Will TARP shift spell relief for consumer ABS market?

NEW YORK (Reuters) - The $2.8 trillion U.S. asset-backed securitization (ABS) market may experience a thaw if the U.S. Treasury follows through on its latest plan to aid strapped consumers.

Issuance of asset-backed securities slumped by 80 percent to $153 billion in the third quarter as recession fears hit home, down from $791.7 billion in the same period a year ago.

"It's hard to venture a guess about where issuance of ABS will go in 2009, because there are too many unknowns," said Darcy Morrison, senior ABS analyst at Evergreen Investments in Charlotte, North Carolina.

"We still need to see what the TARP bailout is really going to do and for whom. We need to see who the survivors will be in the corporate world," she said.

In a securitization, loans are pooled together and sold as securities to investors, allowing lenders remove the debt from balance sheets and offer new loans.

Consumer debt tied to credit cards, auto and student loans were the primary drivers of ABS supply this year, after a major collapse in the U.S.subprime mortgage market shut down the mortgage bond market in 2007.

The U.S. housing market slump and the decline in mortgage bond values contributed to the demise of investment bank Lehman Brothers, the rescue of U.S. housing finance firms Fannie Mae and Freddie Mac, and trillion dollar losses in the stock market, forcing the U.S. Congress to approve a banking sector rescue package known as the Troubled Asset Relief Program or

TARP.

The Treasury's $700 billion TARP was originally designed to buy up troubled mortgages as well as recapitalize banks.

But on Wednesday, Treasury Secretary Henry Paulson announced a shift in the TARP focus away from mortgage assets and toward further capital injections for banks.

Paulson also said support was needed for markets that securitize credit outside the banking system and mooted the creation of a liquidity facility for highly-rated "AAA" asset-backed securities.

The change of approach created resentment as well as hope for the ABS market as it seeks to emerge from its deep freeze.

"Paulson told us one thing but did another. It's the whole bait and switch routine. How can he abandon the mortgage market? This has totally destroyed confidence," said Mike Kagawa, portfolio manager at Payden & Rygel in Los Angeles.

SHIFTING FOCUS

The list of lower-rated ABS securities for sale in the secondary market grew on Thursday as market participants looked to unload securities included in the original TARP plan, but buyers were sparse, traders said.

"The global financial crisis has finally all but shuttered the credit card ABS primary market," said Karen Weaver, an analyst at Deutsche Bank.

"Heightened concerns about the health of corporations, consumers, and the capital markets, and lack of clarity as to when conditions will improve have kept issuers and investors on the sidelines," she said.

Credit card issuance, which led ABS market supply for most of this year, fell 20 percent to $65 billion in the third quarter, as credit markets froze and financing costs soared. ABS issuance came to a grinding halt in October.

"Credit markets are frozen. There aren't any issuers that can go out there and issue right now. And, now you also have the automakers asking for a bailout because they can't finance themselves. This all adds up," said Kagawa.

But others are optimistic the market will show signs of revival soon, with help from the government and holiday season.

Morrison said credit card securities are most likely to re-emerge first, as the segment offers very short turnaround for the investor and provides a way for the consumer to make ends meet.

"Even though the procurement of new customers is down significantly, the Christmas season is coming up and there are people with credit cards out there and that's when they're used the most," she said.

One syndicate manager at a large bank agreed that non-mortgage ABS issuance will return as it is an efficient funding tool for users.

"When issuers feel there's some stability and sponsorship albeit at these exaggerated spreads they are going to hit the market," said the manager.

Issuers have to borrow "and they're not going to change their business models because the markets are 300 basis points wider in yield, as unattractive as it sounds."

For the auto and credit card ABS segments, the supply shutdown, is due largely to the perceived illiquidity and inability to transact in the secondary market, and less to worries over credit quality. By contrast, in subprime mortgages, there's no liquidity and no underlying confidence in credit, the manager said.

"There's going to continue to be an adjustment in the loans, or the rate at which you and I have credit card access, but it's not dead by any stretch of the imagination. It's banged up, its standing still, but its not dead," he said.