Growing demand, cheaper financing and wider participation are
expected to double the volume of asset-backed securities issuance in
the upcoming round of the Federal Reserve's TALF program in June.
May's $13.8 billion of ABS supply, largely financed with $10.6
billion of loans under the Fed's Term Asset-Backed Securities Loan
Facility, was the largest supply month this year and the strongest
since the TALF was launched in March.
As big as this month was, next month is going to be double that
amount, said Dan Castro, chief risk officer at Huxley Capital
Management in New York. The level of investor comfort with the program
is growing and there are still many deals in the pipeline that are
going to come in June, added Castro.
Concerns that the government could retroactively change the terms of
the deal if investors are seen as profiting too handsomely from it
combined with the complexity of the paperwork slowed the program out of
the starting block.
The Fed's TALF program was created to revive consumer lending and reopen the securitization market, nearly shut down by a credit crisis in 2008. As program details have been clarified and customer agreements ironed out, participation in the program has grown.
Over past months, documentation issues surrounding the TALF were
still a concern, but they have been worked out over time, said Mike
Kagawa, portfolio manager at Payden & Rygel in Los Angeles.
Investors and analysts said they were encouraged by the jump in
demand in May compared with April. Investors requested just $1.7
billion in April and $4.7 billion in March.
Kagawa said the program has clearly improved the tone in the secondary market for trading ABS securities.
If you go back six months ago, when the TALF program was initially
announced, there was no liquidity in the marketplace, there was no
trading going on, noted Kagawa.
Spreads on consumer ABS securities are now substantially tighter
than where they stood in November when the market was frozen in the
throws of a deep credit crisis.
Since the Fed's TALF program was announced in November, spreads on
consumer ABS have come in by a significant 250 to 350 basis points,
traders and analysts said.
The cheaper financing is seen luring more issuers into the market and boosting the level of ABS supply.
From an issuer perspective, spreads have narrowed and the cost of
funding has been reduced. That has contributed to larger supply of TALF
securities, said Warren Loui, a partner at law firm Mayer Brown LLP,
in Los Angeles, who recently represented an issuer during the TALF's
As the TALF program is expanded to include commercial
mortgage-backed securities (CMBS) in late June, both issuer and
investor participation is seen increasing.
With the new TALF, you'll find that a lot of the holders of these
commercial real estate loans that are ballooning and need to be
refinanced are going to want to refinance them into new TALF eligible
vehicles, said Ron D'Vari, Co-founder and Chief Executive Officer at
NewOak Capital in New York.
He noted real estate loans from 2004 and 1999 are hitting their
balloon periods and will need to be refinanced soon and expects an even
bigger refinance period in the coming year.
That means you're going to see a better response from the issuers
as far as wanting to tap into this because they are already long the
risks and they are better off rolling it, then killing it, said
D'Vari. So that would invigorate origination to some extent, he said.
From the investor point of view, he believes the reception will be even greater for CMBS.
People may not be as excited to lock in a certain return for three
years but will be a lot more excited to lock in five years because that
gives them more juice. It's a better investment opportunity, said
The Fed recently expanded its three-year loan term under TALF to a five-year term for CMBS.