The Term Asset-Backed Securities Lending Facility (TALF), as it stands, is unlikely to meaningfully impact the currently tight credit markets, Moody’s Investor’s Service found in a recent report. The program will not “gain significant momentum” until the terms are widened to apply to other securities, and therefore the wider investor playground, including pre-2009 triple-A rated commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS). Currently TALF only covers triple-A consumer assets originated for securitization in 2009.
“TALF is structured to provide stop-loss protection to investors via non-recourse loans, while requiring participants to have ‘skin in the game’ with haircuts that force borrowers to retain a share of the risk,” said the lead author of the report and Moody’s analyst, Jean-Francois Tremblay. “Once future expansions are phased in and the program gains momentum, TALF could help stimulate a market-based price-discovery process for less liquid securities, and through arbitrage, the yields on other instruments should fall — which would gradually help all forms of debt.”
Moody’s report reviews the TALF’s credit implications for both investors and issuers in each eligible sector, outlines potential for new issuances under the program and identifies those originators and investors most likely to benefit. For example, “TALF 1.0 should be beneficial to prime retail auto loan lenders…[while] the benefits to lenders of nonprime retail auto loans…will likely be limited,” Moody’s said in the report.
Tremblay, however, voices hesitance on new issuances in the report. “Whether the securities are prime loan ABS, RMBS, or CMBS, perhaps the biggest challenge that originators will face is to fund the riskier subordinated tranches (mezzanine and equity) that are required to support the securitization process,” he said. Originators may need to retain these riskier subordinated tranches, and the junior investors it normally attracts, on their balance sheets due to the current risk-averse environment, which Tremblay said is likely to lead to fewer new originations.
Tremblay noted a limitation to the program due to “the lack of flexibility with respect to the term of the loans, which are currently granted on a standard three-year maturity, regardless of the maturity of the securities being financed,” he said. “Investors purchasing an instrument that has a maturity over three years through TALF will face refinancing and market risks, which are both significant rating factors.”
The report’s projections are not all negative, however. The rating agency expressed a “significantly more positive” view of the potential credit implications of future TALF expansions, which will extend eligibility to to other types of securities “that are currently burdening many banks’ balance sheets.” An expanded TALF, explains in the report, may help banks in three capacities: as ABS originators, as broker-dealers and as investors.
Any significant influence of the TALF expansion on banks’ balance sheets and, in turn, investors’ confidence is likely to cause Moody’s analysts to reduce their loss assumptions, “which may in turn have a positive credit impact on our calculations of banks’ capital ratios and, potentially, on their broader credit profiles and ratings,” Tremblay said.