With the June subscription period of the Term ABS Loan Facilitys (TALF) deadline today, several issuers such as auto companies Ford Motor Co. and Nissan Motor Co. have priced their TALF-eligible deals.
This round saw the program expanding to cover fleet leases, mortgage servicer advances, a more diverse variety of equipment ABS and more auto leases.
For a list of TALF eligible deals under the fourth subscription date available on the ASR Scorecard database, please click on the link below.
The program has been welcomed by market participants. In a Wachovia Securities report, analysts said that without the boost in demand brought about by TALF, spreads would probably be wider across most ABS sectors compared to how they are today.
Quantifying the impact of TALF can be difficult because there have been very few non-TALF -eligible deals to make a robust comparison, analysts wrote. However, they would estimate that last cash flow senior auto ABS could have been 100 to 200 basis points wider than they are currently without the benefit of the program. Additionally, Wachovia analysts said that tiering would have been significantly greater than what it is currently if it were not for TALF.
In terms of secondary market activity, Wachovia analysts said that recent bid list activity has included blocks of 2009 TALF-funded bonds. Their initial expectation at the start of the TALF program was that the market might witness a rapid turnover when spreads tightened. They said that at leverage of 10 times or more, short-run returns have the potential to be considerable, something that could inhibit further spread tightening. Traditional cash ABS buyers may be willing to reenter the market in a more meaningful way once the dynamics of the TALF secondary market become better known, Wachovia analysts wrote.
TALF Risk/Reward
David Morton, partner at independent consulting firm Rocaton Investment Advisors, said institutional investor interest in TALF seems to be rising. The firm is now focusing on evaluating TALF funds that are being raised as well as advising existing clients on whether they should participate in TALF or not.
The number of TALF funds is increasing judging from the emails Ive been receiving, Morton said. We have also been receiving more questions from our clients regarding TALF, which suggests institutional investor interest in the program. Morton added that his firm is most willing to work closely with funds that are established by ABS specialists.
Despite the growth of the program, there is not much crossover interest from non-traditional ABS investors. Those that are keen on TALF are usually traditional managers of fixed-income where the senior tranche of the ABS structure is their sweet spot.
According to Morton, the risk/return reward from TALF is good but has to compete with many other strategies in credit markets which offer similar if not greater potential rewards. Even with potential returns in the mid-teens, underwriting mistakes are magnified by the degree of leverage used by TALF funds, potentially leading to a loss of all of your investment.
He added that for those investment managers whose core competency is not high-quality ABS, there are probably better opportunities in participating in the Public-Private Investment Program (PPIP). Ten to 15 times leverage doesnt leave much room for making mistakes, Morton said. I think you can potentially get higher returns without having to use too much leverage as you do in TALF in PPIP-related investments.
Despite these misgivings about the program, Morton said that TALF is positive since it frees up a lot of primary financing in the ABS world and people are starting to securitize again.
The fact that the program is scheduled to end at the end of 2009 is not even worrisome because one of two scenarios could happen, Morton said. The first is that spreads on high-quality ABS remain so wide that the government has no choice but to extend TALF into next year. The second scenario is that it works so well that spreads narrow that market wouldnt need the program any longer.
