Term ABS Loan Facility (TALF) funding's impact on the securitization market is dissipating, according to Wells Fargo analysts.
They noted that February loan subscriptions were at their lowest level since the program started in March 2009, with only $987 million.
Floorplan ABS was ahead with $440 million of loans, although this amount was merely 19% of
the $2.3 billion of floorplan ABS issued in the past two weeks.
If the floorplan sector really needed TALF to survive, analysts would have expected a bigger proportion of Fed funding. An added $205 million of loans backed by credit card ABS comprised the next biggest segment of TALF loans. ABS issuance might still be focused around the upcoming March subscription date, Wells Fargo analysts said.
Regardless, analysts would anticipate even more deals done away from the first week of March as
issuance patterns start to normalize, they said. There was considerable issuance in late January just before the American Securitization Forum conference that were non-TALF eligible.
TALF's end, according to analysts, will probably have a limited impact on consumer ABS. Spreads could possibly gap out modestly in certain market segments as incremental demand is withdrawn.
However, TALF's removal should be just a "minor annoyance," analysts said. It hardly compares with the potential impact of the different sovereign risks that are now brewing, the overhang in the commercial real estate and CMBS markets, or the resolution of troubled residential real estate and RMBS, they said.
Wells Fargo analysts said that after speaking with a significant number of cash ABS investors in recent weeks, they think that the extent of prospective demand for ABS is underestimated. They believe this demand is there for several reasons.
First, analysts emphasized that ABS still fits a need in fixed-income portfolios at the shorter end of the maturity spectrum. Most ABS deals have an initial average life of two- to five-years. Other fixed-income sectors, including corporate or municipal bonds, usually offer opportunities further out the curve. In short, they said that a notable number of investors still have cash for structured products markets.
Second, ABS provides attractive spreads, analysts said, compared with Treasury and agency securities with similar maturities for the additional credit risk. Underwriting is tighter and credit enhancement has also risen.
Third, issuance from other parts of the securitization markets are still constrained. Pent-up
demand could shift to consumer ABS. For instance, the new -issue CMBS market is at a virtual
standstill, and nonagency RMBS is mostly nonexistent. Added to this, analysts said that the large commercial banks with credit card programs would probably issue less ABS now that those
programs must be consolidated on balance sheet.
The Federal Reserve should feel comfortable taking away the support for consumer ABS on schedule at the end of March.
If the market needs further support after that, which analysts do not believe would be the case, then the infrastructure has already been put in place.