March 18 (Bloomberg) -- A $1.3 billion package of securities backed by Nissan Motor Co. auto loans became the first small piece of what Federal Reserve officials say may grow into a $1 trillion effort to unfreeze business and consumer lending.
Nissan’s planned bond sale marks the debut of the Fed’s Term Asset-Backed Securities Loan Facility, or TALF. The securities will likely price on March 19, the deadline for investors to apply to the Fed for loans to buy the debt, according to a person familiar with the sale who declined to be identified because terms aren’t set.
The Obama administration is counting on the TALF plan to help end the credit crunch and recession, thawing the market for asset-backed securities so lenders can make new loans to consumers. The program, first announced in November, was hampered by delays as investors, dealers and issuers worked on details.
“A number of people were concerned that some glitches might not have been ironed out this week” in time to meet the first deadline for investors to apply for the Fed loans, said Malcolm Dorris, a senior partner in the securitization group at law firm Dechert LLP in New York. “Getting a deal done in March is good for the program. We are still in the wait-and-see stage.”
Investors have shunned debt backed by consumer loans as unemployment has climbed in the worst financial crisis since the Great Depression. Sales of the bonds plunged 40 percent last year to $106 billion, according to data compiled by Bloomberg, choking off funding to lenders. About $2.3 billion of debt backed by auto loans has been sold this year, compared with more than $9.6 billion in the same period of 2008, according to data from JPMorgan Chase & Co.
Spreads Soar
Central bankers and Treasury haven’t been able to meet Fed Chairman Ben S. Bernanke’s goal of reducing consumer interest rates along with the borrowing costs paid by banks. The difference between rates on 30-year fixed mortgages and 10-year Treasuries was 2.1 percentage points as of yesterday, Bloomberg data show. That’s up from an average of 1.75 percentage points in the decade before the subprime mortgage market collapsed.
The extra yield relative to benchmark interest rates that investors demand to own debt backed by consumer loans has soared amid concern that defaults will climb. Top-rated bonds backed by auto loans are trading at about 300 basis points more than the one-month London interbank offered rate compared with 65 basis points in January 2008, JPMorgan data show. One-month Libor, a borrowing benchmark, is currently 0.56 percent.
AAA Rated
The first phase of the TALF will finance the purchase of as much as $200 billion of AAA rated securities containing loans for autos, education, credit cards and small businesses. Officials eventually plan to include other assets, including commercial mortgage-backed securities.
The Fed originally planned to start the TALF in February, then delayed the debut to ensure “all our legal and procedural steps had been taken,” Bernanke said in congressional testimony Feb. 25. On March 3, the Fed and Treasury said applications for the first deals would be due in two weeks, with loans disbursed on March 25.
The largest AAA portion of the Nissan sale maturing in 1.98 years may price to yield between about 185 basis points and 200 basis points more than benchmark interest rates, the person said. JPMorgan and Bank of America Corp. are underwriting the bonds.
Tokyo-based Nissan sold more than $3 billion of debt backed by auto loans last year, Bloomberg data show. Other auto finance companies, including World Omni Financial Corp., have indicated they plan to access the TALF. The Deerfield Beach, Florida-based lender filed a prospectus with the U.S. Securities and Exchange Commission on Jan. 12 to sell securities backed by auto loans.
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