The Federal Reserve jolted the U.S. asset-backed securities market back to life this year, after a crippling credit crisis threatened to shut it down, but despite a major recovery not many are convinced the market is prepared to stand on its own.
Through its emergency Term Asset-Backed Securities Loan Facility, known as TALF, the Fed has been largely credited for reviving consumer lending and reopening the securitization market, an essential funding tool for companies ranging from automakers to heavy equipment manufacturers.
Since the program's launch in March, $42 billion of TALF eligible ABS deals, largely supported by consumer auto loans, credit cards and student loans have been sold to investors. Demand for those securities has driven spread premiums substantially tighter and dramatically reduced costs for issuers.
TALF has made a big difference in opening up securitization and has begun to create useful price discovery, said Jason Kravitt, attorney and founder of law firm Mayer Brown.
ABS issuance climbed to $49.7 billion in the second quarter, versus the paltry $13 billion sold in the first quarter, led by TALF sales.
While the program has gone a long way toward unclogging the consumer ABS market and restoring securitization, many fear a looming December 31 expiration date may put that recovery in jeopardy.
The real challenge to TALF is whether it is working in the sense that if the program went away, the market would still function on its own. The jury is out on that, said Reed Auerbach, attorney and co-CEO of law firm McKee Nelson.
Through its program, the Fed makes loans available to investors for the purchase of ABS securities. This allows lenders to make new consumer loans, as older ones are removed from balance sheets, packaged and sold as securities.
Auerbach said it may very well take past the year-end deadline for the market to be comfortable on its own without the leverage provided by TALF.
There aren't enough investors with mandates to invest in ABS that aren't hedge funds and they're only going to invest if they can make their returns. The only way they can make those returns are on a highly levered basis, said Auerbach.
I'm just looking at the market and not getting a sense that it could survive anywhere near this way currently, without continued support from TALF, said Auerbach.
Dan Castro, chief risk officer at Huxley Capital Management in New York, said while the program has worked quite well, the biggest uncertainty facing TALF is the extension of the program.
If the Fed pulls the plug on the loan transferability on loans already out there that's going to be a significant issue, said Castro. Right now, you can refinance through year-end, if you sell the bond, borrow and take the loan, but after that, it won't work that way, so they need to make TALF loans transferable past the end of the year, he said.
The Fed recently extended a number of other emergency funding facilities through February 2010. The programs were established last year to extend lifelines to credit markets paralyzed by the financial crisis.
If they don't get this done in the next 60 days or so, its going to be a problem because people are not going to do deals if they think liquidity is going to be gone, said Castro.