Wednesday, November 11, 2009

Talf-tastic CMBS

Posted on FT Alphaville by Tracy Alloway:

Ta-dah! Behold the first new CMBS deal in over a year:

(From Structured Finance News, click to enlarge)

`DDR’ is Developers Diversified Realty Corp., an Ohio-based shopping mall Real Estate Investment Trust (Reit). As you can see, the deal, dubbed 2009-DDR1 and underwritten by Goldman Sachs, is for a three-tranche $400m CMBS structure, with the triple-A tranche counting for the biggest slice at $323.5m.

In addition to being the first new issue CMBS since circa 2008, 2009-DDR1 is, crucially, also the first new CMBS to be sold under the Federal Reserve’s Talf programme, which is aimed at kickstarting the market for commercial mortgage-backed securities. That basically means that 2009-DDR1 will be eligible as collateral to secure cheap loans from the Fed, thus helping Developers Diversified pay back or refinance some of its debt.

Refinancing has been a rather big issue for Reits, whose business models basically rely on being able to roll over massive amounts of debt. General Growth Properties, another US mall-operator, filed for bankruptcy in April because of refinancing difficulties.

In any case, the DDR deal is likely to set off a fresh wave of speculation that Reits will soon be lining up at the Talf trough.

This for instance, is from a June 2009 article from ReitWrecks:

There are at least a dozen REITs working on TALF deals, including a number of Mortgage REITs ready to re-pledge AAA CMBS collateral. One such Mortgage REIT, Dynex Capital (DX) estimates that it can re-pledge existing AAA CMBS to the Fed through TALF and get a funding pickup of 800 bps in the process.

Developers Diversified Realty Corp. (DDR), an Ohio-based retail REIT, could be one of the first REITs to reliquify physical assets through TALF. According to the Cleveland Plain Dealer, DDR is working with Goldman Sachs and Citibank to prepare two groups of properties — each worth about $800 million — as collateral for new TALF loans.

The properties DDR has identified are either unencumbered or have near term debt maturities. The latter is obviously be a big, big problem for many highly-leveraged REITs, but the new TALF money now looks like it will alleviate at least some of that risk, as is intended.

Which also hints at one potential hurdle for new-issue CMBS deals under the Talf.

Reits will still have to meet the Fed’s conditions for the Talf. New-issue CMBS can be rejected for the Talf programme on the basis that one or more of the loans in the CMBS pool are delinquent, defaulted, or in special servicing. Or if there’s an `unacceptable’ concentration of loans in a particular geographic area, or property type, or sponsorship. Thus it looks like Developers Diversified only managed a single CMBS deal, instead of its original aim of two.

From Reuters:

Developers Diversified, which owns 670 shopping centers in the U.S., Brazil and Canada, began discussing the deal in June but faced an arduous task of clearing the collateral with the Fed, according to sources. Some properties may have not made the Fed’s cut, since Developers had been working on a pair of issues totaling $550 million.

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