After a steady stream of issuance in the consumer ABS market for the Term ABS Loan Facility's (TALF) past two subscription dates, industry pundits touted the success of the program for not only luring back investors but also bringing new issuers into the market. This includes a $940 auto loan ABS from first-time issuer GMAC's Ally Bank and a $703 million auto-lease deal for the August subscription date from Wheels, its second public U.S. securitization.
TALF's gaining traction in the ABS market is proven by the numbers. About $15 billion in ABS debt were sold for the Sept. 3 subscription date, marking the highest total since June, according to Bank of America data.
There were also some deal upsizings for TALF's deadline last Thursday. Bank of America's $3 billion offering backed by auto loans was increased in size from $2 billion, while Discover Financial Services' $1.3 billion credit card ABS called DCENT 2009-A2 was increased from $1 billion.
However, on the CMBS side, which gained admission to the program in May, issuance has largely been stalled by the lag time it has taken to ramp up new deals. This had market participants unsurprised by the Aug. 17 extension of the government program, past its December 2010 expiration date.
A number of deals are already in the works, said Patrick Sargent, partner at Andrews Kurth and president of the Commercial Mortgage Securities Association (CMSA), citing the announcement by both Developers Diversified Realty and Vornado Realty Trust of plans to ramp CMBS deals using TALF.
"Now issuers know they have almost another year to do this, which should add a boost to the market," he said. Although, the CMSA would have liked the program extended until December 2010 for CMBS instead of its June expiration date, he noted.
New CMBS issuance is likely to be primarily made up of single-issuer multi-property deals like REITs, Sargent said, citing fears of accumulation risk. "There is concern in the market over the risk that the valuations will change on these loans," he said. New origination looks to take the form of single-borrower deals, he said. In these transactions, issuers can, for instance, effectively fund a $500 million loan secured by properties across the U.S. and then, simultaneous to the close of that loan, immediately put it into a securitization where some investors will use the Treasury to buy the CMBS.
But, even with an extension, it won't be that easy to get the CMBS market back off the ground, according to market sources. There is still resistance on the origination side to make new loans to fund these conduits. And the market is not entirely comfortable with a single-borrower, single-asset CMBS structure that has tried to get through the market recently, industry sources said. The lack of origination will make it more difficult to jumpstart the CMBS market.
On its Web site, the New York Federal Reserve said that it reserves the right not to accept bonds even if they meet the rating criteria. The Fed said that it expects diversified portfolios including loan size, geography, property type and borrower sponsorship, among others, but will accept "non-diversified collateral" on a "case-by-case" basis.
Nevertheless, the hope is that with the extension, interest in CMBS will begin to grow outside of TALF-eligible CMBS, Sargent said. Loans that go into deals will have lower LTVs and higher debt service coverage. TALF is a way to bring people back into the market, although investors may not want the constraints imposed by TALF, and it is also not a permanent financing mechanism, he noted.
There is also the possibility that the Fed could consider re-REMICs for TALF funding, which would tighten spreads, although it wouldn't help the new origination market, a market source said.
Seeking ABS Interest Elsewhere
On the consumer ABS side, the fact that a true ABS market has not launched outside the program is the reason behind the extension of the TALF deadline until March 2010, market participants agreed. "Until there becomes a robust market outside of TALF, it will be hard to not have that program," said Jerry Marlatt, senior of counsel at Morrison & Foerster.
But some market pundits noted that an extension might not have been necessary for all segments of the consumer ABS space, especially where investors have noticed opportunity outside of the government program.
Indeed, investors are beginning to look outside of TALF for investment opportunities, as evidenced by the narrowing spreads between TALF-eligible and composite spreads as well as the amount of real money investors in recent TALF-eligible transactions from AmeriCredit and Sallie Mae, Standard & Poor's said in a recent report.
On the auto side, deals are having an easier time getting done with or without TALF, market participants agreed.
Secondary market spreads for triple-A auto ABS tightened during July and into the first week of August. Two-year triple-A autos, which were trading at 100 basis points at the end of July, had tightened to 95 basis points by Aug. 6; three-year autos, which were at 150 basis points at the end of July, were trading at 120 basis points in mid-August, Deutsche Bank Securities analysts said.
This year, rating agencies have increased their credit enhancement requirements for most transactions, and investors are looking at their credit performance expectations in the context of this increased enhancement, said Katie Reeves, director of ABS research at Deutsche Bank. Certain companies, such as Nissan Motor Co., have been able to get deals done in and outside of TALF.
July saw $9.9 billion of new auto deals, $9.5 billion of which were TALF-eligible, according to a report from Deutsche Bank .
Back from Summer Break
Although most new issuance is TALF-eligible, not all of that is being bought exclusively by TALF buyers. As spreads have come in, new money accounts that may have initially been lured in by the prospects of TALF are likely finding the market less compelling than at the outset, Reeves said. She noted that there has been some level of frustration on the part of traditional cash buyers, who may not have established TALF funds and have not always been able to get the allocations that they want in these deals.
