By Sarah Mulholland Feb. 4 (Bloomberg) — The end of a Federal Reserve program that helped unlock credit markets is spurring sales of asset- backed bonds with relative yields five times wider than on debt secured by car loans. The expiration of the Fed’s Term Asset-Backed Securities Loan Facility is driving companies to sell bonds tied to loans that would otherwise require higher yields. Borrowers are offering bonds backed by subprime auto loans, mortgage-servicing payments and assets that have proved hard to sell after the worst credit seizure since the Great Depression. “What we are seeing in the last couple of rounds are issuers in non-traditional asset classes and weaker issuers looking to fund as much as they can before the window closes,” said James Grady , a managing director at Deutsche Asset Management in New York. The firm has $240 billion in assets under management, including asset-backed securities. Ally Bank, a Midvale, Utah-based unit of GMAC Inc., is selling $750 million in so-called floorplan securities backed by payments on loans that finance cars on lots. Nissan Motor Co. , in Yokohama, Japan, issued $900 million of the debt last week. Sales total $3.35 billion this year, including deals being prepared, compared with $3.9 billion all of last year, according to Informa Global Markets in New York. The bonds offer investors higher relative yields because the collateral is considered riskier. Ally Bank’s sale of AAA debt backed by floorplans may yield 1.75 percentage points more than swap rates, compared with a spread of 0.35 percentage point for top-rated auto-loan bonds, according to Bank of America Corp. data. TALF Expires Investors have a deadline of today for taking out loans through TALF this month. The program, which provides loans to investors buying the debt, began in March 2009 and expires March 31. Elsewhere in credit markets, the yield spread on company bonds narrowed 1 basis point yesterday to 164 basis points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index showed. The gap has widened from this year’s low of 160 basis points, or 1.6 percentage points, on Jan. 14. The average yield yesterday was 4.12 percent, up from the low this year of 4.06 percent on Jan. 11. The cost to protect North American company bonds from nonpayment fell yesterday for the third straight day, the longest stretch since the four days ended Jan. 6. Standard & Poor’s said the default rate on speculative-grade debt held steady last month at 10.7 percent. Kraft Foods Inc. may complete the sale of $4 billion in debt today to pay for its acquisition of Cadbury Plc. Choking Off Funding TALF was started to jump-start the market for bonds tied to consumer and small-business loans after sales of the debt plummeted 42 percent in 2008, choking off funding to lenders, according to data compiled by Bloomberg. The program spurred $178 billion of securities sales, according to Bank of America. TALF provides low-cost Fed loans toward the purchase of top-rated securities. It allows buyers to boost returns with borrowed cash and provides issuers with lower funding costs. Companies selling debt through TALF this month include AmeriCredit Corp. , the Fort Worth, Texas-based lender to car buyers with poor credit, and Ocwen Financial Corp., a West Palm Beach, Florida-based company that acquires and services troubled mortgages. Ocwen’s sale is backed by payments connected to delinquent home loans. The program is becoming less useful as investors gain confidence in the economy and use more of their own cash to buy the debt. Yields on top-rated auto-loan securities relative to Treasuries have narrowed to 0.69 percentage point from 6.4 percentage points a year ago, Bank of America Merrill Lynch index data show. JPMorgan, GE Companies including New York-based JPMorgan Chase & Co, Fairfield, Connecticut-based General Electric Co., New York- based Discover Financial Services and Dearborn, Michigan-based Ford Motor Co. sold debt backed by loans and leases outside the program during the past six months, Bloomberg data show. In making the decision to end TALF and three more programs like it, the Fed said in a statement on Jan. 27 that the economy “has continued to strengthen,” while “the pace of economic recovery is likely to be moderate for a time.” The central bank also said it’s “prepared to modify these plans if necessary to support financial stability and economic growth.” Other parts of the asset-backed debt market are also likely to make a comeback as investor sentiment improves. Sales of securities backed by U.S. home loans lacking government-backed guarantees, which stopped two years ago as subprime mortgage defaults surged, may resume this year, industry executives