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The first round of CMBS TALF saw no takers. However, the lackluster reception isn't indicative of a lack of appetite. Market sources said it's just a matter of dealing with a more complex asset class that has required more work and, consequently, will take more time to gather momentum under the Federal Reserve program.
"The program is very well developed, and the Fed has spent lots of time on it, but there are still some issues that need to be worked out," a CMBS expert said. Issues like aggregate risk and hedging risk make the finalization of the program challenging."
One of the reasons behind the lack of takedowns in the initial round of CMBS TALF is that assets don't exist today that are eligible for securitization under the program. The market has to create a whole new set of assets - the aggregation and origination of those assets is what is difficult.
"There is a learning curve at the New York Federal Reserve," the CMBS expert said. "The Fed wants to know how these newly originated assets are going to work, and they are creating a standard for acceptable collateral and that is going to take time." He added that originators also have to gain confidence before they can make a commitment with borrowers. It's a lot easier for originators and borrowers to get to that point of financing new pools of CMBS single-asset origintation through TALF.
JPMorgan Securities analysts also said that the slow uptake on CMBS TALF is the result of event risk and of the mountain of uncertainties investors still face. The most recent came via Standard & Poor's proposed rating changes that could result in downgrades of many recent vintage super-senior bonds, which would make the securities ineligible for TALF.
The Fed has, over the course of developing its initiative, warned that it does not intend to make modifications to eligible securitizations. However, its requirement for triple-A assets could cause the eligible pool of legacy CMBS assets...