Many U.S. pension funds have now returned to the ABS market to purchase TALF-eligible ABS to increase their returns and diversify their asset base, either by directly purchasing TALF-eligible bonds or by moving capital to buy-side vehicles like funds set up by asset managers including PIMCO, BlackRock or Morgan Stanley, S&P analysts said in the report.
The oversubscription of some TALF deals has resulted in increased demand for trading non-TALF deals in the secondary market, which, in turn, has led to higher prices and lower yields. These tightened spreads have made securitization a more desirable capital source for issuers, prompting an increase in ABS issuance, S&P analysts said.
When the Money Runs Out
Although fears have been temporarily allayed by the program's extension, market participants still express concern over how the ABS market will fare once government intervention ends. Spread tightening over the past few months and a flurry of new deal flow over the summer have largely been a result of the TALF, several industry participants agreed.
In addition, new issuance has begun to pick up in previously stalled segments of the ABS market. TALF-related issuance in August moved away from retail, auto and bank credit card ABS, a recent report from Barclays Capital pointed out, turning instead to floorplan, fleet lease and retail credit card ABS.
By mid-August, 11 transactions, including five credit card, three floorplan, two student loan and one fleet lease deal, had priced, totaling $8.2 billion in TALF-eligible issuance, the Barclays report said.
Among the deals that priced in TALF's August round included GE Dealer Floorplan Master Note Trust, GEDFT 2009-1, which was a $500 million facility, Barclays said. CNH Capital America also priced a $583.3 dealer floorplan-backed deal, CNH Wholesale Master Note Trust or CNHMT 2009-1.
On the credit card side, there was $3 billion of new card issuance in the first week of August - the $525 million TALF-eligible First National Master Note Trust 2009-3, which was upsized from an original amount of $500 million; the $1.7 billion TALF-eligible GE Capital Credit Card Master Note Trust 2009-2, which was 2.5 times oversubscribed and upsized from an original amount of $1.25 billion; and three offerings from World Financial Network Credit Card Master Trust - series 2009-B, 2009-C and 2009-D - Deutsche analysts said.
Total issuance for the credit card sector was at $30.2 billion in mid-August, of which about 73% was TALF-eligible, the analysts noted.
Not All Trouble Averted
Furthermore, the renewed stream of liquidity in the markets from the TALF extension does not guarantee that all segments of the ABS market will continue to grow. In fact, underlying industry fundamentals alone may cause certain sectors of the new-issue ABS market not to expand.
Although credit card issuance is expected to continue, accounting issues in the credit card space may impact new deal flow. On the FFELP student loan side, which used to be the bulk of new student loan ABS issuance, origination may see a natural stall as the market shifts to direct lending, Reeves pointed out.
Fed Boosts MBS
TALF also does not currently include RMBS and, as of press time, there was no public discussion of adding the sector to the government program.
However, RMBS appears to be benefitting from its own program, which has also spurned concern over how long the support will last. It is also the reason why market participants do not expect TALF to be extended to this asset class.
Indeed, the RMBS market has seen a boost in pricing by way of the Public-Private Investment Program (PPIP). When the program was announced as a concept in late March, pricing on non-agency MBS started heading up, according to Art Frank, director and head of MBS research at Deutsche Bank. In mid-August, the Alt-A hybrid benchmark was at 58 cents on the dollar from 46 cents in late March when the market bottomed out, Frank said, noting the 12-point jump. Prime fixed-rate pass-throughs had risen to 83 cents on the dollar from 62.5 cents at their bottom. Alt-A senior fixed-rate passthroughs were at 74 cents on the dollar from 48 cents, and option ARMs were at 46 cents from 35 cents on the dollar.
While pricing in the market has also been helped by the re-REMIC bid and less pessimism about the U.S. housing market, resulting in an improvement in the stock market, PPIP was indeed a catalyst to this change, Frank said.
Market participants hope the boost will ease investors back into the market when government supports begins to dwindle.
Following the FDIC
Although, as of press time, there was no mention of if and how the TALF program might be wound down as it reaches its expiration dates, several market participants agreed that it would be a good idea to slowly eliminate the facility.
There should be a gradual phasing out of TALF, Marlatt said. Just like the Federal Deposit Insurance Corp. (FDIC) told banks that they would need to wean themselves off of the Temporary Liquidity Guarantee Program (TLGP), which it said it hopes to wind down by October, the Federal Reserve will have to do something similar with TALF, Marlatt said.
"The Fed could extend TALF for a quarter and then change the terms," he said. "For instance, TALF loans in 2010 could be for a shorter period of time but allow you to have longer term ABS backing it," he said, which will make it more attractive for borrowers to take on more risk outside of TALF-eligible deals.
This should begin to create a marketplace for TALF-quality deals, he added.
The market has already heard talk of an increase in TALF haircuts. "An increase in the fee and other terms, such as required haircuts, would phase the program out more gradually and would make the shift less disruptive," Deutsche's Reeves said.
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