With three offerings down and three to go, the jury is out on whether the Federal Reserve Board’s Term Asset-Backed Securities Loan Facility will thaw credit markets. The program is meant to reopen the securitization markets — and foster the issuance of consumer and business loans — by enticing new underwriters, like hedge funds and private equity firms, to buy asset-backed securities with easy terms and low risk.
Under TALF the Federal Reserve Bank of New York will lend as much as $200 billion on a nonrecourse basis to holders of newly issued triple-A-rated asset-backed securities. The additional sweetener: subsidization for up to 20-to-1 leverage. So far the results have been uneven: Investors tapped TALF for $4.7 billion in March, $1.7 billion in April and $13.8 billion in May.
To encourage hedge fund participation, TALF makes it possible for the Davids to compete with the Goliaths. “It’s not like the Public-Private Investment Partnership, where heft is going to mean something and the bigger players are going to have a leg up on everybody else,” says Joe Topolski, a New York–based partner at Dewey & LeBoeuf and lead counsel on Ford Motor Credit Co.’s $2.95 billion TALF-eligible March loan securitization. “This is one where everyone can play” (see “The Number”).
Enter $300 million New York–based hedge fund firm Belstar Group. “The playing field for big versus small organizations is more level than in the past,” notes Simina Farcasiu, portfolio manager of the Belstar Credit Fund. The firm recently launched two TALF funds to raise $250 million and participated in the first three TALF auctions, the first two of which weren’t quite the barn burners some experts had expected.
“The Fed had this idea that this program was going to be a win-win for everyone,” explains Kevin Scanlan, a New York–based partner in the financial services arm of law firm Dechert. But uncertainty surrounding whether recipients of TALF funds were subject to stringent employee visa restrictions, as well as fears that the government might change the rules of the game, dampened initial enthusiasm. Interest, however, has picked up. “People are putting out feelers, afraid that they might be missing out on the next big thing,” says Brynn Peltz, a New York–based partner at law firm Latham & Watkins, which is helping clients form TALF funds.
