Market Extra: Here come the TALF funds

Market Extra

Fund aims to buy securities that fit Fed’s new $100 billion Term Asset-Backed Securities Loan Facility, or TALF

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When the U.S. subprime mortgage market imploded more than a decade ago, credit investors sifting through the rubble found some gems.

SLC Management, Sun Life Financial’s

asset management arm, is again on the hunt with a new $500 million fund that, like a decade ago, will allow it to invest alongside the Federal Reserve during a crisis.

The fund aims to buy top-rated securities that fit the Fed’s new $100 billion Term Asset-Backed Securities Loan Facility, or TALF, a program expected to get off the ground next month to help fund households and businesses during the pandemic.

Check out: All of the Fed’s Stimulus Programs Should Start Operating Around the End of This Month, Officials Say

The Fed’s TALF facility won’t be making loans directly to consumers or corporations, but it does aim to keep borrowing rates down by financing investors to buy up their debt in the U.S. securitization market.

Read: How the Fed plans to keep credit, a crux of the American economy, flowing to U.S. consumers during the pandemic

Five years ago, SLC acquired Ryan Labs Asset Management, which started deploying its first TALF fund in August 2009 to buy eligible subprime credit card securities, commercial mortgage bonds, and other kinds of debt with Fed funding, according to records kept by the central bank. Those investments generated an annual internal rate of return of 21.5%, according to a SLC, in its announcement of its new TALF fund.

The same team, Daniel Lucey and Phil Mendonca, co-portfolio managers on SLC Management’s Total Return Fixed Income team, will manage the new TALF 2020 effort.

As in 2009, the SLC team will look to buy asset-backed securities and commercial mortgage-backed securities that fit the Fed’s criteria, but also collateralized loan obligations, which were not part of the original TALF program, according to a spokesperson.

Although, a key difference from the last crisis is that it’s a lot harder to find downtrodden securities to buy, particularly since the unleashing of federal aid has given consumers hope of an economic rebound as U.S. states start to reopen their economies, despite the coronavirus crisis putting millions of out of work.

A Neuberger Berman team thinks the new TALF program might more likely produce levered yields in the high, single digits or low teen percentages, for participating investors.

A major criticism of the policy response to the 2008 crisis was that not enough was done to help Main Street. Congress now is working on additional coronavirus stimulus, which could mean another round of direct payments to qualifying households to manage through the pandemic, but it isn’t expected to become reality until late June, at the earliest.

TALF is part of the Federal Reserve’s unprecedented $2.6 trillion pot of emergency funding to help shore up credit markets, an insurance policy, if conditions worsen.

U.S. stocks closed sharply lower Tuesday, after Wall Street digested two hours of testimony by Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin in front of the Senate Banking Committee, where reopening the economy safely during the coronavirus pandemic was main topic of questioning.

Read: Sen. Sherrod Brown inquires of Treasury’s Steven Mnuchin: ‘How many workers should give their lives to increase the GDP or the Dow Jones by a thousand points?’

The Dow Jones Industrial Average

shed nearly 400 points, down 15% on the year to date.

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