TALF: The Federal Government Stimulus Program for Consumers & Small businesses The Asset-Backed Securities (ABS) markets historically have funded a large percentage of consumer credit and Small Business Administration (SBA) -guaranteed loans. The Term Asset-Backed Loan Facility (TALF) was created to increase credit availability and to support economic activity by facilitating renewed issuance of consumer and small business ABS at wider than historical interest rate spreads.
stimulus packages have created opportunities for investors.
TALF loans have three year terms and are non-recourse to encourage buying of certain AAA rated securities backed by newly and recently originated consumer and small business loans. A unique feature of TALF loans is the borrower/investor can put back the loan to the Federal Reserve if the underlying collateral (ABS) The ABS market came to a halt is below purchase value in October 2008 as interest rate at the loan’s maturity. spreads soared to levels well - Duncan Morton III- Interfund Principal With the loan features above historical ranges, reflecting offered, the risk to the unusually high-risk premiums. investor is their economic In a move to revitalize the stake in the transaction, ABS markets, to promote new typically referred to credit extensions, to normalize as a “haircut”. In addition, under the Troubled Assets spreads, and to stimulate investor demand the Federal Reserve Relief Program (TARP), the U.S. Treasury has provisioned Board has implemented a $200 billion loan facility program $20 billion of credit protection to the Federal Reserve initially directed at helping consumers and small businesses. Bank of New York (FRBNY) in connection with the TALF. The creation of the TALF will support the issuance of ABS collateralized by student loans, auto loans, credit card loans, Interfund’s Investment Partnership, Hegemony, is exclusively SBA loans, equipment loans and CMBS loans. Talk of extending available for accredited investors interested in investing in an the plan is already in the works from an initial goal of $200 entity that will participate in the recently created TALF program. billion to $1 trillion. Such revitalization efforts of government
“In an unlikely development, this is the first government backed carry trade.”
Opportunities for Hegemony as an Investor: • • • • • • • •
Purchase at a discount Wide spreads Participation in newly issued or repackaged securities Monthly fundings of top institutions Secured financing Asset maturity equates to loan term completion Possible extension of program to $1 trillion Mispriced risk
TALF Loan Features
Backed by the Full Faith & Credit of the Government
$20 Billion Credit Protection
Varying Terms
Three Years - Non-Recourse
Adjustable Rates Marked-to-Market Risk: Par Value
Investment Risks Include: • • • • •
Standard Loan Features
Liquidity risk Reinvestment risk Asset/Liability Maturities - non linked Consumers fail to fulfil obligations TALF Program subject to change
Reg T Margin Calls Unlimited Accessibility CDS for US Government Debt Priced at Par
LIBOR +50 to100 bps N/A Risk: Margin (Haircut) No Re-Margining Limited Accessibility to Investors Prohibitions on Hedging Priced at Par