TALF 2.0 term asset-backed securities loan facility 

Worth the lockup?

In an effort to revive credit markets and jump-start lending, the Federal Reserve announced in March 2020 a relaunch of its Term Asset-Backed Securities Loan Facility (TALF 2.0). TALF, first used in the aftermath of the global financial crisis of 2007–08, offers several unique incentives designed to encourage private investment in the AAA-rated portion of the structured credit market. To attract investors, the Fed will provide term lending of between 80% and 95% of the purchase price of eligible AAA-rated asset-backed securities (ABSs), commercial mortgage–backed securities (CMBSs) and collateralized loan obligations (CLOs) on a nonrecourse/non-mark-to-market basis. This translates to eligible securities bought through the TALF program being leveraged between five and 20 times. TALF loans also feature favorable pricing terms with rates dependent on the underlying security.

By providing these incentives and focusing mainly on securities backed by newly originated collateral, the Fed is striving to create demand in structured credit markets and support new issuance. This in turn provides financing to consumers and businesses in the U.S. economy. Although the TALF program is complex, it offers a potential opportunity for investors to earn attractive risk-adjusted returns. Note: TALF is a levered strategy, so investors that do not permit leveraged investing will need to amend their policies to take part in the program. The program is expected to be up and running by late May or early June.

In this paper, we will cover:

  • How it works
  • Underlying collateral
  • How to invest in TALF
  • Our recommendation

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*Mercer does not provide legal advice. You should contact your attorney before making any decisions with legal implications.

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