By Mike Antich
The credit gridlock gripping the nation's economy has made it more difficult (and expensive) to fund fleet vehicles using asset-backed securities. Last February, the Federal Reserve and the U.S. Treasury launched a joint program called the Term Asset-Backed Securities Loan Facility (TALF) to improve credit conditions in the securitization markets.
TALF is one part of a larger multipronged governmental effort to loosen the gridlock in the nation's credit markets. As originally configured, the TALF program did not apply to commercial fleet leases. However, this changed March 3 when the Federal Reserve announced the definition of eligible collateral under TALF had been expanded to include commercial leases. As a consequence, qualified investors may use TALF loans to invest in term securitizations consisting of commercial fleet assets. This development has a positive impact on the fleet market since one source of fleet funding is these types of securitizations or term ABS (asset-backed security), where the leases and collateral of only a single issuer are sold to the market.
Advocating this revised definition of eligible collateral was the American Automotive Leasing Association (AALA), which sent a letter to then-Treasury Secretary Hank Paulson last December requesting the inclusion of commercial leases.
Alleviating Stress on Asset-Backed Securities
Over the past two decades, the markets for securities backed by loans and other assets have grown rapidly. Asset-backed securities have become an important means by which fleet lessors fund vehicle purchases. The asset-backed securities market has been under strain since second quarter 2008. This strain accelerated in the third quarter of 2008 and the term ABS market came to a near-complete halt in October. At the same time, interest rate spreads (versus LIBOR) on asset-backed securities rose dramatically as a result of unusually high-risk premiums. For instance, securitization pricing increased from 25 basis points over an index, such as LIBOR, to as much as 600 basis points or more. In fact, pricing fluctuated from day-to-day and lessors struggled to quote consistent pricing to lessees.
The goal of the TALF program is to re-stimulate investor demand for asset-backed securities by increasing the availability of credit to the issuers of the securities. Under the TALF program, the Federal Reserve Bank of New York will make up to $200 billion of loans, which could be expanded to $1 trillion. Loan funds will be disbursed to the borrower, contingent on receipt of eligible collateral, an administrative fee, and margins, if applicable. TALF will cease making new loans Dec. 31, 2009, unless the Federal Reserve Board of Governors agrees to extend the facility.
Eligible for April funding of the TALF are Triple-A rated asset-backed securities backed by commercial, rental, and government fleet leases. The Federal Reserve Bank of New York will provide funding to any eligible borrower owning eligible collateral. TALF loans will have up to a three-year term, will be non-recourse to the borrower (except for a yet-to-be-determined "haircut"), and will be fully secured by eligible asset-backed securities.
More detailed information on "haircuts" and other frequently asked questions about TALF can be found at the Web site for the Federal Reserve Bank of New York. The URL is www.newyorkfed.org/markets/talf_faq.html
TALF May Also Benefit Conduit Securitization
The majority of fleet leasing companies use the asset-backed commercial paper market to fund vehicle acquisitions; however, securitization or term ABS is an important source of fleet funding. The main form of asset-backed commercial paper funding is conduit securitization, which may benefit from TALF since the conduit securitization market looks to secondary market trading of term ABS for indicative pricing. As a consequence, improvements in term ABS may also help pricing in conduit markets.
Unknown Variables about TALF
The decision by the Federal Reserve to include commercial leases as eligible collateral under the TALF program is an important action needed to get credit flowing once again. However, there are still unknowns about the program. For instance, it would be incorrect at this point in time to say TALF loans will be cheaper, since it is still unclear as to what they will cost. As mentioned earlier, the primary purpose of TALF loans is to improve liquidity and to jumpstart the market for term ABS.
In closing, this enhancement of the TALF program also highlights the value and importance of industry associations, such as AALA, which was instrumental in helping to bring about this change.
Let me know what you think.