Textron Financial Could Benefit From New TALF Lending

Textron, the maker of Cessna jets, may be getting fresh liquidity with the new version of the federal Term Asset-Backed Securities Lending Facility, a Federal Reserve lending program. Oddly enough, it can thank the boating industry for that.

Textron’s financing arm, Textron Financial, provides leases for a variety of consumer and commercial products. Its captive business offers financing for Textron products, including helicopters and golf carts, among others, while its non-captive business covers equipment and products from third-party manufacturers. Historically, Textron has either securitized those leases in asset-backed securities or just held them on its books.

Textron announced in December that it would exit the non-captive business to shore up its own liquidity position. To that end, it said it would sell close to $3 billion in leases (roughly 40 percent of them securitized) that are related to “floor-plan financing” — also called distribution financing. Floor-plan financing involves lending to dealers of products as diverse as electronic goods, tractor engines or boats, who use the money to buy inventory for showrooms. As dealers sell products, the floor-plan leases get paid back.

Textron, however, has had trouble selling those leases. Enter the National Marine Manufacturers Association, which — after weeks of lobbying Congress and the Obama administration — finally succeeded in convincing the Federal Reserve to add floor-plan financing as one of four new asset classes that will be eligible for funds from the $1 trillion TALF starting in April. TALF lending aims to supply liquidity to holders of asset-backed securities.

Traditionally, large players like GE Capital could have purchased Textron’s leases and securitized them. But with the asset-backed securities market frozen and GE Capital itself closing down part of its financing business, that hasn’t happened. Other smaller players like TCF Bank would only buy the leases at cut-rate prices, which would mean losses for Textron. (TCF has already taken over some of Textron’s clients in the distribution-financing business).

Standard & Poor’s even went as far as to downgrade Textron Financial’s rating to junk last week — several days before the Fed announced the expansion of TALF — citing the negative impact of Textron’s decision to exit some of its financing business.

Now with the prospect of TALF providing fresh liquidity to potential buyers of asset-backed securities, the securitization market is likely to reopen. (At least, that’s the goal of the program.) If all goes well, it should then allow Textron to securitize the remainder of its leases and to unload them to potential investors. In turn, the securitization process will bring some much needed liquidity to Textron as well as some support in winding down its portfolio.

The wild card for Textron, though, is whether its asset-based securities can earn the AAA rating required by TALF. That will depend on the quality of the underlying collateral. So if folks have kept those boats, tractor engines and golf carts in good shape, then Textron should be fine. If not — watch out.