Thursday, September 3, 2009

TALF Helps Revive Securities

Posted in the Wall Street Journal by Anusha Shrivastava:

The Federal Reserve's support for securities backed by consumer loans has helped revive this market, with issuance so far this year close to $100 billion.

That is a key step for the securitization market that plays an important role in the flow of credit to the broader economy and keeps the cost of borrowing to consumers in check. This market virtually closed down in the wake of the Lehman Brothers bankruptcy, prompting the Fed to launch its TALF program, the Term Asset-Backed Securities Loan Facility, in March.

Since then, some $100 billion in new bonds backed mainly by credit-card and auto loans have been sold. Of these, about $77 billion were eligible for TALF funds.

That still is down from last year, when issuance by August stood at $122 billion, though it marks a revival from the mere $8.2 billion issued in the final three months of 2008, said Chandrajit Bhattacharya, director of fixed-income research at Credit Suisse in New York. Two years ago, issuance by this time of year stood at $296 billion.

This week alone, about $15 billion in new issues were priced, even though summer is traditionally a slow time. GMAC Inc.'s Ally Bank and Hyundai Motor Co. tapped the market for the first time this year.

"The market is open for a diverse group of issuers," said Craig Leonard, head of structured-debt syndicate at Barclays Capital. They "wanted to issue before the third quarter ended and while credit spreads are still tight."

Spreads measure the returns that issuers have to offer to attract investors. These have tightened, thanks to Fed's support for the market. Before TALF's launch, risk premiums on triple-A credit-card deals stood at 3.50 percentage points over the one-month London interbank offered rate, a benchmark for short-term borrowing. These days, the risk premiums are in the 1.25-point range over Libor.

On Wednesday, American Express Co. sold its $1.25 billion credit-card loan-backed deal at 1.25 points over Libor. In June, it sold a $1 billion credit-card loan-backed bond at 1.35 points over Libor.

In a sign of investor demand, several of this week's offerings were increased in size. Bank of America Corp.'s auto loan-backed deal was increased to $3.021 billion from the original $1.995 billion. Discover Financial Services' $1.3 billion credit card loan-backed deal was higher than the originally planned $1 billion.

"TALF has to be viewed unquestionably as a success," said Dan Nigro, an asset-backed securities' portfolio manager at Dynamic Credit Partners in New York.

The central bank included existing and newly created commercial mortgage-backed securities in the program in June and said last month that TALF, initially scheduled to expire at the end of the year, will be extended.

TALF loans against newly issued asset-backed securities and existing commercial-mortgage-backed securities will be extended through March 31, 2010. For newly issued CMBS, which take a significant amount of time to put together, the extension is until June 30, 2010.

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