The month of March saw ABS activity spurred by the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF).
Issuers Ford Motor Credit Co., Nissan Motor Acceptance Corp. and Huntington National Bank came to market with TALF-eligible auto deals while Citigroup also jumped on the TALF bandwagon with a credit card offering, Citibank Card Issuance Trust 2009-A1.
The once moribund new issuance market came alive again, with securitization market players hopeful that these deals signal that TALF has accomplished what the government was hoping for, which is to help the plight of the credit markets, consumers and small businesses by facilitating ABS issuance.
However, some remained skeptical about the program's popularity given the number of deals that came through for the program's March subscription date.
A source from a dealer said it is unreasonable to expect a flurry of deals for TALF's March subscription date. He expects more transactions to come forth in April, which gives issuers a more reasonable time frame. "Why do healthy companies that don't need the funding right away rush to come to market with a TALF-eligible deal?" asked the source.
Market expectations might have been too much regarding TALF's initial draw. "There were some questions in interpreting the terms of TALF that the market had to sort through," Warren Loui, a partner at Mayer Brown said. "But I've seen a willingness by market participants ranging from the government, issuers, and underwriters to try to come up with sensible solutions."
The government too is making sure that TALF's reach is as expansive as possible. Last week the Treasury expanded TALF to cover non-recourse loans to eligible borrowers to fund their purchases of legacy securitization assets. These collateral include RMBS originally rated triple-A and CMBS and ABS that are currently rated triple-A.
The Federal Reserve has been quick to come out with TALF Frequently Asked Questions (FAQs) and has not hesitated to clarify terms of the program to cater to the securitization market's needs.
Earlier in March, for instance, the Federal Reserve of New York released a revised set of FAQs to offer additional clarity on the Fed's funding commitment under the program. The New York Fed said that an eligible borrower posting eligible collateral should receive financing, except in exceptional cases. A source from a dealer told ASR that this is "new and powerful language" that gives assurance to those who want to access the program.
Remaining Issues with TALF
Even with many securitization players now focused on TALF-eligible new issuance, some are holding off from participating in the program.
A lawyer source said that even though he has worked with clients willing to invest in TALF-eligible collateral, some have expressed reluctance to do so because of the legislative risk that the government could make changes to the program later on. There is also uncertainty around Congress' reaction to the types of returns generated by TALF.
The public's perception of the program could be colored by the "media hysteria" surrounding the AIG bonuses, he said. Even recent clarifications by the Fed regarding TALF "have not helped people who are nervous about the potential for changes in the program down the road," he said. "It's a crisis of confidence."
Others say that the change of law risk might make it harder for investors to get out of positions they own at the time the shift occurs. For instance, the change might happen at a time of assignment of the loan.
However, some experts say that the government will not undermine what it has set out to do with the program.
"There is concern that forward or retroactive changes to the TALF program could impact the liquidity and marketability of ABS transactions," Mayer Brown's Loui said. "Because TALF is intended to promote capital availability and support economic activity, we would hope that any changes to the program would not diminish those goals."
A concern that Loui pointed to was the refinancing risk related to loans under the program. "Because the maximum maturity of the TALF loan is three years, if the underlying ABS security has not been repaid by then, the investor would bear refinancing risk," Loui said. He added that an additional factor that could affect an investor's return would be the difference between the prepayment speed assumptions used by TALF in calculating the weighted expected life and the corresponding haircut for the TALF loan versus the actual prepayment speed of the underlying credit exposures.
Issuers initially expressed apprehension that the TALF would bring in nontraditional investors, with the usual cash buyers seemingly reluctant to participate in the program. However, a source said that having new types of investors in the playing field is not necessarily a bad thing. "The more buyers you have, the better that would be to bring spreads down," the source said.
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