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| Richard Smolev |
London law firm Kaye Scholer is urging European managers to seize the opportunities available to them under the Term Asset-Backed Securities Loan Facility ("TALF") by launching new funds as soon as possible. Investors have the opportunity to use attractive, non-recourse financing provided by the Federal Reserve Bank of New York to invest in AAA-rated asset-backed and commercial mortgage-backed securities.
TALF initially was created to kick-start the securitization markets. It has been generally successful both in reviving the issuance and reducing the spreads of consumer ABS, but the program has a scheduled sunset of Dec. 31.
"Investors must recognise that the $1 trillion TALF program is slotted to terminate by the end of the year and may not be extended and that they therefore must act nimbly to avail themselves of the benefits it offers," said Partner Richard Smolev. "A number of our clients actively are raising funds in this space now so that they will have at least four or five months to take advantage of what TALF offers."
"This is an undiscovered secret of what's happening in the U.S.," said Partner Timothy Spangler, "and we are evangelising our European client bases about the magnitude of the opportunity."
"The information hasn't got out here in Europe," agreed Partner David Rivera. He says there is a misconception that the U.S. government's intervention is purely for the benefit of the U.S. "There is a place at the table for European money," said Spangler. "Non-U.S. investors must conform to program guidelines, but TALF's leverage and upside potential is not reserved solely for U.S.-based investors," he added.
If a fund puts in a bid to buy ABS that qualify for a TALF loan and the bid is accepted, the Fed lends the investor most of what the bonds costs, and the manager only has to put up the margin. The size of the haircut depends on the security's asset class and its duration.
Kaye Scholer is particularly targeting managers that are "strong in allied areas" such as credit, said Spangler. While they may need to supplement their headcount by hiring specialists from the buy side, investing in ABS using TALF's leverage is a fairly straightforward strategy due to its "buy-and-hold" nature.
Kaye Scholer is advising European fund managers to aunch TALF-focused funds with their subsidiaries and affiliates in the U.S., or by establishing joint ventures.
Under TALF so far credit card loans have enjoyed the lion's share of the action, accounting for 53% of the loan requests. The auto sector has made up 29% of the requests and the rest has come from the student loans (9%), equipment (4%), premium finance (2%), servicing advances (2%) and small business (1%) loans. New issue (2009) and legacy (pre-2009) CMBS also are being added to the mix of collateral that is eligible to support a TALF loan.
In the U.S. public pension plans have been at the vanguard of investing in TALF. Spangler said that while it is too early to say how European investors will react, he expects interest from institutional investors because TALF's leverage affords opportunities for attractive yields that may not be available at this point in the market in private equity or traditional hedge funds.
Kaye Scholer is educating and encouraging fund managers to act quickly to create a fund structure to tie together these opportunities, which Spangler described as "a very very unique mid-2009 opportunity." --Harriet Agnew
This article was originally published in Alternative Investment News.
