Investors Back Away From Fed's TALF

By ANUSHA SHRIVASTAVA Issuers of bonds eligible for the Federal Reserve's Term Asset-Backed Securities Loan Facility are still few and far between, indicating investors remain wary of participating in this lending program. This could undermine the government's efforts to lower consumer-lending costs and eventually clean up bank balance sheets if participation in the program, called TALF, remains lackluster. Only two issuers have put together about $1.4 billion of TALF-eligible bonds heading into the Fed's Tuesday deadline for investors applying for funding to buy such debt. This is less than the $8.2 billion of TALF-eligible deals that emerged before the first loan-application deadline last month. At the time, four large deals, including Citigroup Inc.'s $3 billion credit-card-backed deal, were sold. Then, investors had applied for $4.7 billion in loans, an amount that disappointed many market participants who had expected greater demand. The figure this time is set to be even lower unless there is a last-minute flurry of deals before Tuesday's 5 p.m. EDT deadline. Under the Fed's program, investors can apply for financing by handing over eligible collateral such as new bonds backed by auto loans and credit-card debt. The list of collateral eventually will expand to commercial and risky, older residential mortgage-backed securities. CarMax Inc., the large used-car dealer, this week offered investors $630 million of TALF-eligible bonds backed by prime auto loans, while Nissan Motor Co. brought its $750 million World Omni deal to market. Tedious paperwork, fear of legislative interference and curbs on hiring foreign workers have dissuaded many from participating in TALF, even though the central bank's financing terms are attractive. "There are a lot of mechanical issues that are holding them back," said Dan Nigro, an asset-backed securities portfolio manager at Dynamic Credit Partners in New York, which manages $5 billion and is looking to participate in the program. "After months of no issuance, the spate of issues last time around was good news, but we are still taking baby steps here." Some investors missed the initial deadline because they weren't comfortable with some of the clauses related to the program, like allowing the Federal Reserve to examine their documents. Others are wary of a clause that restricts the employment of foreign workers on a temporary visa. "There is an inheritance of constraints in the program," said David Audley, executive vice president for strategy and research at Beacon Capital Strategies, an electronic-trading platform for asset-backed and mortgage-backed securities in New York. While investors are keen to participate, Mr. Audley said, they find the process onerous. However, the "power of leverage" and the promise of huge gains will eventually draw investors, Mr. Nigro said. Interest will increase once the residential and commercial mortgage-backed securities are included, he added. "It's a question of time," he said. "There'll be a lot more issuance before the next deadline."