The CMBS portion of TALF is gearing up for a second-half run that many hope will revive the dormant securitized loan market.
Formerly active conduit lenders such as Wells Fargo and Prudential are working on originating new loans for a TALF execution, while other lenders have quietly been originating deals since earlier this year. No new issuances have been brought to market yet, but there is a sense in the industry that new deals will be coming soon.
The New York Federal Reserve, which administers TALF, has selected research firm Trepp as collateral monitor of the program. Trepp will analyze the CMBS bonds eligible for TALF, and advise the Fed on each bond’s metrics and performance. TALF is a program where investors can get favorable loans to purchase AAA-rated CMBS. No investors subscribed to TALF loans during last month’s initial window, and few are expected to in the second round on July 16, since no new issuances have been brought to market. But industry watchers expect more activity in the August subscription period.
According to Trepp, the second half of the year should see activity for TALF CMBS pick up significantly. “Some lenders are just reopening their lines, but my understanding is that some folks have been a little more active in originating collateral since the beginning of the year,” says Thomas Fink, senior vice president and managing director of New York-based Trepp. “There are a couple of institutions that are actually close to having diversified pools available, but we have not seen any applications.”
The industry is buzzing that the first issuances will likely be single-borrower deals, where a well-diversified REIT secures financing for a variety of properties, creating an instant pool. While the Fed has expressed a desire for a pool with different asset classes, it also has the authority to waive that requirement in the interests of the market. “They recognize that particularly on the new issue side, achieving geographic diversity, asset type diversity, and borrower diversity immediately may be difficult,” Fink says.
“Our understanding is that there are deals in the works,” adds Annemarie DiCola, Trepp’s CEO. “The market is expecting to see some activity during the summer windows, and that’s what we’re all looking forward to.”
Lenders Hit Roadblocks
Lender CWCapital has been considering programs that would use TALF to finance new origination, but the company says there are a few impediments. First, many borrowers are still going through a painful de-leveraging process, making refinancing difficult. Second, the agencies and life insurance companies are offering prices on debt that are well-inside of what capital market lenders can offer.
“What you could originate is limited by the fact that most properties are encumbered and frequently overleveraged, and by the fact that anything that’s relatively decent, a life company will probably do," says Hugh Hall, a managing director at CWCapital Investments.
CWCapital is also concerned about the aggressive timeline of the program, which is set to expire at the end of 2009. “While TALF is a good program in that it has stopped the utter freefall, it's really not a sufficient program to fundamentally contain cap rate expansion because the cost of funds is too high, and there’s a significant amount of uncertainty about its availability when it comes time to securitize,” Hall says.
Looking Back, Looking Forward
Trepp has been busy since being selected by the Fed on June 16. The company’s database contains information on every CMBS issuance since the late 1990s, and the firm has been analyzing the credit risk built into various vintage CMBS pools. No firm has yet submitted a list of bonds for legacy financing, however.
Trepp sees the success of the consumer asset-backed security (ABS) side of TALF as a model for the CMBS side. The program was already successful in significantly tightening spreads on consumer ABS, and once that market was revived, fewer bonds needed to rely on TALF financing to find an investor.
“One of the measures of success is the extent to which there are bonds eligible for TALF financing that didn’t use TALF financing,” Fink says. “Many people just bought the bonds without any independent financing from the Fed. So if that’s the impetus you’re looking for, it would appear to be a successful stimulus.”
There’s concern in the industry that TALF’s sunset date of Dec. 31, 2009 is too aggressive, that any success seen in the second half will disappear once the program closes. Many are hopeful that the Fed will extend the program, but even if they don’t, the effects felt in the second half may have legs.
“The example that will be set by the business activity that we expect to take place will encourage more private activity that won’t be reliant on government involvement,” DiCola says. “So we think that good news travels.”
For a basic primer on the TALF and TARP programs, click here.