Lower Borrowing Costs on Way

TALF's Tighter Risk Premiums to Help Consumers By ANUSHA SHRIVASTAVA As the Federal Reserve's program to support consumer lending gathers pace, risk premiums on debt securities are shrinking. Issuers, like General Electric and J.P. Morgan Chase, are putting together billion-dollar deals that qualify for the central bank's Term Asset-Backed Securities Loan Facility, or TALF, and eager investors are obtaining loans from the Fed to snap up these bonds, which are backed mainly by auto, credit-card, student and equipment loans. Risk premiums on these deals have tightened significantly over the past few months, making it feasible for issuers to pass on gains to consumers in the market for a new vehicle, a loan to pay for education or even agricultural equipment. More time and continued investor interest in the program is needed, however, before consumers will start to feel the benefits. Risk premiums on three-year, triple-A-rated credit-card deals have tightened from 3.75 percentage points above the one-month London interbank offered rate when TALF began in March, to 2.50 percentage points at the end of April, according to data from Barclays Capital. This is still a far cry from the $1.3 billion credit-card loan-backed deal American Express sold in May 2007, where the largest tranche sold at one month Libor minus 0.01 percentage point. That was before the credit freeze. On Monday, J.P. Morgan sold its $5 billion deal at 1.55 percentage points over one-month Libor, an improvement of 0.20 percentage point over Citigroup's deal sold in March. "The tighter the spreads are, the better the economics are for the issuers," said Dan Nigro, an asset-backed portfolio manager at Dynamic Credit Partners. Key to the TALF program, regulators including Treasury Secretary Timothy Geithner have said, is getting the spreads down and enabling issuers to sell bonds with lower interest rates, which should eventually flow through to consumers in the form of lower rates on credit cards or student or auto loans. In the auto sector, where issuers like Volkswagen and Honda Motor have brought TALF-eligible deals, spreads have tightened about 0.50 percentage point to about 2.56 percentage points over Libor at the end of April. In March, that number was 3.10 percentage points, but at the beginning of 2007 it stood around 0.45 percentage point. The difference is even starker when comparing TALF and non-TALF deals. CNH Global sold an equipment loan-backed bond deal in March, before such collateral was eligible for TALF. This week, it sold a TALF-eligible deal backed by almost identical collateral that was 1.60 percentage points tighter than in March. Still, it is unrealistic to expect borrowing costs to plunge immediately. It took about two months for mortgage rates to come down significantly after the Fed announced it would buy bonds backed by mortgages. In the asset-backed securities market, "it is too early to expect financing terms on loans to come down," said Gyan Sinha, a partner at KLS Diversified Asset Management. But, when lenders securitize more loans, they have more freedom to offer better rates, he said. "If you give the program sufficient time, rates will come down."