Consumer Loan-Backed Issuance Unlikely To See Much Of Rebound

The consumer loan-backed securities market is unlikely to rebound much from recent record lows, and may actually weaken if rule changes make securitization more expensive or the economy slows down substantially.

About $135 billion of asset-backed deals will be issued this year, according to a note from Barclays Capital. That is roughly in line with $131 billion in 2009, when the market was helped by the Federal Reserve's Term Asset-Backed Securities Loan Facility, or TALF. Only $125 billion of ABS was issued in 2008, which Barclays said was a record low for the market.

A robust ABS market is important because the ability to bundle consumer loans into securities and sell them to investors lowers borrowing costs for consumers.

Under TALF, the central bank offers inexpensive loans to investors to buy securities backed by auto, student and equipment loans. The program was launched last March because this market virtually shut down as investors became fearful of collateral underlying these deals.

The consumer loan-backed portion of TALF is scheduled to expire this March, but industry participants said they don't think this will significantly affect the market because banks and other ABS issuers have increasingly been able to sell deals that do not rely on TALF support--avoiding the paperwork that comes with it.

They are more concerned about regulations that may require banks to hold capital against ABS bonds even after they sell the bonds to others. Also, there is uncertainty about changes to Federal Deposit Insurance Corp. rules. Under current rules, the FDIC is empowered to seize the assets of a bankrupt bank--including the loans underpinning ABS securities. The FDIC is considering changing these rules, creating a "safe harbor" that would make the underlying assets out of its reach.

"Because of the potential FDIC safe harbor rule changes and pending requirements to retain more residual risk, there will likely be an increase in the cost of securitization," said Randall Bauer, senior portfolio manager in the structured products group at Federated Investors in Pittsburgh. "The market will likely be less attractive for issuers."

That said, they may still like to join this market to diversify their funding sources, even if the cost to the issuers is higher. "They just won't use it to the degree they did in the past," Bauer said.

While the better-ranked issuers have some degree of freedom in choosing which path they take, some issuers, like subprime consumer asset originators, which have "limited funding alternatives," may need to securitize even more, he said.

If, however, the economic recovery remains tepid or if there is a further slowdown, there may be "little to no growth in financing needs," say Citi analysts in a recent note.

With the effects of the regulatory factors and the slow economy unresolved at this point, they say "it would be difficult to match the 2009 full-year supply during 2010."

They project "roughly $112 billion of gross new issue consumer ABS supply" for this year.

-By Anusha Shrivastava, Dow Jones Newswires; 212-416-2227; [e-mail]