The Federal Reserve announced today the revival of its term asset-backed securities loan facility (TALF) to provide increased access to funds amid concerns about shrinking liquidity in capital markets.
The TALF — which includes an equity investment of $10 billion from the U.S. Department of Treasury — was first deployed during the credit crisis and will make $100 billion in loans available to investors to purchase bonds collateralized by auto loans and leases, floorplan loans and other asset classes, the Fed noted. Investors are required to take a “first-loss position” on the securities, meaning they would lose their entire investment before the Fed or The Treasury suffered any losses.
Further, ABS deals must be AAA-rated and issued no sooner than today to be eligible for TALF. Loans provided to investors under TALF will have a maturity of three years and come with a fee equal to 10 basis points to the loan amount.
Year to date, auto financiers have issued $27.7 billion in ABS bonds, a decrease compared with last year’s YTD figure of $30.5 billion, according to J.P. Morgan Securities.
As the auto market braces for a complete picture of COVID-19’s negative impact on the industry, one concern voiced last week by S&P Global Ratings was a lack of funds accessible through the capital markets. Nonbank auto lenders, such as captives and independent financiers, historically have used the ABS market as a source to secure additional liquidity. On average, most auto lenders transact quarterly.
The TALF — also called a “special purpose vehicle,” or a separate limited liability company created to help raise capital — was first introduced in March 2009 during the credit crisis “to improve market conditions for ABS more generally,” according to a Fed statement. It was closed for new loan extensions on June 30, 2010, and incurred no losses during its tenure. Final distributions to the Treasury and the New York Fed were completed on Nov. 6, 2014.
