TALF-backed auto ABS deals unlikely until Q3

The auto industry might not see its first securitization backed by the Federal Reserve’s term asset-backed loan facility (TALF) until the beginning of the third quarter, analysts told Auto Finance News.

When TALF was first introduced during the credit crisis in November 2008 to alleviate the financial squeeze on lenders and provide additional sources of liquidity, the first loans weren’t made until March 2009, said Brian Ford, senior director and head of structured finance research at Kroll Bond Rating Agency.

The period of time between the Fed announcing TALF and when the first deal comes to market largely depends on how long it takes to hammer out the specific details of the TALF program. For TALF 2.0, the Fed announced the revival of the program March 23 and issued more detailed parameters April 9.

A handful of parameters needed to be finalized, said Ines Beato, DBRS Morningstar’s senior vice president of structured finance, U.S. ABS.

“There was some back and forth between the Structured Finance Association and the Fed,” Beato said. “We hadn’t really seen much movement on the specifics in terms of what the TALF program would entail, when it actually comes into play and starts purchasing. It’s a bit of a wait and see.”

The Fed released yesterday the haircut schedule — meaning the percent reduction in the value of the asset that can be used as collateral for the loan — and the types of collateral eligible. In auto, bonds backed by prime retail loans and leases, subprime retail loans, commercial and government fleets, rental fleets and floorplan financing will be eligible to receive TALF loans. These assets must have a weighted average life of less than five years. Depending on the subsector and weighted average life, the assets will receive a haircut between 6% and 16%.

More can be gleaned about the potential issuance backed by the 2020 TALF program by looking back at 2008, or “TALF 1.0,” as Beato calls it. “During TALF 1.0, some of the bigger [issuers] started and it opened up the market for others,” she said. “Maybe that’s how it goes here.”

American Honda Finance Corp., Ford Motor Credit, GM Financial and Santander Consumer USA are some of the larger issuers in auto ABS. SCUSA is the largest issuer, with $21 billion in outstanding securities at yearend 2019.

While it is too early to tell how many issuers will come to market and take advantage of TALF, it’ll largely depend on spreads; if spreads are tight enough, it might make sense for issuers to come to market without TALF.

As the economy begins to recover from the COVID-19 pandemic and spreads tighten, there will become a point where the TALF financing isn’t as attractive, at which point issuers would stop using it, KRBA’s Ford said, noting that the program is a success once it doesn’t need to be used anymore.

The U.S. auto ABS market has not seen a new deal since March 11, when Carvana and Westlake Financial Services issued $456 million and $778 million deals, respectively.

Most auto lenders that securitize came to market in the first quarter, but as vehicle sales drop and originations slow, it is unclear whether the market will see any issuances in the second quarter.

Moody’s Investor Service declined to comment on TALF at this time.