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Weekly Wrap: TALF funds largely absent from ABS dealmaking

Remember the Term Asset-Backed Securities Loan Facility? The ballyhooed Federal Reserve rescue plan rushed out in March,tasked with preserving new-deal issuance of structured-finance and asset-backed securities as the COVID-19 pandemic spread into the U.S.?

If it slipped your mind, you’re not alone.

On Monday, the Federal Reserve Board of New York issued its latest monthly report to Congress detailing the ongoing utilization levels of TALF, along with other Fed lending facilities like the Primary Dealer Credit Facility and the Main Street Lending Program.

Through Aug. 31, the $100 billion TALF program had been tapped to the tune of only $2.6 billion.

Originally touted as a “powerful incentive” for issuers to sponsor deals despite market worries over the economic impact of coronavirus, TALF has since been relegated as a break-glass-for-emergency backup for an ABS market that has held steady in securities volume and investor demand through the third quarter.

Simply stated, investors have found TALF offering rates uneconomical in comparison to standard market pricing for new-issue ABS volume, which picked up in the third-quarter despite the scant involvement of TALF money.

“The Fed was absolutely brilliant in just announcing the program, and being super thoughtful about how it would essentially become a backstop for spread levels,” Christopher Long, president and chief executive officer of Palmer Square Capital Management. Palmer Square has utilized TALF via its own opportunity funds, but so far only for trading legacy commercial-mortgage backed securities.

The spreadsheet accompanying the Fed’s report lists 193 three-year loans granted by the Fed, on a non-recourse basis through special-purpose vehicles, to investors for the purchase of AAA-rated asset-backed securities.

The vast majority of TALF loans were for the purchase of U.S. Small Business Administration loan pools and secondary-market CMBS bonds (new-issue non-agency CMBS bonds issued after March 23 are ineligible).

Only a handful of loans TALF financed included investments in new-issue refinanced student loan pools (SoFi and Navient Corp.), but none for auto, credit-card or equipment finance ABS nor static collateralized loan obligations.

(The Fed had revised its eligibility rules in April to include CLOs after the leveraged-loan industry raised objections on their initial exclusion).

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The Ford Motor Co. logo stands at the Sutton Ford Lincoln car dealership in Matteson, Illinois, U.S., on Monday, April 3, 2017. Ward's Automotive Group released U.S. monthly total and domestic auto sales figures on April 3. Photographer: Daniel Acker/Bloomberg
Ford returns with floorplan ABS
Dealer inventory financing by automove captive-finance lenders broke a long dry spell this week, when GM Financial priced a $620 million floorplan ABS transaction.

The low-rate environment allowed the General Motors affiliate (through its GMF Floorplan Owner Revolving Trust) to close with a fixed-rate senior-note coupon of 0.68% on a senior-note tranche, compared to 2.9% on the second of its two floorplan deals from 2019.

Now, it's Ford's turn.

Ford Motor Credit will be issuing two series of notes from its Ford Credit Floorplan Master Owner Trust totaling $1.3 billion, backed by the monthly receivables from the accounts financing inventories of mostly new vehicles for franchised Ford dealerships in the U.S.

Like GM and other OEM-affiliated lenders, Ford Credit had a decline in monthly payment rates from dealers struggling in the opening months of the coronavirus pandemic. But MPRs have since "normalized," according to a presale report from Fitch Ratings. The MPRs, in fact, hit a record high of 62.3% for the master trust in July.

"Yields have recently declined with movements in the prie rate, although spreads ahve remained relatively strong," Fitch noted.

Unlike other recent deals, Ford plans to market two subordinate tranches of notes (Class C and Class D, together making up 7% of the total pool of note balances) to investors.
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Student housing under distress
As fall classes at universities are opening (virtual or otherwise), student-housing properties with mortgage-backed securities are coming under increased financial pressure on forbearance requests, according to a report from Trepp researcher Catherine Liu.

Although student-housing encompasses just over 10% of the multifamily housing types in Fannie Mae, Freddie Mac and CMBS portfolios, they have more than triple the amount of forbearance requests, percentage-wise.

"[Nearly 6% of the total $27.1 billion in student housing Fannie, Freddie, and CMBS loans were flagged for needing forbearances, which compares to a 2.06% request rate for all other multifamily subtypes," wrote Liu. "Student housing accounted for about 10.7% of the total forbearance request volume despite comprising only 4% of the total $680 billion multifamily debt universe from these lending sources."

Trepp identified nearly $1.6 billion across 101 properties as having requested or been granted COVID-19-related financial assistance. Among the largest loans were an $82.6 million loan for The View at Montgomery complex near Temple University in Philadelphia and the $43 million Wolf Greek Apartments serving students at North Carolina State University in Raleigh.

The outsized forbearance requests fall in line with perceived added risks from the private construction of off-campus student housing, Liu wrote. The student-housing CMBS market "had already been underperforming with notably higher delinquency and special servicing rates relative to the broader multifamily segment," she wrote. "Factors such as high turnover, susceptibility to overbuilding and local market competition, higher maintenance needs, and short leasing cycles have contributed to the perceived riskiness of the sector."

The delinquency rate student student-housing CMBS reached a post-crisis high of 13.66% on July 1, compared to just 2.19% for the remaining multifamily categories.
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Closeup image of old blue credit card.
Credit card ABS metrics improving
Fitch Ratings this week noted that despite oingoing challenges to borrowers from the COVID-19 pandemic, U.S. prime and retail credit-card ABS performance remains stable.

