US Attempt to Support Small Business Loans

Okay, this is really tricky... and it took me sometime to digest this press release to better understand how the US govt is trying to help loans to the Small Businesses. However, let me give this a shot. What I found most useful was this white paper from the US treasury.

Importance of Securitization Markets
This is important to understand why US doesn't go through the banks (i.e. offer risk sharing on defaults of loans given out by banks like the UK) to address the credit crunch to small businesses. Over the past two decades in the US, what banks have used to raise funds for loans to small businesses is to create Asset-Backed Securities (ABS) through collateralising these loans and then selling them to investors.

To do this, a bank sells their pool of loans (or the loans they intend to give out) to a Special Purpose Vehicle (some other created legal entity). The SPV then splices them up based on different risk levels and then sells it to different investors.

The reason why this has been so popular, that it broadens the investor base and as a result brings funds in more easily and cheaply. This is as compared to our system where, banks fund such borrowings either from deposits from their consumers, or through raising money from the capital market.

Credit Crunch has dislocated ABS market
Federal Reserve data shows that around 1/4 of all non-mortgage consumer credit (here could include car loans, college tuition as well as small busines loans) have been funded out of ABSes. As a result of the severe dislocation of these markets, new issuance has come to a virtual halt in Oct 2008.

TALF Plan of Attack
TALF's plan of attack is to lend money to potential investors of these ABS so as to catalyze the flow of funds into the banks to allow them to lend. The Federal Reserve Bank of New York will lend up to $200bn to holders of eligible ABS. Investors will be charged an interest rate which includes risk premium for these loans and will have to put up the respective collateral (the asset behind the securities themselves) for such government funding. Depending on the risk of the loans, investors may have to put up higher level of collateral then the loan given out ("haircuts") For instance, if the haircut is 10%, then to receive a $90 loan, investor must give $100 in collateral. $20bn has been set aside for possible defaults (10% rate assumed)


http://blogs.wsj.com/privateequity/2009/03/04/pes-glass-is-talf-full/
PE’s Glass Is TALF Full

By Shasha Dai

Now that the details of the government’s TALF plan have been unveiled, private equity firms find themselves intrigued.

TALF - short for Term Asset-Backed Securities Loan Facility – will provide three-year loans at relatively low interest rates to private investors, who will in turn buy securities backed by newly- or recently-issued consumer debt like car loans, student loans and credit card receivables. The program aims to re-open the securitization market so that banks will start lending to consumers again.

Several private equity firms have already expressed interest in participating. Blackstone Group Chairman Stephen Schwarzman told papers including The Wall Street Journal that his firm is considering investing in securities using TALF funding. The Journal also reports that hedge funds Millennium Capital Management, Cerberus Capital Management and Fortress Investment Group are considering participating.

Other firms with expertise investing in debt include Oaktree Capital Management LLC, Apollo Management LP, Ares Management LLC and Bain Capital. Officials at those firms either declined comment or said they haven’t made a decision yet.

Those firms that do go after this program may face some pushback from their LPs. Investing in consumer loan-backed securities is new to most PE firms – Blackstone, for instance, hasn’t been involved in this area in the past. A similar issue recently arose for some firms, including New Mountain Capital and BC Partners, when they decided to move into debt investing and had to seek LP approval.

“The first issue is what they tell their LPs,” said Steven Kaplan, a professor at University of Chicago Graduate School of Business. “For some, this is off-strategy, and some LPs will not like it.”

But whether or not buyout firms decide to tangle directly with TALF, they should still benefit tangentially from the program. TALF’s intended unlocking of consumer credit should help portfolio companies in related industries, such as auto finance companies or for-profit colleges, by increasing demand for their services.

However, TALF probably won’t have much direct impact on the lending markets buyout firms most want unlocked - those for their own portfolio companies - since it doesn’t address things like high-yield bonds. TALF only finances purchases of AAA-rated securities, or those backed by the most secure debt.

“It won’t help PE firms (directly), as financing for PE transactions comes from high-yield bonds and institutional loans,” said a senior loan officer at a large bank who asked not be named.

But it’s a beginning.

“This is a little bit of experimentation,” said Mitchell Hollin, a partner at growth equity investor LLR Partners. “The securitization market is a long way from coming back.”

Will look at the following website detailing US govt's credit assistance plans in a following post. http://www.financialstability.gov/