Details of the Public-Private Investment Program (PPIP) still leave a number of questions unanswered.
However, market sources said that while more clarity is still needed before buyers bite, if the funds get underway, this will potentially take a significant chunk of supply out of the market and effectively begin to rid it of the securitization overhang.
According to market reports, non-agency residential paper has already rallied 15% to 30% in higher pricing, PPIP is expected push prices even higher.
But the new details for PPIP offer no real reference on financing rates or information on exact haircuts or how it will develop leverage for the different asset classes eligible under the program.
“There is clearly going to be some price discovery in Non Agency space as the market figures out what the rules of the game are gonna be,” wrote Jefferies analyst Jesse Litvak. “But if you're telling me that a super senior MTA (or even better yet, a senior mezz) is gonna get the same terms as a prime hybrid bond......that is very interesting. It is my view that the lower $$ price paper is what could see a little pop in here. I also think the offerred side of the market is going to be up today (on everything), but I really think the bidside of the market is unch to maybe a marginally higher.”
So far the Treasury Deparment has pre-qualified nine firms to participate as fund managers but there remains concern among buysiders that some of these firms have little knowledge of the market and therefore are not appropriate candidates to manage the PPIP funds.
Each firm will have up to 12 weeks to raise at least $500 million in capital from private investors to be matched by the Federal Reserve. The funds can obtain leverage from the Treasury, from participating in the Term ABS Loan Facility (TALF) program and from private sources.
Initially modestly sized as a Treasury investment of up to $30 billion in equity and debt, the program can be “quickly expanded” should economic and financial conditions deteriorate. The government expects to close the first public-private investment fund in early August.
One source at an independent consulting firm with $200 billion in assets under management said that over the next two weeks, it would be performing due diligence on managers to see if they could move ahead and added that it was clear that some firms don’t belong in the program because they simply don’t know the assets.
Also a concern for the buyside is how politically motivated managers might be over the term of the PPIP. For example, if some funds aren’t being used as much as others, there could be political pressure to get the fund invested. The problem is that finding the buyers could be a challenge if pricing remains expensive.
“We could see a misalignment of interest of the givernment wants these assets to sell but not at the price that investors want to buy – who makes the decision?” a buysider said. “Investors like RMBS and CMBS but at cheaper levels than they are today. So the question remains do we buy this paper unlevered or through PPIP where its better structured but carries with it the political baggage?”
