As we have previously discussed, the Term Asset-backed-securities Loan Facility (“TALF”) program of the Federal Reserve and US Treasury has piqued the interest of investors world-wide. We are receiving multiple inquiries every week about how best to position our clients to benefit from the government program. If you’re reading this, you likely already know that the TALF program was intended to create an artificial market to replace the “shadow market” of securitized loans that had fueled the US economy for the past decade, and which was largely responsible for its crash.
Since the other similar, and more recently announced PPIP program, has yet to gain any traction and which still raises far more questions than answers, investors seem more ready and willing to test the TALF waters. It has been reported that the six TALF-eligible transactions announced for the May auction have been six to twelve times oversubscribed — roughly double the rate reported for the previous month’s auction.
As we have seen with TARP, the federal government has not been shy in changing the rules of its games in mid-play. The potential benefits of the TALF program, namely risk limited leverage in the form of non-recourse 88%-95% financing, and attractive potential returns, which many estimate to be in the 15%-30% range, are seen by many to outweigh the risks that the uncertain parameters of the program pose.
Our most frequent inquiry involves sophisticated private equity firms seeking to pool large funds to acquire the TALF assets for its members. For sophisticated investors with ready capital, an understanding of asset-backed securities, an ability to manage funds and pools, and a stomach for cutting edge investments, investment in TALF is emerging as a very attractive opportunity relative to the dearth of other viable investment options. The announcement on May 19, 2009 that the Federal Reserve will include certain CMBS in TALF should only expand the universe of interested investors.