Analysts: TALF will have limited impact on reviving CLO new issuance
CLOs will be among the newly eligible assets as eligible assets for the Federal Reserve’s expanded $2.3 trillion term asset lending facility (TALF) program.
But the benefits of TALF 2.0 liquidity may be initially limited for the stalled market for new-issue broadly syndicated collateralized loan obligations.
According to the Fed’s announcement last week, the new TALF program that will provide $100 billion in loans for the purchase of AAA-rated CLO securities by institutional investors. But bank research reports note the loans will only apply to purchases of CLO notes backed by newly issued leveraged loans – a category of assets with a currently narrow supply to feed into new-deal production.
“With key details still vague, we believe these programs are unlikely to provide direct relief to [broadly syndicated] CLOs,” wrote ,” according to a report issued Monday and authored by Wells Fargo analyst Dave Preston, who heads CLO and commercial ABS research. “The definition of ‘newly issued’ is unclear, but at face value, this provision appears to be severely limiting.”
TALF will not cover purchases of notes in deals consisting of existing loan assets managers have warehoused via banking credit facilities, nor those being constructed with secondary-market loan assets managers are buying at distressed prices to fill static “sprint and print” deals.
“If the collateral for the newly issued static CLOs must be newly issued loans, the program will likely have little effect on the estimated $15-$20 billion in existing warehouses,” according to another Wells report Preston wrote last week. “Also, the ‘print and sprint’ static CLOs currently in the market typically take advantage of the manager’s ability to purchase loans at a significant discount in the secondary market, which this program would exclude (based on first reading).”
JPMorgan’s high-yield and leveraged loan research team concurred “that the impact is likely to be limited, as static CLOs tend to be a small portion of annual new issuance.
“The financing cost may not also be attractive depending on the economics of the new issue transaction,” JPMorgan’s report added.
CLO senior notes were also included in the Fed’s expanded Primary Dealer Credit Facility last month. The TALF program set terms at 150 basis points over a 30-day benchmark set against the New York Fed’s daily Secured Overnight Financing Rate.
Despite the drivers lacking for new-market issuance, JPMorgan still believes that TALK will help “will improve market sentiment,” and also dissuade issuers from potentially liquidating warehouse lines for forthcoming deals with the market thaws.
Middle-market CLOs, which are made up primarily of smaller corporate loans funded through private direct-lending firms, could “theoretically” benefit from TALF more than BSL CLOs due to the higher interest rates on the loans. “However,” the report stated, “we expect that the lag on new issue loan origination may be even longer for private credit.”