said at a conference this week. ‘Dipping the Toe’ “You’re going to see people come to market to some extent but it’s just going to be dipping the toe in the water,” Bill Felts, a senior vice president at Citigroup Inc.’s mortgage unit, said at the American Securitization Forum conference in Washington. Sales of so-called non-agency bonds backed by new home loans peaked at almost $1.2 trillion in both 2005 and 2006 before freezing as the worst U.S. housing slump since the Great Depression sparked losses and curbed lending, according to the newsletter Inside MBS & ABS. In the credit-default swaps market, contracts on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, fell 0.5 basis point to 92 basis points. Credit Quality A basis point on a credit-default swap protecting $10 million of debt from default for five years equals $1,000 a year. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to meet its debt agreements. A decline signals improvement in perceptions of credit quality. The default rate on speculative-grade debt was little changed at 10.7 percent last month, and may decline to 5 percent by December 2010, S&P said yesterday. During January, seven companies defaulted, compared with 14 at this time in 2009. “Credit metrics in the U.S. are showing the first indications of strengthening credit quality, as well as stronger lending conditions and signs of life among speculative-grade new issuance,” wrote Diane Vazza , head of S&P’s Global Fixed Income Research Group. Companies in the U.S. are marketing at least $6.7 billion of high-yield bonds following a record $16.4 billion in January, according to data compiled by Bloomberg. Speculative grade bonds are rated below Baa3 by Moody’s Investors Service and BBB- at S&P. Kraft Bonds Kraft is rated Baa2 by Moody’s and BBB by S&P. The Northfield, Illinois-based company may finish the sale of debt due in 3.25, 6, 10 and 30 years today, said a person familiar with the transaction who declined to be identified because terms aren’t set. Kraft plans to issue a minimum of $1 billion in each maturity, the person said. “It’s going to be a big deal, so the question is how robust the demand is going to be,” said Jeff Given , a money manager who helps invest $19 billion in fixed-income assets at MFC Global Investment Management in Boston. “I expect it to go fairly well.” The 3.25-year notes may yield about 150 basis points more than Treasuries, while the 6- and 10-year debt may pay spreads of about 187.5 basis points, said the person. The spread on the 30-year bonds may be about 15 basis points wider than that of the 10-year notes. Last Deal Kraft last sold bonds in December 2008, issuing $500 million of notes due in February 2014. The 6.75 percent notes were priced to yield 525 basis points more than Treasuries of similar maturity, Bloomberg data show. Those securities traded yesterday at 112.11 cents on the dollar to yield 110 basis points more than Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. In Europe, Portugal led a surge in the cost of insuring against losses on European government debt to record-high levels amid concern the country will struggle to finance its budget deficit. Portugal sold 300 million euros ($417 million) of 12- month bills yesterday after indicating it planned to issue 500 million. The securities were sold to yield 1.38 percent, compared with 0.93 percent at a Jan. 20 auction. Credit-default swaps on Portugal soared 29 basis points to a record 196, according to CMA DataVision prices. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments including Portugal and Greece jumped 5 basis points to an all- time high of 93.5, CMA prices show. Spanish government agency Instituto de Credito Oficial increased the yield premium it paid on a 1 billion-euro bond sale to entice investors. Swap Rates Madrid-based ICO, which lends to businesses, paid 65 basis points over the benchmark swap rate, according to data compiled by Bloomberg. That compares with a spread in the low 50-basis- point range offered Feb. 2, according to a banker with knowledge of the transaction who declined to be identified because the terms weren’t set. Snai SpA , Italy’s second-largest gaming and betting company, pulled a sale of high-yield bonds citing “market conditions” and a dispute with Bridgepoint Capital Ltd. Snai planned to raise 350 million euros selling bonds. Bridgepoint asked the company and Snai Servizi Srl, its parent, for 20 million euros in damages for its failure to accept an offer for its gaming activities. To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net
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End of TALF Means Bond Sales With Spreads Five Times Wider: Credit Markets
