New-issue CMBSuccess under the Talf

Posted by Tracy Alloway on Nov 18 15:55. Comment.

Here’s something which hasn’t happened before.
The New York Fed received requests for federal loans to purchase new-issue CMBS in its latest Talf subscription:
This is likely down to the CMBS deal mentioned last week, More…
Here’s something which hasn’t happened before.
The New York Fed received requests for federal loans to purchase new-issue CMBS in its latest Talf subscription:
This is likely down to the CMBS deal mentioned last week, by Reit Developers Diversified Realty Corp., the first new issue in many months and the first to be eligible as collateral under the Fed’s Talf programme. Under the programme, which is aimed at kickstarting the market for new and legacy (pre-2009) CMBS, investors can borrow as much as 85 per cent of the CMBS bond’s value by pledging their securities as collateral - A bit of a carrot for the commercial real estate investor.
So what was demand like in the DDR CMBS sale?
From the FT:
The deal drew strong demand and came at low yields, which bodes well for the availability of new loans for commercial property. But investors and analysts stressed that existing mortgages from the boom years remain a problem
. . .DDR sold $400m in bonds backed by 28 shopping centres in 19 states, according to Moody’s. Goldman Sachs, the underwriter, priced the $323.5m triple A, Talf-eligible part of deal at a spread of 140 basis points over swaps, which was below the anticipated spread of 175bp last week and comes to a yield of about 3.80 per cent, investors said.
Hooray, no? Bring on the non-Talf new-CMBS issues!
But wait.
We mentioned last week that any new CMBS issued as part of the Talf had to meet the Fed’s rather strict criteria — and it looks like that might have been what helped lift sentiment on the DDR deal. From the FT again:Conservative underwriting of the underlying loan and the fact that the deal comes from one borrower fuelled demand. Other low leverage, single-borrower CMBS deals were expected to follow.
But investors cautioned that the commercial mortgages that need to be refinanced are riskier and more complex than the DDR deal and what the Fed and private investors are willing to finance.
Thomas Zatko, managing director at Babson Capital Management said: “The feeling is that because it was the first deal, it was heavily vetted by the Fed. It remains to be seen, without the Talf, what the yield would have been.”
Specifically, the DDR CMBS bonds are secured by 28 shopping centres in 19 states occupied by reasonably recession-proof stores such as Wal-Mart and ShopRite. The $400m loan is also about half the value of the underlying properties — as opposed to say the 70 per cent or so that was prevalent before the financial crisis. The three-tranche structure of the deal is also relatively simpler than some of the multi-tranche structures seen in years gone by.
And remember, DDR reportedly initially wanted to get two deals away under the Talf, but in the end only managed one.
In other words, the Talf can certainly help CMBS issues, but it’s definitely not a CRE cure-all.

Related links:
Talf-tastic CMBS - FT Alphaville
Reggie Middleton personally congratulates Goldman [on DDR deal] - ZeroHedge
Talking Talf on commercial real estate - FT Alphaville