After a nearly four-month drought, securitization of credit card and other consumer receivables is poised for a revival - with a different group of buyers.
The Term Asset-Backed Securities Loan Facility (TALF), which the Federal Reserve Board will launch next month, will seek hedge funds and other leverage-hungry investors to fill the market void left by traditional buyers.
Analysts said the strategy is likely to spur significant issuance. For card lenders, that means a vital source of funding will become available again; roughly a third of receivables currently outstanding were financed through securitization.
"There's a lot of cash on the sidelines right now," said Daniel Castro, the chief risk officer at Huxley Capital Management.
Analysts at Barclays investment bank said in a report published Monday that $55 billion to $60 billion of credit card-backed securities will be issued this year - roughly the same amount as last year.
There are hedge funds "who hadn't really participated a lot in the [ABS] market in the past but view this as a good opportunity," said Jeffrey Taft, a partner in Washington with Mayer Brown. "I think the Fed would say, 'Any investor is a good investor.' "
It is unclear whether demand from the new group of investors will be enough to replace what was lost. The deteriorating quality of card debt could discourage some hedge funds, which have had their own problems lately.
To make sure they bite, the Fed will have to offer attractive financial terms - such as an equity requirement, or "haircut," that is not too steep, analysts said.
And rather than securitizing through the facility, lenders might prefer to raise funds through other government programs, like the guarantees on bank debt offered by the Federal Deposit Insurance Corp. (FDIC).
In November, the Fed simultaneously announced the creation of the facility and a program in which it would buy $600 billion of MBS and debt issued by the government-sponsored enterprises.
That program has had an immediate and dramatic effect in driving down mortgage spreads - and thus the rates for new loans - as investors anticipated new demand. (The Fed bought more than $10.2 billion of agency mortgage bonds in its first three days of such purchases this month.)
Through the facility, the Fed will offer investors loans to purchase newly issued, triple-A ABS. The loans would be nonrecourse; if the investors defaulted, the Fed would be able to seize only the collateral, putting it at risk if the bonds drop in value.
For most asset classes, the bonds would have to be backed by recently originated loans. The idea behind that requirement is to spur lending to consumers, as well as to small businesses.
But for card receivables, the aim is not so much to expand the availability of credit as to keep it from further contracting. The only credit card-backed securities eligible for financing under the facility will be those issued to refinance bonds maturing this year. About $64.9 billion of such securities are scheduled to mature this year, according to Barclays.
The Treasury Department would provide $20 billion of loss protection to the Fed using Troubled Asset Relief Program (TARP) funds. The Fed would further protect itself by requiring the buyers to put some money down. Taft said that the size of that haircut - which the Fed has yet to specify - will a critical issue for the program.
"They want to spur people to take advantage of it, but they also don't really want to take a terrible loss," he said.
Credit card securitization held up pretty well for most of the financial crisis but seized up in October.
The difference in yield between a triple-A, three-year credit card bond and the one-month London interbank offered rate surged from the low double digits a year earlier to a high of 650 basis points last month. The card bond issuance market was bone-dry in the fourth quarter.
Traditional asset-backed securities investors have been kept on the sidelines by "the fear that they buy something today, and then spreads widen next week - the mark-to-market risk," said Katie Reeves, director of asset-backed research at Deutsche Bank Securities. "So we need to see a floor on that somehow, an end to this cycle of spread widening."
Last week's tightening of spreads on all asset-backed securities could reflect a sense among investors that the bonds have hit a bottom, Reeves said.
The new facility would not lure back "real money" investors, such as insurance companies, that do not use leverage and have been a mainstay of the market, she said. Nevertheless, "getting hedge funds involved does help" compensate for the withdrawal from the market by collapsed structured investment vehicles and the GSEs. "The hedge fund money is at least a new source of liquidity," Reeves said.
The Barclays analysts and other observers said the other government programs could siphon off some securitization activity.
"Even though the TALF is going to lower the cost for investors ... it might still be better for some issuers to not securitize and to use these other programs as long as they're available, because it appears those other sources of funding might be cheaper," Castro said.
Donald Fandetti, an equity analyst at Citigroup, said that with so much unsettled, it might be wise for companies to continue to look for new approaches to funding.
"You might want to seek more of a long-term, direct-to-consumer bank strategy," he said.
(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.