ELFA commends Treasury and Federal Reserve Board.
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Press Release Summary:
ELFA commended Department of Treasury and Federal Reserve Board of Governors for expanding Term Asset Backed Loan Facility to include leases and loans and offered recommendations to proposed program structure, eligible collateral rating requirements, TALF loan terms, and TALF loan index. ELFA believes decision to include equipment leases and loans as eligible asset class under TALF will become critical component of government's efforts to stimulate lending and investment in commercial sector.
Original Press Release:
ELFA Commends Treasury, Federal Reserve Board
Offers Program Structure Recommendations for TALF
Washington, DC, March 25, 2009--The Equipment Leasing and Finance Association (ELFA) commended the Department of Treasury and Federal Reserve Board of Governors for expanding the Term Asset Backed Loan Facility (TALF) to include equipment leases and loans and offered recommendations to the proposed program structure, eligible collateral rating requirements, TALF loan terms and the TALF loan index.
"We believe the inability of banks, independent equipment finance companies and captive finance subsidiaries to fund the origination of equipment leases and loans has greatly curtailed the ability of U.S. businesses to operate and invest for the future," said ELFA President Kenneth E. Bentsen, Jr. "U.S. businesses finance an even greater proportion of critical equipment such as information technology, thus we believe the decision to include equipment leases and loans as an eligible asset class under TALF will become a critical component of the government's efforts to stimulate lending and investment in the commercial sector," Bentsen said.
"While the ELFA believes that the inclusion of equipment finance Asset Backed Securities (ABS) in the TALF will be beneficial to increasing liquidity to our market, and may even attract some financial institutions that otherwise have not utilized ABS as a funding structure, we still believe the Treasury and Federal Reserve should consider additional funding structures in line with more traditional sector practices," Bentsen said.
Key Program Structure Recommendations
Following are the recommendations ELFA submitted regarding the eligible collateral rating requirements, TALF loan terms and TALF loan index.
TALF Eligible Collateral Rating Requirement: ELFA believes that the limitation of TALF eligible collateral to ABS with the highest investment grade rating from at least two nationally recognized statistical rating organizations ("NRSRO") will potentially undermine the intent and effectiveness of the TALF and CBLI. ELFA fully appreciates the prudential responsibility of the government in extending credit to the private markets. We believe, however, that the highest NRSRO rating, particularly in the current market environment, will require an unachievable amount of capital for many, if not most, equipment lease and loan issuers.
TALF Loan Terms: ELFA believes extending the term of TALF loans from one to three year greatly improves the opportunity for market acceptance of the program. However, while a three-year term is far better, it may still prove insufficient for longer dated collateral underlying the targeted asset class ABS. According to data collected by PayNet Inc., a leading provider of risk management services in the equipment finance and small business lending sectors, the vast majority of equipment loans and leases have a term of between three (3) and five (5) years.
TALF Loan Index: For TALF loans secured by other eligible fixed-rate ABS, we recommend indexing to like term swap rates. This change would allow a 1 Year ABS investor to index to a 1 year benchmark, thereby eliminating the delta between the 1 Year benchmark and 3 Year benchmark and possibly encouraging fixed rate investors in the 1 and 2 Year ABS tranches.
Alternative TALF Structure
ELFA also proposed an alternative TALF structure that would involve directly funding the purchase of ABS through a trust established by the issuer. ELFA believes this structure would attract more equipment finance companies and captive finance subsidiaries and create a more equitable spread of the TALF and would ultimately benefit the investor, the finance companies and the consumer through a lower cost of funds.
"As an alternative to structuring ABS for sale to eligible borrowers with non-recourse financing through the Federal Reserve Bank of New York, we would suggest directly funding the purchase of such ABS through a trust established by the issuer," said Bentsen. While the current TALF guidelines explicitly prohibit the issuer from purchasing their own ABS through TALF, ELFA believes the allowance for finance companies to more directly access TALF funds in this manner might accomplish two complimentary objectives:
Allowing the issuer to structure a AAA ABS that is sold through an underwriter into a trust or special purpose vehicle and fund the sale through the TALF, at some rate slightly higher than the eligible borrower rate, would pass on the FRB subsidized funding cost through to the issuer with all of the same credit criteria, while providing the same security to the TALF. This would likely attract more equipment finance companies and captive finance subsidiaries that fund either through the debt market or conduits and warehouse lines.
By allowing for the purchase of ABS through a trust established by the issuer, the FRB would have one further tool to make sure that the price of ABS did indeed fall. In other words, if ABS prices did not fall, all finance companies, as issuers, would utilize a trust to access the TALF thus forcing the bond investors to accept lower overall returns (albeit still in the double digits). Thus by allowing finance companies to also more directly access the TALF, a more equitable spread of the TALF benefit would result as some benefit would accrue to the ABS investor in the form of increased total return and some benefit would accrue to the finance companies and ultimately the consumer in lower cost of funds.
About ELFA
The Equipment Leasing and Finance Association is the trade association that represents companies in the $650 billion equipment finance sector, which includes financial services companies and manufacturers engaged in financing the utilization of and investment in capital goods. Our sector provides capital to the business, government and nonprofit sector for investment in capital, plant and equipment. ELFA members are the driving force behind the growth in the commercial equipment finance market and contribute to capital formation in the U.S. and abroad. Its over 700 members include independent and captive leasing and finance companies, banks, financial services corporations, broker/packagers and investment banks, as well as manufacturers and service providers. For more information, please visit www.elfaonline.org
For more information, please contact David Fenig, VP for Federal Affairs at dfenig@elfaonline.org
