The New York Federal Reserve posted late yesterday the list of bonds that were accepted
and rejected as collateral for the second round of legacy CMBS Term ABS Loan Facility (TALF).
This time, the New York Fed accepted 83 bonds, but rejected three. According to a report from Bank of America Merrill Lynch analysts, this round's rejection rate (~3.5%) was similar to the first round, where the Fed rejected one of the 36 bonds submitted (~2.8%).
BofA/Merrill analysts mentioned previously that the total amount of TALF loans requested for the
August subscription was about $2.3 billion.
This suggests, according to analysts, an average loan request of approximately $26.6 million per bond — there could be multiple loans requested for each bond. They noted that the average loan request per bond in the first round was $18.6 million.
BofA/Merrill Lynch analysts are still asking the Fed to release more information. The analysts are happy the Fed heeded the market’s request to disseminate the rejected and accepted collateral
to the market simultaneously, but the analysts also think that added information would be useful.
For instance, the sizes of the loans for the bonds accepted or rejected were not provided, analysts noted. There was also no data on whether the loans were made for a five- or three-year term. This could be important, analysts said, considering that the NY Fed has been warning the market that it could limit the amount of five-year financing at some point going forward.
The Fed also did not disclose the price it eventually used on these bonds. BofA/Merrill analysts think the prices used — which ultimately determines the available leverage — and how they are different from trade prices would be an important factor for CMBS investors. This month, prices have been a little volatile and a price change from the purchase price could impact the levered returns.
More significantly, analysts said, the prices used could have information regarding the Fed’s risk assessment of bonds and, ultimately, about which bonds they accept and reject. This is important, they said, as a rejected bond will, in all likelihood, trade wider.
Analysts would also like to see the N.Y. Fed talk about the basis for these bonds' rejection. The
general statement on why bonds were rejected was the same as in the prior months. Essentially, analysts noted that the Fed listed two possible general reasons for rejection in its statement.
Each rejected bond either did not meet the requirements of the TALF program or it was rejected based on the NY Fed's risk assessment. The Fed did not list bonds rejected for what analysts would describe as operational reasons, which include incomplete request form, inadequate sales confirm, borrower ineligibility or reasonableness of a secondary market price.
Last month, analysts "struggled with understanding' why the sole bond that was not accepted was rejected. Their best guess was that it was mainly based on structural complexity. Likewise, this month, analysts were surprised at certain rejected bonds. This is because, in their assessment, some of these were not necessarily worse, in terms of risk, compared with others that were accepted.