The U.S. government’s Term Asset-Backed Securities Loan Facility program got off to an auspicious start in March only to fizzle in April. The $200 billion program aims to revive the weak market for securities backed by consumer and small-business loans by lending investors most of the money needed to buy these troubled assets.
The March rollout sparked the sale of $8.2 billion worth of triple-A-rated securities, according to Barclays Capital (the government won’t say if its offering was fully subscribed). Buyers borrowed more than half that amount — $4.7 billion — from the Federal Reserve Bank of New York under TALF. The fact that unleveraged buyers stepped up is a hopeful sign, but where, then, are the hedge fund managers?
“Most of the ones that I and my colleagues talked to are waiting for the program’s expansion to commercial-mortgage-backed securities,” says Amy Baumgardner, a lawyer in the Washington office of Morrison & Foerster, a firm whose specialities include finance. They won’t have to wait long — the government will unveil its $500 billion to $1 trillion Public Private Investment Partnership, nicknamed TALF 2.0, sometime over the next several weeks. By delaying, however, hedge funds may miss out on what Barclays estimates will be an annualized return in the midteens. Craig Schneider of Standard & Poor’s Ratings Services says such returns may turn hedge funds into unsubsidized buyers of asset-backed securities. But TALF may still not attract as many investors as the government hopes “because of certain restrictive terms and adverse market conditions.”
Indeed, the government had difficulty selling some TALF securities. For instance, investors had absolutely no interest in offerings backed by student loans or U.S. Small Business Administration loans. And April’s rollout attracted less than one third of March’s participation. The $2.57 billion in April issues were auto-loan bonds put forth by World Omni Financial Corp. and CarMax Business Services and credit-card deals from World Financial Network National Bank and retailer Cabela’s. Auto issuers in March included Ford Motor Co. ($3 billion) and Nissan Motor Co. ($1.3 billion). Also in March, Citigroup issued $3 billion backed by credit-card receivables.
The TALF program promises to underwrite up to 93 percent of an investment, depending on the type of asset and issue. And its loans are nonrecourse — they don’t have to be paid back. So for $20 million, an investor could acquire roughly $200 million in asset-backed securities, a leverage junkie’s dream.
It sounds like a no-brainer, but it may be that hedge funds are avoiding the offerings because they are spooked by TALF’s red tape and the potential political trappings. TALF comes with strings that aren’t typically attached to asset-backed offerings, and some hedge fund managers fear the government may decide after the fact to change what by any measure are very attractive terms. Kenneth Morrison, a partner in the Chicago office of Kirkland & Ellis, an international commercial law firm, says TALF language was revised many times because investors and dealers disagreed on the terms. “The 13th version just circulated,” he said in early April.
Peter Kaufman, president and head of restructuring and distressed M&A at Gordian Group, a New York investment bank, wonders if hedge funds are hesitating because of concerns about a backlash should the investments prove wildly successful. “Who’s to say if you make a lot as a private investor they’re not going to come after you?” asks Kaufman, who says he worries, for instance, about the specter of confiscatory taxes. “Who knows what they’d do?”
