04/17/2009

Issuance to Surge With TALF's Next Round

The third round of funding from the Federal Reserve's Term Asset-Backed Securities Loan Facility is shaping up as the largest yet.

As much as $10 billion of securitizations are in the works for the program's May installment, headlined by a $3.6 billion student-loan deal from Sallie Mae. Also in the queue are auto-loan issues of $1 billion from Toyota and $500 million from Honda, along with an auto-lease transaction from PHH Vehicle Management.

Among credit-card deals, J.P. Morgan is planning a $1 billion offering and GE Capital is working on an issue of undetermined size. Motorcycle manufacturer Harley-Davidson also intends to be in the market. So do Caterpillar and John Deere, following through on previously discussed plans.

Early indications are that the issues will price by May 7, with the Fed doling out TALF loans to buyers on or around May 14.

While the deal flow is still a far cry from what was the norm before the credit market tanked, it is robust by recent standards. Just $7.4 billion of TALF-eligible bonds priced in the program's opening round in March, followed by a mere $2.7 billion of offerings in April - representing the lion's share of U.S. asset-backed securities volume in recent months.

Those totals came as a disappointment to many industry players, who initially predicted that Round 1 alone would see $20 billion of production. But next month's tally suggests that interest in the program is still increasing.

There have also been signs of a broader market recovery. Only about half of TALF-eligible bonds have been purchased with loans from the program to date, indicating that some buyers are confident enough to gamble with their own money. A sprinkling of offerings conducted outside of TALF's scope also shows that certain issuers are able to access the market without government assistance. USAA, for example, priced an auto-loan deal this week without TALF support (see Intial Pricings on Page 6).

TALF's complexity may be partly to blame for the initiative's slow start. Buyers have to consent to a 40-page contract that has been revised every month, while issuers face mountains of related paperwork. Indeed, it was a paperwork matter that kept Sallie from completing its deal in time for the April round.

Now it's believed that most issuers are up to speed.

TALF is designed to revive demand for asset-backed bonds - and thus stimulate consumer and commercial lending - by extending Fed loans to buyers of such instruments. Projections are that the facility could eventually funnel $1 trillion of government money into the market.

The program initially caused spreads on new asset-backed bonds to tighten, demonstrating that it was serving its purpose. However, values appear to have leveled off with Round 2. A 1-year piece of a $750 million auto-loan securitization that World Omni priced April 7, for instance, fetched a spread of 170 bp over Libor. That's comparable to the 175 bp spread on similar securities sold by Nissan on March 19.

On the other hand, secondary-market prices have been improving since the Fed disclosed plans for TALF in November. This week, 3-year bonds from Nissan's issue that initially went for 300 bp over Libor were trading 80-100 bp tighter - effectively putting them over par. Similar-dated Ford securities that initially priced at 425 bp over swaps have tightened by about 50 bp.

Non-TALF-eligible issues have also tightened in secondary trading. Just this week, 3-year credit-card securities from J.P. Morgan saw their spreads contract by 40 bp, to 260 bp over Libor.

Market players expect spreads to tighten further on both new issues and secondary-market trades, but see no near-term prospects for a return to the ultra-narrow levels that prevailed prior to the credit crisis. That's partly due to a balancing of supply and demand, as hedge funds have been TALF's biggest borrowers - and they require double-digit returns. If spreads fall too far, "probably, the hedge funds go away," one source said.

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