Fed Reserve's TALF Program Backs First New Issue CMBS

The creation of CMBS 2.0 has not even begun but evidence that demand for the bonds exists was demonstrated this week as Developers Diversified and Goldman Sachs issued the first CMBS deal in over a year - of course it is backed by the TALF program which will have time limits. So, while this transaction brings hope, it is not a evidence that we have developed a panacea for the long-term....much like taking an aspirin to cure a head ache caused by a brain tumor....Below is a description of the transaction as provided by Co-Star on its Watch List eblast.

Developers Diversified, Goldman Sachs Put CMBS Deals Back in Action

By Mark Heschmeyer
November 18, 2009

Town Center Plaza in Leawood, KS, benefited from the first new CMBS deal in more than a yearThe first new-issue commercial mortgage backed securities (CMBS) supported by brick-and-mortar properties in nearly two years successfully sold this week.

DDR Depositor LLC Trust 2009 Commercial Mortgage Pass Through Certificates, series 2009-DDR1 represents the beneficial interests in a trust fund established by affiliates of Developers Diversified Realty Corp. The trust fund will consist primarily of a single promissory note secured by cross-collateralized and cross-defaulted first lien mortgages on 28 of Developers Diversified Realty's properties. Goldman Sachs Commercial Mortgage Capital originated the $400 million loan.

The deal sold at its asking price and saw strong investor demand. The word on the street was that the deal was up to five-times oversubscribed. The capital markets had been looking to this deal as a measure of investors' appetite for risk involving commercial real estate assets and, in some ways, as a sign of the potential strength of the recovery.

As sold, DDR's five-year loan would bear an interest rate of less than 6% after factoring in all fees and expenses. As a result, the strong demand for this deal could prompt other potential borrowers to pursue CMBS financing, according to Opin Partners LLC, an investment house in New York. In fact, DDR is said to have another upcoming securitization, and other REITs are also expected to come to the table including, Fortress Investment Group, which may have as much as $650 million in commercial mortgages to package into a new-issue CMBS eligible for TALF funding.

The Federal Reserve's TALF (Term Asset-Backed Securities Loan Facility) was key to the deal. The Federal Reserve created TALF to help market participants meet the credit needs of households and businesses by supporting the issuance of asset-backed securities collateralized by commercial mortgage loans, auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, or residential mortgage servicing advances.

Eligible borrowers on the DDR deal can borrow Fed funds for the five-year fixed period at a rate of 3.5427%. TALF funds can only be used for the purchase of AAA-rated class of securities. Of the $400 million DDR deal, Fitch Ratings rated $323.5 million as AAA ($41.5 million was rated AA and $35 million A). The DDR deal is expected to close officially next week at which time, the loans will also be funded.

Some of key ratings drivers cited by Fitch Ratings included:

Loan-to-Value Ratio (62.4%): The Fitch stressed value is $641 million, based on a Fitch weighted average cap rate of 8.7%.

Debt Service Coverage (1.44x): The Fitch-adjusted cash flow for the 28 properties was $55.6 million, approximately 16.% less than the trailing 12 months net operating income.

Strong Tenancy and Mix: A majority of the portfolio is anchored by national or large regional tenants, with Wal-Mart representing the largest tenant exposure at 10.3% of the total square footage and 5.4% of base rent. The top five tenant concentrations, which represent 23.2% of total square footage (and 15.2% of base rent) are all investment-grade rated. Other top tenant concentrations include TJX Cos., Lowes, Home Depot, and Bed Bath & Beyond.

The 10 largest properties backing the deal and their allocated loan amount are listed as follows:

Town Center Plaza, Leawood, KS; 649,696 square feet; $54.3 million; Hamilton Marketplace, Hamilton, NJ; 956,920 sf; $44.4 million; Plaza at Sunset Hills, Sunset Hills, MO; 450,938 sf; $30 million; Brook Highland Plaza, Birmingham, AL; 551,277 sf; $26.4 million; Crossroads Center, Gulfport, MS; 545,820 sf; $26.4 million; Mooresville Consumer Square, Mooresville, NC; 472,182 sf; $19.5 million; Deer Valley Towne Center, Phoenix, AZ; 453,815 sf; $18.9 million; Downtown Short Pump, Richmond, VA; 239,873 sf; $13.4 million; Abernathy Square, Atlanta, GA; 129,771 sf; $13 million; and Wando Crossing, Mt. Pleasant, SC; 325,907 sf; $12.8 million.

Regulating Financial Companies: The House Committee Draft

This week the US House of Representatives issued its draft legislation on regulating financial companies...which has significant implications for the future of banks, mortgage REITs and CMBS issuers....from Dewey & Le Beouf:

The Discussion Draft (the “Draft”) on financial stability released by the House Financial Services Committee combines many of the proposals originally made by the Obama administration but frequently changes their force or emphasis. In the course of this bill-drafting process, Congress appears to be gradually creating a more general system of financial regulation, changing in potentially fundamental ways the basic orientation of regulation in the United States from one focused on a specific industry or product to one concerned with the effects and importance of financial activities and products in general, regardless of their history or specific characterization. In the Draft, this change manifests itself in the near omnipresence of the defined term “financial company” and its variants and in the generality of the proposed remedies. In certain portions of the Draft, the word “company” alone (without the modifier “financial” and without appearing in the defined form of “financial company”) plays a significant role, at least in circumstances in which the entity being subjected to regulation engages in significant financial activity. To accommodate institutions whose activities might be dramatically affected by an abrupt implementation of more general financial regulation, the Draft also creates an unusual transitional or grandfathering mechanism.

For more, click on the following link:

http://www.deweyleboeuf.com/~/media/Files/clientalerts/2009/20091110_RegulatingFinancialCompanies-TheHouseCommitteeDraft.ashx