TALF blunts steep decline in ABS issuance in Q2

By Nancy Leinfuss

NEW YORK, June 30 (Reuters) - U.S. asset-backed securities (ABS) issuance fell 30 percent in the second quarter but avoided a steeper decline due to an emergency loan program from the Federal Reserve to unclog consumer lending.

Through its Term Asset-Backed Securities Loan Facility (TALF), the Fed aims to stimulate lending at the consumer loan levels and reopen the securitization markets, a crucial funding tool for issuers of ABS.

While ABS declined to $49.7 billion in the quarter from $71.6 billion in the same period a year ago, it escaped a deeper 79 percent decline in the first quarter, when sales amounted to just $13 billion as the market struggled to climb out of a deep credit crunch.

"TALF is a major reason why you're seeing the jump in issuance that we've seen in this quarter," said Dan Castro, chief risk officer at Huxley Capital Management in New York.

Issuers have sold about $42 billion of supply under the TALF program since its launch in March. Another $8.1 billion of new ABS deals are gearing up to come to market under the Fed's fifth loan subscription round set for July 7.

Through its program, the Fed makes loans available to investors for the purchase of securities backed by consumer loans, and allows lenders to make new loans as older ones are removed from balance sheets, packaged and sold as securities.

Most TALF sales are meeting with strong demand from investors and have been oversubscribed, investors said.

"The government is providing leverage so that investors can get the kinds of returns they were able to obtain when there was leverage in the system," said Castro.

Also making deals more attractive to investors is the cleaner loan collateral in ABS transactions due to tighter underwriting standards and stronger credit enhancement supporting the deals.

The strong demand for ABS deals has pulled spreads in from their record wide levels during the height of the credit crisis in late 2008. As a result, issuer funding costs have been dramatically reduced, analysts said.

For this year's first half, JPMorgan Securities (JPM.N) led underwriting with 20 deals totaling $16.4 billion, including $15.1 billion sold in the second quarter in 16 deals, according to Thomson Reuters.

Supply was down 50 percent to $65.3 billion overall in the first half of 2009, versus $133.5 billion in deals sold in the year-earlier period. (Reporting by Nancy Leinfuss; editing by Jeffrey Benkoe)