While the government’s efforts to revive the commercial mortgage-backed securities (CMBS) industry are still in the early stages, many investment firms are now readying TALF funds to strike when the iron grows hot.
What’s more, several conduit lenders are taking steps to re-open their securitized loan platforms, looking to originate new conduit loans this summer to be sold through TALF in the fall. This next wave of conduit loans will be very conservatively underwritten, but the trend signals the first step in a process that could significantly enhance the liquidity of the multifamily industry.
TALF funds for consumer-backed securities have already been launched by Prudential Financial, Morgan Stanley Investment Management, PIMCO, and Citigroup. But many investors, such as Standish Mellon Asset Management, are choosing to sit out the first few consumer TALF offerings, eager to see how the concept played out.
“We weren’t sure whether it would be something that was going to fit within our product offering,” says Tom Graf, managing director of structured products and global workout solutions at the Boston-based Standish Mellon. “But as we went through several TALF subscription periods, it became apparent to us that this was something we could be successful at.”
The company recently opened two TALF funds—one aimed at investing in new CMBS and consumer asset-backed securities, and a second fund focused on legacy assets, such as CMBS issued before 2009.
TALF is basically a loan program, providing low-cost debt to CMBS investors to help spur interest in the market. TALF investors need only $15 in their own equity to achieve $100 of purchasing power. The hope is that increased investor interest will ultimately lower interest rates on new conduit loan originations.
The early efforts have been positive, and many firms are targeting rates of return in the 10 percent to 16 percent range. Many more investment firms are expected to announce TALF funds in the coming days, buoyed by the early success of the program, and growing more comfortable with the prospect of partnering with the government.
One lesson Standish Mellon took from watching the early TALF consumer efforts is that early adopters will see the greatest payback. “Given how this program has played out in its early stages, spreads have started to tighten, so the yield spread premium that you’re getting to buy that same asset is lower now than it was originally,” Graf says.
While TALF has already been successful at spurring auto and student loan investment, the CMBS version of TALF has been slow going. The first deadline for investors to request TALF loans for new issue CMBS came and went on June 16 without a single application. But the lack of initial interest wasn’t surprising, given that no new CMBS issuances have been offered through the program, and it remains unclear what legacy CMBS will be offered.
“We’ve heard rumors of new issue CMBS forthcoming,” Graf says. “There may be some deals in the works, but not for the [June 16] subscription date.”
Much depends on how quickly conduit lenders can put together a well-diversified pool of loans—for different property types and geographic location, which is a requirement of the TALF program.
“The first real test is when the first CMBS is formed, sold, and priced,” probably no sooner than September, says Spencer Levy, senior managing director at CBRE's Restructuring Services Group based in Washington, D.C. “We’re speaking with several major players that are opening their warehouse lines and lending in this environment specifically for this purpose.”
Levy also believes that the first CMBS issuance under TALF may be a single-borrower transaction, such as a REIT with a diversified pool that recently recapitalized by renegotiating credit lines.
For a basic primer on the TALF and TARP programs, click here.