UPDATE:Issuance Of Non-TALF Consumer Loan-Backed Deals Growing

There is a steady growth in the issuance of consumer loan-backed bond deals that are not eligible for funding under the Federal Reserve's program to revive this market.

This signals investors are tentatively warming up to this corner of the credit market which went into hibernation once the credit crunch erupted.

About $9 billion in deals with collateral ranging from student and auto loans to agricultural-equipment loans have come to market since the beginning of the year, according to Informa Global Markets, an information provider for such bonds. This includes a $946 million auto loan issue from USAA, a financial services company, that is due to be sold on Wednesday.

Still, this is less than nearly $12 billion in asset-backed securities deals sold that were eligible for funding under the central bank's Term Asset-Backed Securities Loan Facility, or TALF, which has had a slow start. Though some investors have been wary of the central bank's program because of lengthy documentation and other requirements, they are finding the asset-backed securities sector attractive.

"Investors clearly see safe returns in ABS," said Michael Wade, head of asset securitization origination at Barclays Capital in New York. The bank has been an underwriter for five of the eight non-TALF deals that have emerged since the beginning of this year.

The bulk of the deals sold have been those backed by auto and student loans, including three non-TALF eligible ones from SLM Corp. (SLM), better known as Sallie Mae.

Investors are drawn to these bonds because of their relative stability when contrasted with subprime loan-backed deals and the much-maligned collateralized debt obligations, he said.

Defaults and downgrades on bonds backed by auto and credit-card loans have not been as swift or as dramatic, Wade pointed out.

Even though risk premiums are much wider on the current crop of deals compared with similar bonds sold two years ago, given that yields on Treasurys are at all-time lows, asset-backed securities are seen as an attractive investment, Wade said.

He said an older Honda auto loan-backed deal sold flat to swaps but the one-year portion on a deal sold earlier this year was priced at 175 basis points over swaps.

There is "pent-up demand" for new asset-backed securities "with or without TALF," said Chris DeReza, a researcher and manager at Informa Global.

Issuance of consumer loan-backed deals will pick up in the weeks ahead, regardless of whether they are eligible for the Fed's program, market participants say.

Hedge funds are the main buyers of TALF-eligible deals, and the non-TALF deals are being bought by "real money investors" who are not mandated to use leverage, DeReza said. These include insurance companies, pension funds, some banks and money managers.

While there are indications of recovery in this market, it will be a long time before issuance matches the more than $230 billion in 379 deals issued in 2007, according to data from Asset-Backed Alert, a trade publication.

In 2008, issuance totaled $60.83 billion and there were 78 deals.

-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371; [e-mail]