July's $11 bln TALF ABS deals garner strong demand

By Nancy Leinfuss

NEW YORK, July 7 (Reuters) - U.S. asset-backed issuers easily sold $11 billion of new securities supported largely by auto loans on Tuesday, under the fifth subscription round of the Federal Reserve's program to revive consumer lending.

The deals sold under the Term Asset-Backed Securities Loan Facility, known as TALF, were met with strong investor interest, enabling issuers to cut funding costs.

"All TALF eligible tranches have been significantly oversubscribed, with yield spreads contracting commensurately, thereby reducing the cost of consumer credit," said Don Ross, global strategist at money management firm Boyd Watterson, in Cleveland, Ohio.

Banc of America Auto tightened the spreads offered on its deal, while increasing the size of its offering to $3.9 billion from $2.5 billion, to accommodate the huge demand generated by its first auto sale, dealers and investors said.

In another sale, AmeriCredit's $725 million auto deal was oversubscribed by 17 to 19 times, allowing the issuer to narrow the spreads offered, investors said.

Honda increased the size of its offering to $1.8 billion from $1.5 billion and narrowed spreads, while Chrysler Auto and Ford Credit sold $1.2 billion and $1.02 billion of securities, respectively, dealers said.

"The (TALF) program is working very well. If you look at Chrysler, a few months ago they would not have been able to do a deal," said Mike Kagawa, portfolio manager at Payden & Rygel in Los Angeles.

Chrysler's AAA-rated one-year and two-year notes were priced at narrower spreads of 110 basis points and 150 basis points over eurodollar swap futures, dealers and investors said.

"Demand is pretty much a given now, while the entire market is on tenterhooks awaiting clarification by the Federal Reserve as to whether TALF is going to be expanded to create more supply," said Ross.

The program, designed to stimulate consumer lending and reopen the securitization market, was recently expanded to the commercial mortgage-backed securities market, where frozen credit markets limited refinancings on billions of dollars of commercial real estate debt and resulted in a wave of defaults.

Reed Auerbach, attorney and co-chief executive at law firm McKee Nelson, said the market will likely see TALF expanded to the residential mortgage-backed securities market.

"I think the Fed will extend the program to RMBS legacy securities. We've seen a lot of resecuritizations in the market, in the form of re-remics, where issuers take formerly issued securities and repackage them into AAA securities," said Auerbach.

"There's been a lot of demand for those assets and they are currently non-TALF eligible. That tells me that if there are buyers for those assets, why wouldn't someone buy on a levered basis pre-exisiting TALF?. It seems that would be the next logical step," said Auerbach.

ABS issuers have sold about $53 billion in securities backed by consumer debt since the program was launched in March, with last month's $16.5 billion volume under TALF the largest so far. (Editing by Leslie Adler)