Monday, October 12, 2009

Goldman Sachs Seeks to Restart Commercial-Backed Debt

Posted on Bloomberg by Sarah Mulholland and Christine Harper:

Goldman Sachs Group Inc. may sell the first commercial-mortgage bond since June 2008, taking advantage of an untapped Federal Reserve program.

The five-year, $400 million loan to Developers Diversified Realty Corp. made by a unit of the New York-based bank is secured by 28 shopping centers. Developers Diversified Realty Corp. It will be used to repay debt on those properties and others, and to reduce the outstanding amounts of credit facilities, Developers Diversified said yesterday in a statement.

Developers Diversified and Goldman Sachs are working with the Fed to qualify the loan for the central bank’s Term Asset- Backed Securities Facility to unfreeze the $700 billion market for securities backed by commercial mortgages, according to the statement.

“An actual close at reasonable terms would be a significant positive for new-issue TALF which has been slow to get off the ground,” said Aaron Bryson, an analyst at Barclays Capital in New York.

The pipeline of issuers under TALF has shrunk as unsecured debt markets opened up to real estate companies, and this deal would mark the first since the Fed program was opened to newly issued commercial-mortgage-backed securities in June.

Drop in Issuance

Sales of U.S. commercial-mortgage-backed debt slumped to $12.2 billon last year from a record $237 billion in 2007 as the credit crisis sapped demand, choking off financing to borrowers with maturing debt, according to JPMorgan Chase & Co. data.

Michael DuVally, a Goldman Sachs spokesman, declined to comment.

The TALF was opened in March to revive the market for securities backed by consumer loans. The program draws investors by offering Fed loans toward the purchase of top-rated debt. The program has helped spur $135.7 billion in sales of consumer and business asset-backed securities, Bank of America Corp. data show.

The program isn’t likely to have a “big impact” for newly issued commercial-mortgage securities, said Vishwanath Tirupattur, an analyst at Morgan Stanley.

“There may be a few deals, but I don’t think it is on the same order of magnitude as in the case of consumer ABS,” Tirupattur said in an e-mail.

Assembling Bonds

It takes several months to assemble a pool of commercial mortgages to package as bonds, and banks are reluctant to write new loans without a means to protect against price swings on the debt.

A single commercial mortgage-backed bond sold in 2007 could contain 200 loans on as many as 350 properties, according to data compiled by Bloomberg.

The U.S. government pushed to revive the market for commercial real estate amid a pullback in lending and a 36 percent drop in property prices from their October 2007 peak.

About $524 billion of commercial mortgages held by U.S. banks and thrifts are scheduled to come due before 2012, half of which probably won’t qualify for refinancing because they exceed 90 percent of the property’s value, according to distressed- assets investor Lone Star Funds.

At least $410 billion, or two-thirds, of commercial mortgages bundled and sold as bonds coming due by 2018 will have difficulty refinancing, according to data from Deutsche Bank AG.

The delinquency rate for commercial mortgages bundled and sold as bonds was 4.34 percent last month, according to FTN Financial.

The initial TALF deals may provide price points for new loan originations, said Darrell Wheeler, an analyst at Citigroup Inc. in New York.

“If price levels remain stable enough, several issuers will start originating smaller loans for multi-loan CMBS pools that will not require TALF financing support,” Wheeler said in an e-mail.

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