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).