07/10/2009

TALF Investments Rally on Secondary Market

Secondary-market prices are soaring for bonds that qualify for buyer financing via the Federal Reserve's Term Asset-Backed Securities Loan Facility.

The movements set the securities apart from non-eligible paper, whose values have remained unchanged or have even moved in the opposite direction. For example: Three-year senior auto-loan bonds that Honda priced at 250 bp over swaps in a May 5 TALF transaction were changing hands this week at 125 bp over swaps - with much of that differential emerging in recent days.

By comparison, triple-A-rated auto-loan bonds with similar maturities but without TALF eligibility were trading this week at 225 bp over swaps, unchanged from the previous week.

The reason for the so-called tiering: There has been more demand for recent TALF bonds than issuers could accommodate, forcing investors to seek supply on the secondary market. One buysider noted that in the latest monthly round of TALF issues, which priced on or just before July 7, a $725 million auto-loan deal from AmeriCredit was 17 times oversubscribed.

"If the oversubscription continues, you'd fundamentally expect that spreads will continue to tighten" for TALF-eligible paper, another trader said.

Investors are eager to snap up TALF bonds for several reasons. First, the non-recourse nature of the Fed loans acts as an added assurance for bondholders. It also helps that such financing is available, as most other sources of leverage have vanished. And because the underlying collateral is relatively new and designed to meet Fed standards, the bonds are seen as less risky than securities issued under the looser lending standards that prevailed prior to the credit crisis.

That also explains growing demand for TALF paper from "cash" buyers - those who don't intend to tap the Fed for financing. Some $11.8 billion of bonds priced in TALF's July round, but investors borrowed only $5.4 billion from the Fed to finance those purchases. A month earlier, investors tapped the Fed for $11.5 billion to purchase $16.5 billion of TALF-eligible product.

"The cash demand is very strong," said one trader who expects demand will continue to grow.

Of course, there's a flip side to the strengthening market - less-attractive yields. Some investors were bemoaning the tightening trend this week.

"You put up your [TALF] order, get a smaller allocation, and the price has been raised," one said.

Another buysider noted that every TALF deal issued this week priced at tighter spreads than initially expected, and spreads on most issues were narrower than in previous rounds. Honda, for instance, priced a batch of one-year senior auto-loan paper on July 7 at 75 bp over EDSF, 45 bp tighter than comparable securities sold May 5.

On the secondary market for TALF-eligible issues, one-year auto-lease paper that BMW priced June 2 at 120 bp over EDSF - a cash equivalent of 99 cents on the dollar - traded this week at $1.14.

Three-year J.P. Morgan credit-card bonds that priced May 5 at 150 bp over Libor are now going for a spread of 120 bp. By comparison, non-TALF credit-card bonds with three-year maturities were selling this week at 135 bp over Libor - 15 bp wider than last week.

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