19 Aug 2009, Harsharan Bagria, Risk magazine
The Talf was launched in March, offering investors inexpensive loans to purchase AAA-rated asset-backed securities (ABS) in the hope of reviving the US securitisation market and generating up to $1 trillion of loans for consumers and businesses in the process.
Financing for Talf-eligible new issues of ABSs and legacy commercial mortgage-backed securities (CMBSs) will be extended until March 31 2010, while loans to buy newly-issued CMBSs will be available until June 30 2010.
Talf issuance has dominated the US securitisation market since the scheme was launched. According to Bank of America-Merrill Lynch research, Talf-eligible ABSs account for 62% of the $101.4 billion total securitisation issuance in 2009. To date, the Fed has extended $41.5 billion in loans to buy Talf-eligible transactions.
Given the relative paucity of non-Talf issuance, few market participants were surprised at the decision to extend the facility. “It is not unexpected, and suggests there remains a need to stimulate new issuance and to offload legacy assets,” commented Alexander Batchvarov, head of ABS research at Bank of America-Merrill Lynch. “There is clear evidence new issuance of credit card and auto loan ABS has been stimulated through the scheme, which has indirectly and positively affected market sectors which are not eligible under the Talf.”
Since the scheme's launch, credit spreads in all asset classes have tightened considerably. In the auto ABS market, the average spread of three-year Talf-eligible ABS has fallen from 150 basis points on March 27 to 135 bp on August 6, while non-Talf-eligible ABS have gone from 325 bp to 130 bp over the same period. Spreads on similar credit card ABS narrowed from 150 bp to 135 bp for Talf-eligible securities and 350 bp to 155 bp for non-Talf-eligible securities over the same period.
This shows the positive direct and indirect effects of the Talf on the securitisation market in general, Batchvarov believes. “In such a highly leveraged market, a quick withdrawal of the scheme would mean a significant price correction, which would lead to a significant risk of impairment of assets,” he said.
According to Colin Fleury, London-based head of ABS investments at Henderson Global Investors, such evidence also indicates the market still needs government support. “The eventual objective is to get the markets to a point where demand is sufficient without the Talf. However, at this stage it is not clear whether the market is robust enough to deal with the withdrawal of the Talf,” he commented.
In fact, many market participants have called for the programme to be extended further, specifically to support residential mortgage-backed issuance. However, as Batchvarov points out, “there may be a need for more action, but the US government must consider its commitments with the deficit and monetary policy”.