Some observers expect issuance of credit card-backed bonds to pick up substantially in the coming months, though lenders are weighing the costs of alternative sources of funding.
The Federal Reserve Board extended $2.8 billion of loans last month to fund the purchase of securities in a $3 billion offering by Citigroup Inc. in the first round of financing under the Term Asset-Backed Securities Loan Facility (TALF), a program initially designed to ease the flow of consumer credit. The next subscription date for TALF loans will be April 7.
"Especially the big players that have a need for lots and lots of cash to support their credit card issuance will continue to take advantage of TALF," said Joseph Suh, a partner in the New York office of Schulte Roth & Zabel.
It will not "be their sole source of funding," he said, "but it's going to be one of the sources they use."
The volume of future TALF subscriptions is likely to top the first round's, he said. During that round, participants were still feeling out the process and scrambling to achieve acceptable agreements with the primary dealers that are acting as intermediaries for the Fed.
Once the agreements are in place, "these deals are going to get done and they're going to get done very quickly," Suh said.
During a conference call last month on Discover Financial Services' first fiscal quarter, which ended Feb. 28, its chief financial officer, Roy Guthrie, said the company might seek to sell bonds through TALF simply to demonstrate the ability to do so, even if the pricing is higher than it would like.
Guthrie said his company was pleased to hear that the Citigroup deal priced at 175 basis points above the one-month London interbank offered rate, which he described as "closer to the ZIP code" Discover wants but still 50 basis points to 70 basis points too high.
Discover was able to collect deposits with a weighted average maturity of longer than 30 months and fixed interest rates of under 3% in its most recent quarter, he said. He cited the prospect for even lower deposit costs because of the Fed's effort to reduce longer-term rates. "Talf has to compete with that," he said.
With Libor currently around 50 basis points, the yield on the Citi notes is around 2.25%, but Guthrie noted the risk of inflation for floating-rate instruments.
Suh said that some of his clients felt the first deals would be more expensive for issuers than subsequent ones because of light initial investor participation, but that some investors had been seeking higher returns than were presented in the first round, suggesting that spreads would not fall.
In a report published last week, Joseph Astorina, an ABS analyst with Barclays' investment bank, wrote that the Citi offering helped squeeze secondary market spreads 25 to 50 basis points tighter.
For three-year, triple-A bonds, yield spreads over the one-month Libor fell 25 basis points for the second consecutive week, to 350 as of Thursday, according to Barclays. The spread was 650 at the end of last year.
Astorina wrote that "likely issuers comprise companies that do not have large deposit bases, including" Discover and American Express Co.
About $3 billion of credit card-backed bonds are due to mature in April and about $10 billion in May, according to Barclays.
TALF was originally intended to support new consumer lending and, for credit cards, was limited to offerings used to refinance maturing securities.
But the program is being expanded and enlisted to provide leverage to investors as a part of the Obama administration's plan to lift problem assets from bank balance sheets