05/08/2009

TALF Distribution Raises Buyers' Hackles

As the Federal Reserve's Term Asset-Backed Securities Loan Facility produced its third monthly wave of bond offerings this week, some investors were grumbling that they never got a fair shot at the deals.

Instead, the buysiders claimed that underwriters arranged ahead of time to sell certain transactions to just a few large clients. They point to two issues in particular: a $209 million auto-loan securitization from Mitsubishi and a $5 billion credit-card deal from J.P. Morgan.

Bookrunner Bank of America placed the Mitsubishi securities with just two investors, while J.P. Morgan's underwriting arm effectively took its already-planned transaction off the table for other buyers after receiving a reverse inquiry from five big clients. There was also talk that BofA, J.P. Morgan and RBS Greenwich Capital carried out a $2.6 billion issue for Sallie Mae in a similar fashion (see Initial Pricings on Page 10).

In each case, market players said they initially caught wind of the sought-after deals a few weeks ago only to see them carried out amid an air of secrecy. Many said they never even had a chance to bid on the issues.

So who are the buyers? Sources point to BlackRock and Pimco as candidates, as they often do when naming big-time holders of asset-backed bonds - and valuable clients of underwriters. Those apparently getting shut out, meanwhile, include a number of hedge fund managers that set up vehicles in recent months specifically to trade TALF-eligible bonds.

Some of those firms are run by former bankers. They argue that by limiting distribution of the bonds, underwriters are actually making them less liquid and harder to value by suppressing potential for secondary-market trading. "The underwriters are missing the point of TALF by going about it this way. The success of a deal should always be judged by both its execution and the diversity of buyers it is distributed to," one of the investors said. "This trend toward secrecy within TALF is disturbing. It runs counter to the fact that it's a government-run program."

The disenfranchised buysiders are stopping just short of accusing the underwriters of wrongdoing. "This is a fine line they're walking. This is a government-sponsored securitization program . . . They should be very, very careful of any whiff of impropriety," another investor said.

Underwriters counter that they have always given big-time buyers the first shot at deals, regardless of whether the government is involved. They also maintain that most of this week's $13 billion-plus of TALF-qualifying issues were oversubscribed, which would support assertions that they tapped a wide-enough swath of investors.

The banks also point out that offerings from CNH Global, Honda and Volkswagen were expanded due to strong demand, further proving that enough investors are getting their shares. "It sounds like sour grapes to me. My question is: 'Where were these guys when we couldn't get a deal done a year ago?' " one underwriter said. "Now that the government is involved, they're all dying to get in."

Wachovia researcher John McElravey noted that from an issuer's point of view, widespread distribution isn't as important as the nature of the bondholders. "The issuer wants his bonds in the hands of investors who are interested in a long-term relationship," he said.

The buyers, meanwhile, say the apparent favoritism toward the biggest shops was also present in TALF's first two monthly funding rounds. But it wasn't as pronounced then, because overall participation from both investors and issuers was lighter.

This is hardly the first time market players have complained about matters relating to TALF, which seeks to bolster lending by offering government financing to buyers of asset-backed bonds. All along, there have been gripes about a lack of information from the government. Institutions that are creating vehicles to buy TALF-eligible deals and then repackage them into new securities are also miffed that a set of guidelines released by the Fed on April 28 didn't contain enough information for them to proceed - marking the second time they've faced such a disappointment.

The companies interested in setting up the vehicles include Barclays, BlackRock, Deutsche Bank, J.P. Morgan and Pimco.

Market players expressed further annoyance when the Fed said last week that commercial-mortgage bonds would become eligible for TALF loans beginning in June, but said nothing of residential-mortgage issues. Now many fear that home-loan issues will never make the cut, despite previous indications to the contrary from government officials. "This year is almost half over, and this whole TALF thing is supposed to go away Dec. 31," one investor lamented, referring to the program's planned expiration date.

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