Tuesday, June 2, 2009

Under the TALF, the Fed provides low-cost loans to investors, such as hedge funds, to buy AAA-rated asset-backed securities.

TO BE NOTED: From Bloomberg:

"Fed Says TALF Loan Requests Increase to $11.5 Billion (Update2)

By Scott Lanman and Sarah Mulholland

June 2 (Bloomberg) -- The Federal Reserve said investor requests for loans to buy asset-backed securities increased to $11.5 billion from May, the program’s highest monthly total and a sign of sustained interest after a slow start.

Investors sought funds from the Term Asset-Backed Securities Loan Facility to purchase bonds backed by auto, credit card, equipment, education and other kinds of loans, the New York Fed said today on its Web site. About $15 billion of securities were eligible for TALF loans in the fourth monthly round of requests, compared with $13.5 billion in May.

“The momentum is positive,” said Ron D’Vari, co-founder and chief executive officer of NewOak Capital LLC, an advisory and asset-management firm in New York. “There’s a lot of pent- up demand. We have been in a dysfunctional mode of the market, with very low issuance for close to a year and a half now.”

The Obama administration and Fed Chairman Ben S. Bernanke are counting on the TALF as a cornerstone of plans to revive credit and end the recession. While the program is on pace to fall short of its $1 trillion official ceiling, Bernanke said in a letter to a lawmaker last month that the TALF has helped create “improved conditions” in the ABS market.

This month’s requests follow totals of $4.7 billion in March, $1.7 billion in April and $10.9 billion in May. Bernanke said May 12 that “early indications” showed demand for TALF loans in June would exceed May’s amount.

Missed Payments

Today’s loan requests include $528.6 million to buy securities backed by loans designed to help small businesses buy insurance and $494.5 million for debt backed by loans extended by residential-mortgage servicers to cover missed payments by homeowners. They are the first such TALF loans for the two classes of securities.

The housing-related loans are notable because “there’s a crying need for financing in the mortgage area,” said Ed Gainor, a law partner at McKee Nelson LLP in Washington, who is working with TALF issuers and underwriters. “You’ll see a lot more of those deals.”

The Fed is expanding the TALF over the next two months to aid the commercial real estate market, seeking to avert defaults in an industry with “severely strained” lending conditions, Bernanke said last month.

The central bank will begin taking loan requests sometime later in June to buy commercial mortgage-backed securities issued this year. In late July, the Fed will start accepting investor requests for loans to purchase older CMBS.

Fed officials are discussing how and whether to add private residential mortgage-backed securities to the TALF.

Eligible Debt

Bayerische Motoren Werke AG, Ford Motor Co. and Nissan Motor Co. were among companies selling asset-backed debt eligible for the fourth round of the TALF. Some deals were increased in size, as Germany’s BMW and Ford each sold $2 billion of securities backed by automobile debt, according to people familiar with the sales who declined to be identified because terms aren’t public. BMW had planned to sell $1.5 billion of the debt, and Ford was to offer $1 billion.

Dearborn, Michigan-based Ford also sold $834 million in bonds backed by auto leases, the people said. Other companies that sold the TALF-eligible debt include American Express Co., CIT Group Inc., Citigroup Inc. and Deere & Co., they said.

Under the TALF, the Fed provides low-cost loans to investors, such as hedge funds, to buy AAA-rated asset-backed securities.

Next Phases

The Treasury Department is using capital from the $700 billion Troubled Asset Relief Program to protect the Fed from losses. Under the initial phase of the TALF, directed at consumer and business credit, the Fed has committed to extend as much as $200 billion of loans this year, aided by $20 billion of TARP funds. The Treasury and Fed have said the next phases of the TALF may increase total loans to as high as $1 trillion.

Elizabeth Warren, the Harvard University law professor who heads a panel overseeing the U.S. financial bailout, said in March that the committee was “concerned that the TALF appears to involve substantial downside risk and high costs for the American taxpayer, while offering substantial rewards to a small number of private parties.”

Ford paid 250 basis points more than the benchmark interest rate when it sold auto-loan bonds maturing in two years for the first round of TALF on March 19, compared with just 140 basis points more than the benchmark today. That means it’s cheaper for Ford to borrow, and more expensive for investors buying the bonds.

“Returns are still attractive, but they are not as attractive as they were in April, when the bonds were ridiculously cheap,” said Dan Castro, chief risk officer at Huxley Capital Management, an investment and advisory firm in New York. “Not as many of the TALF bonds are going to work for a 15 percent rate of return as did at the beginning of the program.”

The lower potential return may drive away some hedge funds from the program and bring in other investors who “can accept a lower yield,” Castro said.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Sarah Mulholland in New York at smulholland3@bloomberg.net."

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