01/23/2009

TALF Filling Empty Securitization Pipeline

Market insiders are predicting that the Federal Reserve's Term Asset-Backed Securities Loan Facility will spark up to $20 billion of new structured-finance offerings in its first month.

The expectations indicate that industry players are developing a clearer picture of how the $200 billion TALF program will stimulate the now-frozen securitization business after it kicks in next month. At that point, the Fed will begin allowing investors in triple-A-rated bonds backed by auto loans, credit-card receivables, student loans and small-business credits to post those holdings as collateral for low-cost government loans.

At least one issuer, auto lender World Omni, is already shopping an asset-backed bond offering that would appear to qualify for such exchanges. The $500 million deal is secured mostly by loans on Toyota cars sold by the automotive-dealership arm of World Omni's parent, JM Family Enterprises.

While World Omni hasn't explicitly promoted the issue as TALF-eligible, market players certainly see it that way - in part because the underlying assets are of a particularly high credit quality. The transaction also fits in with expectations that auto lenders, especially cash-starved Chrysler, GMAC, and Ford, will be the first to take advantage of TALF. Credit-card lenders would soon follow, with industry insiders identifying Bank of America, J.P. Morgan and Citigroup as candidates.

However, opinions differ on exactly how much deal flow TALF will create. The securitization co-heads at one investment bank said they think issuers will initially test TALF with about a dozen deals totaling roughly $1 billion each, with the intent of sampling investor demand for such offerings and sizing up the resulting funding costs. Overall, they see $10 billion to $20 billion of transactions flowing out of the initiative in its first 30 days.

Others think a slower start is likely. "I think that's a little on the high side," said Darcy Morrison, a senior asset-backed securities analyst at Wells Fargo unit Evergreen Investments in Charlotte.

Bond pricing will likely be a key factor in determining who is right, as will the Fed's yet-to-be disclosed loan terms. Issuers generally agree that the program will inject some much-needed liquidity into the securitization sector by drawing in investors, reinforcing a spread-tightening pattern that began to emerge over the past few weeks (see article on Page 4).

Indeed, buyers seem ready to jump on TALF-eligible bonds. "The reverse inquiries we're seeing from customers are tremendous," one trader said, referring to instances in which buysiders submit requests for products they would like to see offered.

The question is how much yields will fall as a result. One buysider noted that a $152 million tranche of 1-year securities from World Omni's offering is making the rounds at a suggested yield of 4.9%, compared to a 6.2% return on comparable paper on the secondary market.

The pricing seems to suggest that funding costs, which are still at unaffordably high levels for many issuers, will eventually settle in a more economical range as buysiders pick up deals for use in the exchange program. Unless that happens, however, many issuers that have avoided securitization for the past several months may continue to turn to other sources of funding. "It's the [current yields] that they're not comfortable with," one trader said.

With securitization failing to offer an acceptable cost of capital, growing numbers of issuers have recently opted to fund loans via deposits or a multitude of government programs that have already been put in place amid the credit crisis. The FDIC's Temporary Liquidity Guarantee Program, for instance, allows companies to issue 1-year unsecured bonds with government backing at relatively low yields.

As for the Fed's loan terms, issuers and investors are taking particular interest in a "haircut" the central bank will apply to bonds it accepts as loan collateral - that is, the discount it will apply to the securities when determining how much to lend. "We're just still waiting on details," said a spokeswoman at one of the U.S. automakers.

Regardless, issuers are prepared to move quickly if TALF proves a workable addition to their funding arsenal. "We're geared up [to issue] without even gearing up," said an executive at a credit-card lender. "We have a very flexible structure. What we need is a buyer. It's very easy to issue."

Meanwhile, the consensus is that TALF will have plenty of capacity to meet the asset-backed bond market's immediate needs, especially considering that issuance has been at a standstill for months. A source noted that even in the securitization industry's busiest years, $200 billion would have covered virtually all triple-A-rated bonds backed by auto loans, credit-card accounts, student loans and small-business loans.

But if the Fed expands TALF to cover mortgage-related transactions, the program may be depleted in short order. The idea behind the initiative is to encourage issuance of new asset-backed securities and, by extension, boost consumer lending.

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