BlackRock, Voya Revive TALF Trade That Returned Double-Digits

Memories of the housing crash and financial crisis of 2008-2009. A Federal Reserve program to allow some to borrow cheap from The Fed and buy distressed assets that earn double-digit returns.

(Bloomberg) — Money managers are reviving one of the most profitable credit trades of 2009, thanks to the Federal Reserve.

Dozens of firms, from BlackRock Inc. and Voya Financial Inc. to credit specialists Palmer Square Capital Management and Varadero Capital, are raising funds to deploy into a central bank lending program that’s being resurrected to support the flow of consumer credit, according to people with knowledge of the matter.

They’re seeking to replicate the windfalls many enjoyed in the aftermath of the financial crisis when, by taking advantage of low-cost loans via the Term Asset-Backed Securities Loan Facility, they were able to notch double-digit returns purchasing top-rated ABS as the economy recovered.

It’s the latest example of how credit managers who spent much of the past decade battling low yields are now raising cash to seize on deep discounts created by the economic fallout from the coronavirus pandemic.

Investors, for their part, have been happy to oblige, piling billions of dollars into funds targeting distressed and dislocated securities as they aim to make up for steep losses elsewhere.

“If you look at what you’re getting an opportunity to invest in, it’s AAA rated paper that’s offering really healthy yields for the risk,” said Chris Long, president and founder of Palmer Square. “This go around, the TALF program is a bit more of a known entity. The fact that TALF proved so successful in 2009 really bodes well for demand.”

Still, some market watchers are already warning that replicating the gains of the last crisis may prove easier said than done.
On the heels of the U.S. housing collapse, asset-backed securities looked a lot more fragile in early 2009 than they do today. Average risk premiums on AAA rated ABS deals reached nearly 8%, according to Bloomberg Barclays index data. This year, they peaked around 3% in March and have since fallen to about 1.4%.

talf

“You’re not going to get 20% to 25% returns like you did in 2009,” said Greg Leonberger, director of research at investment consulting firm Marquette Associates. “The return potential is lower because spreads are lower.”

An example of the availability of distressed assets available is the TRACE number of distressed bonds traded.

distbrond

Here is the latest TALF term sheet.

talfphoto