09/11/2009

First New-Issue TALF Deal Set for October

Developers Diversified Realty is on track to unveil the first commercial MBS transaction under the TALF program in mid-October, but two other potential issuers - Simon Property and Westfield - have dropped out of the picture.

The developments add some clarity to the murky CMBS pipeline, which has been the source of much speculation since May, when the Federal Reserve unveiled the TALF program for new-issue CMBS transactions.

The current indications are that Developers Diversified will launch the first two deals: one in October and the other possibly in November. Vornado Realty is next in the queue, followed by a third, unidentified REIT. At some point, Inland Real Estate Group is also expected to come to market.

If those deals go well, other issuers could follow. "Everyone is sitting on the sidelines to wait for the other guy to go first," said one market veteran.

But the defections of Simon and Westfield are blows to the TALF program, formally known as the Term Asset-Backed Securities Loan Facility, which enables investors to get low-cost financing from the government to buy super-senior CMBS.

While Simon and Westfield were exploring CMBS transactions, the REIT bond market suddenly thawed out, so both firms rushed to float unsecured debt instead. Simon priced $500 million of bonds on Aug. 6, and Westfield followed with $2 billion of paper on Aug. 26. That enabled the mall REITs to lock in financing at relatively attractive rates, rather than waiting to float untried CMBS deals under the TALF umbrella.

Developers Diversified hasn't yet decided how to divide its shopping-center collateral between the two transactions, so the relative sizes have not yet been set. But they are expected to fall in the $500 million to $600 million range.

Goldman Sachs is leading the first transaction, which is scheduled to the hit the market by mid-October. That would give Goldman time to place the bonds before the monthly deadline - Oct. 21 in this case - that investors face for applying for TALF loans.

Citi will lead the second Developers Diversified offering. J.P. Morgan is believed to be working with Vornado and Inland.

The new-issue CMBS program under TALF has gotten off to a slow start, partly because of concerns about the difficulty of placing bonds below the super-senior tranches - which are not eligible for TALF financing.

That uncertainty could hang over the market until the first offering is unveiled and market players get a look at the rating structure. "After we get the first deal done, the market will open up," said one veteran CMBS player.

There are signs that more prospective borrowers are eyeing CMBS. Last month, the Fed agreed to make self-storage collateral eligible for TALF financing, in addition to the main property types, according to advisory firm Park Bridge Financial, which is advising self-storage REITs about possible CMBS transactions.

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