The Term Asset-Backed Securities Loan Facility (TALF), will probably attract hedge funds as new buyers of ABS, according to a report from Standard & Poor's released today.

The rating agency said that even though the facility might fall short of its stated lending potential of $1 trillion as a result of certain restrictive terms and adverse market conditions.

The revival of the securitization markets, according to the agency, is essential to getting financial institutions lending again.

"If TALF is successful in attracting new investors, it could allow financial institutions to reduce their debt, freeing up their capital for new loans," said Tanya Azarchs, a S&P credit analyst, in the article called Will TALF Stabilize U.S. Financial Institutions By Revitalizing Securitization?

Azarchs added that, "And to the extent TALF helps restore confidence in risk taking and helps establish prices for assets, it would be beneficial to bank ratings. Still, we see TALF as just one part of the government's proposed fixes for securitization, and not a panacea for the banking system's woes."

On March 25, the Federal Reserve Bank of New York will distribute to investors its first round of three-year financing under the program to buy triple-A ABS backed by credit card, student loans, auto loans, and loans with Small Business Administration (SBA) guarantees.

The rating agency thinks that  financial institutions, specifically those that are cash-strapped auto finance lenders that usually have limited funding options other than ABS, stand to benefit. Banks, regardless of their need for more liquidity, might look to TALF as a means to diversify their funding.

The rating agency warned that TALF might face some challenges, however. Most major financial institutions have enough access to liquidity via other government support programs, including the Troubled Asset Relief Program (TARP), or depositors, at more favorable rates.

Azarchs also said that other issues with TALF, such as its probable lack of risk transfer of subordinated ABS tranches, those below the triple-A government-guaranteed level. Furthermore, banks' more prudent underwriting standards might make them reluctant to lend anew; and consumers have been more cautious on spending and debt, which could limit demand.

In the TALF terms, potential problem areas include transferability restrictions and maturity mismatches, Azarchs said.


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