Lenders' wariness could impede recovery in consumer-credit conditions
SAN FRANCISCO (MarketWatch) -- A new Federal Reserve program to encourage more consumer lending hit a speed bump Tuesday, with investor demand for cheap Fed financing to buy bonds backed by credit-card and auto-loan payments sinking more than 60% from the program's initial round last month.
$3.3 billion raised
SAN FRANCISCO (MarketWatch) -- A new Federal Reserve program to encourage more consumer lending hit a speed bump Tuesday, with investor demand for cheap Fed financing to buy bonds backed by credit-card and auto-loan payments sinking more than 60% from the program's initial round last month.
Investors applied for $1.7 billion in loans to purchase asset-backed
securities under the second installment of the Term Asset-Backed
Securities Loan Facility, or TALF, the Federal Reserve Bank of New York
said in an update to its Web site late Tuesday.
securities under the second installment of the Term Asset-Backed
Securities Loan Facility, or TALF, the Federal Reserve Bank of New York
said in an update to its Web site late Tuesday.
That's down from $4.7 billion in requests during the program's first
round last month. It also falls short of the $3.3 billion in
TALF-eligible bonds companies brought to market Tuesday.
round last month. It also falls short of the $3.3 billion in
TALF-eligible bonds companies brought to market Tuesday.
The gap between the amount of bonds sold and requests for Fed financing
for these bonds suggests some investors chose not to use the Fed's
attractive loan rates to purchase asset-backed securities.
for these bonds suggests some investors chose not to use the Fed's
attractive loan rates to purchase asset-backed securities.
That reluctance may stem from fears the federal government would imposeThe gap between the amount of bonds sold and requests for Fed financing for these bonds suggests some investors chose not to use the Fed's attractive loan rates to purchase asset-backed securities.
restrictions on institutions that use bailout programs -- concerns bond
underwriters and investors were hashing out in legal documents,
analysts said.
underwriters and investors were hashing out in legal documents,
analysts said.
Or it may reflect a return of investors that don't need the leverage
supplied by the Fed program, such as pension-fund money managers.
supplied by the Fed program, such as pension-fund money managers.
The gap "reflects real money coming back into the market and issues
with customer agreements that people aren't entirely comfortable with
yet," said Chris DeReza, manager in structured finance at Informa.
with customer agreements that people aren't entirely comfortable with
yet," said Chris DeReza, manager in structured finance at Informa.
Hesitance using TALF to issue more securities backed by credit-card and
auto loans could weigh down a hoped-for recovery in consumer credit.
auto loans could weigh down a hoped-for recovery in consumer credit.
Also Tuesday, the Fed said total outstanding consumer credit, including
credit-card and other loans, fell at a 3.5% annual rate in February.
Credit has declined in five of the past seven months. Read more on consumer credit.
credit-card and other loans, fell at a 3.5% annual rate in February.
Credit has declined in five of the past seven months. Read more on consumer credit.
$3.3 billion raised
Issuance of asset-backed securities that met guidelines of the Term
Asset-Backed Securities Loan Facility program shows this market is
slowly perking up, though the pace slowed from the first leg of the
TALF.
Asset-Backed Securities Loan Facility program shows this market is
slowly perking up, though the pace slowed from the first leg of the
TALF.
Five companies priced $3.3 billion TALF-eligible deals Tuesday, with
two last-minute issuers coming to market in the morning, according to
DeReza. One issuer expanded its offering to meet investor demand and
priced its bonds at a lower rate than the market had expected.
two last-minute issuers coming to market in the morning, according to
DeReza. One issuer expanded its offering to meet investor demand and
priced its bonds at a lower rate than the market had expected.
Still, this round's issuance was less than half of what issuers raised
in the first leg of TALF, which ended March 19. Then, four issuers came
to market with a total $8.2 billion in TALF-eligible deals, according
to Barclays Capital analysts.
in the first leg of TALF, which ended March 19. Then, four issuers came
to market with a total $8.2 billion in TALF-eligible deals, according
to Barclays Capital analysts.
