The Federal Reserve Bank of New York committed up to $100 billion to provide three-year loans through a special purpose vehicle, according to the Fed's April 9 term sheet. Eligible borrowers — which can include pension funds — must be U.S. companies with collateral consisting of AAA-rated asset-backed securities and collateralized loan obligations issued on or after March 23. Commercial mortgage-backed securities issued before March 23 also are eligible collateral. The TALF program will award loans equal to the market value of the securitized assets less an upfront fee. The Fed will stop making loans from TALF as of Sept. 30 unless the program is extended.
Although the Fed hasn't said when TALF 2.0 will begin, odds are on a June 1 rollout, industry observers said.
With the program's commencement date looming, managers with private credit expertise aren't wasting time prepping new funds to accommodate the assets they will acquire with their TALF loans, said Alice Lee, London-based director, investments and head of securitized credit manager research for investment consultant Willis Towers Watson PLC.
"After grinding to a halt, the (ABS) market is waiting for new issuance to pick up again," Ms. Lee said, adding that "spreads (relative to an ABS bond's corresponding swap rate) have continued to tighten since the TALF program was announced and a good portion of the AAA ABS bond market now trade below 200 basis points."
"Given the current trajectory, the return opportunity looks more like it will be in the high single-digits to low teens. Still, for assets that have a low risk of credit impairment, it could still be a good trade," she said, noting "managers are trying to get into this program fast because credit spreads may continue to tighten. It might be over before you know it."
Option-adjusted ABS spreads have narrowed from a recent peak of 325 basis points on March 26 to 180 basis points on April 16 for the Bloomberg Barclays U.S. Aggregate Corporate Average OAS measurement. On Dec. 31, the spread was 44 basis points.
Among the money managers known by sources to be readying funds are Angelo Gordon & Co. LP and Hildene Capital Management LLC. Spokesmen for the firms declined to comment.
Industry observers said many larger firms that participated in the initial TALF program are thought likely to reup for the new program, including BlackRock Inc., Morgan Stanley Investment Management, Invesco Ltd., Pacific Investment Management Co. and T. Rowe Price Associates Inc. Spokesmen for these firms declined to comment or did not respond to requests for information about their TALF 2.0 intentions.
ArrowMark Partners, a subsidiary of ArrowMark Colorado Holdings LLC, Denver, was the fourth-largest borrower in the first TALF program with a total $4 billion in loans and does "intend to participate in the TALF auctions, assuming investment conditions remain attractive," said spokeswoman Robin C. Beery in an email.
ArrowMark Partners managed $19.6 billion as of Feb. 29, its most recent SEC investment adviser disclosure filing showed.