22 Jul 2009, Peter Madigan, Risk magazine
The induction of CMBSs into Talf began inauspiciously on June 16, when not a single subscriber came forward to take the New York Fed up on its offer of cheap financing to buy the assets.
The following auction on July 16 went better, with almost $669 million being requested to purchase 'legacy CMBS' - the US government's term of choice for illiquid securities.
The sum was small compared with previous loan requests for other classes of asset-backed securities (ABS). At the preceding Talf auction on July 7, $2.8 billion was requested to purchase auto loan securities and $1.4 billion to buy credit card-backed securities, amid total loan requests of $5.4 billion. Since the first Talf auction on March 17 the New York Fed has provided $34.5 billion in financing, the biggest single award being $6.2 billion in credit extended to purchase credit card ABS at the June 2 auction.
Despite the encouraging signs to come out of the first commercial mortgage auction, dealers feel there could be still some way to go before the facility starts being used to its full potential.
"Talf has only really worked so far in the ABS space, but it has got ABS deals up and running, and that has meant investors have got more comfortable in structure than we would have expected three months ago when Talf started. I'm quite pleased to see how many cash investors are involved and how much confidence they have in the underwriting and the credit support levels," said Toby Cobb, co-head of US CMBS business at Deutsche Bank in New York.
A further boost to the prospects of reviving CMBS markets through the Talf was presented by yesterday's unexpected decision by rating agency Standard & Poor's (S&P) to rescind its July 14 decision to downgrade 23 classes of previously AAA rated CMBS to BBB over fears the assets would not be able to withstand severe deterioration of economic conditions without suffering default.
S&P's dramatic about-turn followed an outcry from CMBS market participants and a barrage of complaints from investors attacking the reliability of the rating agency's models. The almost unprecedented reversal and reclassification of the paper back to AAA means the securities in question are now eligible for purchase under Talf.
While the downgrades were in effect, however, they had the predictable consequence of tightening spreads on those CMBS that retained the S&P AAA rating.
"When the Fed announced Talf, most CMBS AAA bonds were trading in the 700 basis point range, including several bonds S&P has watch-listed under its new methodology. After one or two trades, it became clear the non-downgraded bonds were pricing much better, so whereas before we were marking the bonds at 600-700bp, non-watch-listed are now trading in the 300bp range," observed Darrell Wheeler, head of CMBS research at Citigroup in New York.
Whether the temporary downgrade of the CMBS classes will prove to be a stigma remains to be seen, but analysts appear far more optimistic today about the prospects for the revival of the commercial mortgage securities market than they were six weeks ago.
They are more pessimistic, however, about the prospects for residential mortgage-backed securities (RMBS) ever becoming eligible for Talf funding. "The Fed has not figured out a way to apply the Talf programme to RMBS, even though it continues to claim it is looking at ways to make it happen. It is not clear to me that they will, especially since the Fed has also stated it intends to terminate the Talf programme at the end of its current term, so I'm not very hopeful," remarked one New York-based ABS analyst.