"In general I think it was a success, but it's not as robust as some might have expected," DeReza said.
Used-car dealer CarMax Inc.
brought a $980 million deal, which it increased from $630 million because of investor demand.
brought a $980 million deal, which it increased from $630 million because of investor demand.
World Omni Financial Corp., which lends money to buyers of Toyota Motor Corp.
vehicles, sold $750 million. An issuer brought a $337 million deal
backed by Small Business Administration loans, DeReza added.
vehicles, sold $750 million. An issuer brought a $337 million deal
backed by Small Business Administration loans, DeReza added.
Credit-card issuers Cabela's Inc.
and World Financial Network sold $487 million and $709 million, respectively.
and World Financial Network sold $487 million and $709 million, respectively.
The two credit-card issuers came to market Tuesday, the final day for
investors to submit loan requests to the Fed. Before that, analysts
said issuance under the program was looking disappointedly slim.
investors to submit loan requests to the Fed. Before that, analysts
said issuance under the program was looking disappointedly slim.
"The second round seems to be slow," said Ron D'Vari, principal at
NewOak Capital, which advises investors on asset-backed securities and
other debt. "If this is going to be the size of TALF stimulating
securitization, it would end up being somewhat of a disappointment."
To lure institutional investors back to the asset-backed securities
"Participants remain wary of the political risk involved in any
government-subsidized rescue program," analysts at Wrightson ICAP said
Tuesday.
NewOak Capital, which advises investors on asset-backed securities and
other debt. "If this is going to be the size of TALF stimulating
securitization, it would end up being somewhat of a disappointment."
A company representative for World Omni acknowledged it was in the market with a TALF-eligible transaction.
Representatives from World Financial Network parent Alliance Data Systems Corp.
and CarMax did not immediately respond to calls for comment. A Cabela's representative declined to comment.
and CarMax did not immediately respond to calls for comment. A Cabela's representative declined to comment.
The New York Fed said investors requested $811 million in discount Fed
financing to buy bonds backed by auto-loan receivables and $897 million
to buy bonds backed by credit-card payments
financing to buy bonds backed by auto-loan receivables and $897 million
to buy bonds backed by credit-card payments
A good start
Asset-backed securities are structured bonds that pool car loans and
credit-card loans and pay bond holders with portions of the loans'
interest payments.
credit-card loans and pay bond holders with portions of the loans'
interest payments.
To lure institutional investors back to the asset-backed securities
market, where issuance had dried up after the collapse of Lehman
Brothers, the Fed is offering discounted loans to buyers of new
securities. Investors that use leverage, or borrowed money, to buy
asset-backed securities were integral to the boom in issuance earlier
this decade.
Brothers, the Fed is offering discounted loans to buyers of new
securities. Investors that use leverage, or borrowed money, to buy
asset-backed securities were integral to the boom in issuance earlier
this decade.
In TALF's first round, investors tapped the Fed for $4.7 billion in
loans to fund these purchases. That was also far less than the amount
issuers sold to investors.
loans to fund these purchases. That was also far less than the amount
issuers sold to investors.
But investors liked them, even without the discount loan rates.
The first TALF deals from Ford Motor Co. , Citigroup Inc. ,
Huntington Auto and Nissan Automotive Finance "were well received,"
said Joseph Astorina and Gaetan Ciampini of Barclays in a report last
week.
Huntington Auto and Nissan Automotive Finance "were well received,"
said Joseph Astorina and Gaetan Ciampini of Barclays in a report last
week.
The auto loans in particular offered attractive leveraged returns, they added.
Issuers and investor may have backed away from Fed financing because of
fears that the U.S. government could impose more restrictions on
compensation and disclosures of companies that use its liquidity
programs.
fears that the U.S. government could impose more restrictions on
compensation and disclosures of companies that use its liquidity
programs.
"Participants remain wary of the political risk involved in any
government-subsidized rescue program," analysts at Wrightson ICAP said
Tuesday.
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