09/10/2010

Secondary Sellers Locking In TALF Profits

A growing number of investors want to cash out of bonds they bought with financing from the Federal Reserve's Term Asset-Backed Securities Loan Facility.

The reason: The bondholders feel the securities have reached their maximum values, meaning now is the time to sell and repay their TALF debt. Anything left over would be theirs to keep.

Indeed, several bid lists of $150 million to $300 million that circulated over the past two weeks were heavy with TALF-eligible paper - with those issues commanding prices as high as 6 cents over par. And industry participants expect the pattern to continue in the coming weeks.

The Fed offered its first round of TALF financing in March 2009 in an attempt to stir up demand for asset-backed bonds, and thus increase production of those deals' underlying credits. The values of qualifying securities have increased substantially since then.

For example, one of the program's first issues was a three-year credit-card deal from Citigroup that priced at 175 bp over Libor. Now comparable bonds with top ratings are changing hands at 20-25 bp. But they've been around that level for a while, leaving many bondholders convinced that it's time to take profits. "There's a decent amount of price appreciation that you have had in there, and there's no real additional upside," one investment-bank researcher said.

The willingness of buyers to take on the paper, meanwhile, in part reflects a recent shortage of new issues (see article on Page 1). In something of a twist, supply dropped after the Fed offered its last round of TALF financing in March, creating technicals that have boosted the values of structured-finance instruments and fed the recent trades.

Many of the players now bidding on TALF paper are traditional asset-backed bond investors like pension systems and managers of money-market funds, as opposed to the hedge funds and other non-traditional buyers that initially took part in the program. On average, TALF loans financed 90% of each qualifying investment. But some of the market's most familiar buyers weren't able to participate, due to policies prohibiting the use of leverage.

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