Posted in the Wall Street Journal by ANUSHA SHRIVASTAVA and MICHAEL ANEIRO:
A government program to unfreeze the credit markets got a boost as companies rushed to issue nearly $10 billion of bonds and as credit markets rode the same wave of optimism that sent stocks soaring.
The program is designed to increase the amount of credit available to consumers. The market tumbled last year because banks couldn't sell off the credit-card, auto and student loans to investors. But the Federal Reserve's Term Asset-Backed Securities Loan Facility, or TALF, got off to a slow start when it began in March as investors stayed on the sidelines.
That changed Monday. A small group of investors asked J.P. Morgan Chase & Co. to put together a bond offering backed by credit-card loans that is eligible for the program. The $5 billion deal is the largest yet of the TALF-eligible offerings, according to Barclays.
The J.P. Morgan deal sold at 1.55 percentage points over the one-month London interbank offered rate.
Banks sold $8.2 billion of securities under the plan in March and $2.57 billion in April.
"The fact that we've seen almost $10 billion worth of transactions in the latest round is a strong indication that the program is gaining momentum," said Joe Astorina, a consumer asset-backed securities analyst at Barclays Capital in New York.
Companies are rushing to lock in yields, which are at their lowest levels since October, according to data compiled by Banc of America Securities-Merrill Lynch.
Merrill's U.S. Corporate Master Index puts yields on high-grade bonds at an average of 4.81%, compared with October's record low of 4.61%. Companies issuing debt include International Paper Co. and Procter & Gamble Co.
The $5 billion deal put together by J.P. Morgan is one of six deals, including General Electric Co.'s $1 billion credit-card-backed deal, due to be sold Tuesday, the deadline for the Fed's nonrecourse loans under TALF. J.P. Morgan, which is underwriting the deal, didn't return calls seeking comment.
CNH Global NV, the agricultural and construction equipment unit of Fiat SpA, increased the size of its offering to $1 billion Monday from an original $780.6 million. Honda Motor Co. has a $1.25 billion bond, Volkswagen AG has a $1 billion issue and motorcycle company Harley-Davidson Inc. has a $500 million deal.
The Fed has had to cajole investors to participate in the program, which it announced in November, and has made several changes. Most recently, it increased the duration of some loans to five from three years and broadened eligible collateral.
In its inaugural round, the Fed received applications for only $4.7 billion of loans to finance investor purchases of TALF-eligible bonds. That number plummeted to $1.7 billion in April.
Investors complained about documentation requirements, the possibility of congressional meddling if they made significant profits using the Fed's loans, and curbs on hiring foreign nationals.
Even though the central bank has been fine-tuning the program, several large firms have "mothballed plans to participate," because they still aren't fully comfortable with the program, said David Morton, a partner at Rocaton Investment Advisors in Norwalk, Conn., with $200 billion in assets under advisement.
"They fear a public spotlight if they make money off the program," he said.
Market participants expect issuance to pick up before the June loan-application deadline as investors decide the gains to be made are too large to ignore.
"The signs are encouraging," said Jim Harrington, senior portfolio manager at Ryan Labs Asset Management in New York, which is helping investors participate in TALF.
"As momentum picks up and spreads tighten, investors will not want to miss out."