Fitch noted that outstanding credit-card porfolios of credit-card and private-label charge card issuers "experienced slightly higher monthly payment rates (MPR) and lower chargeoffs as of the August 2020 distribution date."

"This is still in part attributed to the augmented unemployment benefits through July, as well as issuers who have offered deferral programs to shield portfolio losses from consumers that are unable to make full payments," the report stated. "Despite continued elevated unemployment levels historically, there has been a low level of re-enrol;ment or extensions into these programs."

Retail credit-card charge-offs tracked by Fitch improved for a fourth consecutive month, dropping 16 basis points to 6.09% in August. The charge-off rate is also 53 basis points lower than the 6.94% rate in August 2019. Late-state delinquencies were down 30 basis points month-over-month to 1.78% – the first time delinquenices have dipped below 2% since Fitch began tracking performance in its retail card index.

Fitch's prime credit-card chargeoff index, which tracks over $84.1 billion in credit-card ABS,also improved for a fourth-straight month, dropping to 2.88% last month which matches the 2020 low experienced in February.
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U.S. Vice President Joseph "Joe" Biden speaks during an interview in Singapore, on Saturday, July 27, 2013. Biden said the U.S. is pushing China to negotiate quickly with Southeast Asian nations on a code of conduct for the South China Sea, an area that's a "major, major, major highway of commerce." Photographer: Munshi Ahmed/Bloomberg *** Local Caption *** Joe Biden
CLO industry news
If Biden wins
Wells Fargo Securities this week pondered the potential impact for the leveraged-loan and CLO industries, should a Democratic Party sweep of the White House and Congress takes place.

One of the fundamental expectations is a rush to close deals before November, as investors begin to ponder the potentially “large difference between the status quo and a change in the executive branch.”

“We expect heavy CLO supply in September and October as managers look to issue prior to the U.S. election,” according to the report issued Wednesday. “We expect risk appetites to wane as November nears.”

If vice president Joe Biden wins the presidential election and his Democratic Party takes both houses of Congress in November's elections, Wells projects the impact for 2021 and beyond will be:

· increased regulatory scrutiny on leveraged loans and CLOs, including the re-application of leveraged lending guidance that prompted banks to shun deals with high levels (6x and above) of leverage.
· Potential changes to the securitization rating process
· Reversing the Trump administration’s Volcker Rule revisions
· Lower loan supply and tighter loan spreads, owing to better loan fundamentals
· Less CLO demand from regulated institutions
· CLO supply concentrated in larger issuers
· CLOs may not gain bond buckets

Leveraged loans – ongoing recovery
Loan market prices and yields continued their recovery from the brief distressed period from the opening stages of the coronavirus outbreak.

According to JPMorgan leveraged finance research, closing leveraged loan prices on the bank's leveraged loan index improved Thursday to an average $94.99 (per $100 par). Loan yields closed Thursday at 5.78%, compared to the 5.81% on February 21, and three-year spreads closing at 555 basis points. "Returns for loans have now outpaced bonds in four of the last five weeks...after underperming bonds in each of the last eight weeks preceding this stretch.

In March, the volume of loans trading under $90 zoomed from $130 billion to $783 billion in a one month period; that has since leveled off to $221.9 billion, as the market for loan issuance improved in August with more than $77 billion in new supply, according to JPMorgan.

Michael Marzouk, the managing director and portfolio manager for bank loan strategy at Pacific Asset Management, said in a recent interview that while loans in the gaming and hotel sector have yet to bounce back, “there's been other sectors that have been quite resilient, whether it's packaging or software businesses."

"Loans have lagged this year,” he added. “But I think it looks like it might be the time for loans to shine."
On the Horizon
Issuers filing ABS-15G registrations for new-issue U.S. ABS for the week of Sept. 4-Sept. 10 (per Finsight.com):

Exeter Automobile Receivables Trust 2020-3, Exeter Finance (Subprime auto ABS)
Mercedes-Benz Auto Lease Trust 2020-B, Daimler AG (Auto lease ABS)
Regional Management Issuance Trust 2020-1, Regional Management (Esoteric ABS/Consumer loans)
CFMT 2020-ABS, SHAP 2018-1 LLC (Reverse mortgage MBS)
JPMorgan Mortgage Trust 2020-7, JPMorgan Acceptance Corp. II (RMBS)
Citibank, N.A., London Branch EMEA International Residential Finance (RMBS)
Santander Drive Auto Receivables Trust 2020-3, Santander Consumer USA (Subprime auto ABS)
Wells Fargo Mortgage Backed Securities 2020-RR1 Trust, Wells Fargo (RMBS)
Liberty Lending 2020-1, Liberty Lending (Esoteric/Consumer loans)
Volvo Financial Equipment Trust 2020-1, Volvo Financial Services (Esoteric/Equipment)
BX Commercial Mortgage Trust 2020-VKNG, Blackstone (CMBS)
AMSR 2020-SFR4, Amherst Holdings (RMBS/Single-family rental)
DriveTime Auto Owner Trust (DTAOT) 2020-3, DriveTime Automotive Group (Subprime auto ABS)
Nationstar HECM Loan Trust 2020-1, Nationstar (RMBS)
VBTOW 2020-1, Vertical Bridge Holdings (Esoteric/Tower lease)
FHFM 2020-M061 Trust, Freddie Mac (RMBS)
OBX 2020-EXP3 Trust, Onslow Bay Funding (RMBS)
CoreVest American Finance 2020-3 Trust, CoreVest (CMBS)

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