instead means that credit may be available, but inadequate in amount, price or other terms because, for example, asset-backed securities spreads are elevated compared to normal market conditions.
The debt or lease obligations or other customer receivables being borrowed against must fall into one of nine categories: auto loans and leases, student loans, credit card receivables (both consumer and corporate), equipment loans and leases, floorplan loans, premium finance loans for property and casualty insurance, certain small business loans that are guaranteed by the US Small Business Administration, leveraged loans or commercial mortgages.
Loan sizing will turn on the amount of eligible collateral pledged. The Fed will only accept AAA-rated US dollar-denominated asset-backed securities issued on or after March 23, 2020.
The Fed will apply a haircut to the full value. The haircut varies by economic sector, the weighted average life of the pledged customer paper and historical volatility. The government has provided a schedule of haircut percentages. Collateral substitutions during the term of a loan will generally not be allowed.
Any company attempting to borrow at the TALF window must be formed under US law. It must have significant operations in the US or have a majority of its employees in the US. It must also have an account relationship with a primary dealer. US businesses that have a foreign government owning 10% or more of any outstanding class of securities are ineligible to borrow. Both equity and debt instruments are considered “securities” for this purpose.
Any investment fund — or a portfolio company of such a fund — attempting to borrow must show that no foreign government holds 10% or more of the securities of the management company.
Over the last few months, the Federal Reserve has expanded the classes of eligible collateral to include static collateralized loan obligations, meaning CLOs with reinvestment features, and legacy commercial mortgage-backed securities issued before March 23, 2020.
The legacy commercial mortgage backed securities must be related to real property located in the United States or a US territory.
The Federal Reserve said that it may consider adding new asset classes as eligible collateral in the future.
All loans extended under TALF will be non-recourse, be generally pre-payable, and have terms of three years.
With some exceptions, the interest rate to borrow at the TALF window against asset-backed securities — like securitized solar commercial asset borrowing — with underlying credit exposures that do not have a government guarantee will be 125 basis points over the two-year overnight swap index rate for securities with a weighted average life less than two years or 125 basis points over the three-year overnight swap index rate for securities with a weighted average life of two years or greater.
The three-year overnight swap index rate is currently 0.29%. The spread would put the interest rate on borrowing at 1.54%. That compares to 3.35% rate that was on offer in the asset-backed securities market for commercial solar securitizations before COVID-19 shut the market down.
The Federal Reserve will assess a one-time administrative fee of 10 basis points of the loan amount on the settlement date.
The minimum amount a TALF borrower can borrow is $5 million. There is no maximum loan amount.
The Federal Reserve will not lend directly through the TALF window. Rather, the New York Federal Reserve Bank will make loans to a special-purpose vehicle that will lend, in turn, to private-sector borrowers, essentially the future revenue streams they offer as collateral into current cash. The Federal Reserve is prepared to lend up to $100 billion through the TALF window. The US Treasury will make a $10 billion equity investment in the special-purpose vehicle as a form of political buy-in by the government in case the special-purpose vehicle incurs losses on the loans.
The purpose of TALF is ensure there is enough liquidity in the asset-backed securities markets.
The Federal Reserve put out a term sheet to provide potential borrowers with details. In the first few versions of the term sheet, the Federal Reserve made no reference to renewable energy financial assets. Industry advocacy groups pressed to include consumer renewable energy financial assets in the list of eligible collateral, but have been unsuccessful. However, in a significant development, a Federal Reserve official confirmed by email in late May that the category of “equipment loans and leases” includes commercial solar loans and leases.
Asset-backed securities pledged as collateral to borrow through the TALF window must have been issued on or after March 23, 2020. Commercial mortgage-backed securities issued on or after March 23, 2020 will not be eligible
The securitization markets slowed in March due to the COVID-19 pandemic, but prime auto and equipment lease securitizations were becoming more common by late May with the expectation that the TALF program will be launched this summer, and the related spreads have tightened.
The Federal Reserve has said there will be approximately two TALF loan subscription dates per month, and each will be open to all eligible asset classes. The first loan subscription date for the TALF program will be June 17, 2020, and the first loan closing date will be June 25, 2020. The TALF window is set to close on September 30, 2020, meaning no further loans will be made after that date, unless the program is extended.