10/30/2009

BofA Eyes TALF, Mezz Financing for Fortress

Bank of America is seeking to arrange $650 million of financing on a portfolio controlled by Fortress Investment, part of which could be raised via a securitization eligible for the Federal Reserve's TALF program.

The fixed-rate debt package tentatively would consist of a $414 million senior loan and $236 million of mezzanine debt. BofA plans to securitize the senior loan, either inside or outside of the TALF program, by yearend. It is currently shopping the mezzanine portion at yields of 12-14%. The debt package, which would have a term of 5-7 years, is contingent on BofA's ability to both securitize the senior loan and place the mezzanine debt.

Fortress would use the proceeds to partially refinance $1.6 billion of mortgage debt provided in 2007 by BofA, Citigroup and Bear Stearns. The loan helped finance Fortress' $3.5 billion takeover of Florida East Coast Industries, which operated a railway and a property firm called Flagler Development. The loan is backed by Flagler's portfolio of office buildings, industrial properties and land.

It's unclear how Fortress, a New York fund operator, would pay back the remaining portion of the $1.6 billion loan. It's also unknown which lenders are currently on the hook for that loan. Citi reportedly sold much of its position to Apollo Management, Blackstone Group's GSO Capital Partners and TPG. Bear was taken over by J.P. Morgan last year, but many of Bear's real estate assets were assumed by the Federal Reserve Bank of New York. The loan matures this year. News reports in July said that Fortress was trying to negotiate an extension. BofA, Citi, J.P. Morgan and the New York Fed declined to comment.

Buysiders said the new mezzanine loan has been structured into senior and junior pieces, each of which could be divided among multiple investors. The asking yields of 12-14% are lower than on seasoned debt available in the secondary market. Investors said BofA was evidently betting that investors would pay up for newly underwritten debt, with current data on rent rolls, vacancies and other measures of performance.

If BofA can lock down acceptable prices on the mezzanine debt, it would then move to securitize the senior portion, which would likely be rated from triple-A to single-A. Rating agencies are now analyzing the collateral, and the tentative $414 million size of the senior portion could still change.

The Fed is looking at the Flagler collateral to determine its eligibility for TALF loans, according to market players. Under TALF, formally known as the Term Asset-Backed Securities Loan Facility, the Fed provides low-cost financing to buyers of high-grade structured securities, including CMBS, as part of federal efforts to resuscitate the securitization market.

Even though the Fed expanded the TALF program to new-issue CMBS deals in June, no such deals have materialized so far. But Goldman Sachs and Citigroup have long been working on separate transactions for Developers Diversified Realty. Multiple market players said that Fed reservations about transactions backed by loans to one borrower are contributing to the slow pace of the program.

The office and industrial properties in Flagler's portfolio appear to qualify for the TALF program. "The issue is probably not the collateral," said one industry veteran who has been taking the pulse of the Fed. "The issue is probably the fact that this is a single-borrower deal. Ask yourself why Goldman's deal for DDR keeps getting delayed, even though the loan has already closed. It's not the collateral. The Fed doesn't like the lack of diversity in a single-borrower transaction."

It now looks like either Fortress or Developers Diversified will be the first player out of the gate with a new-issue TALF deal. But if Fortress doesn't get the green light, BofA is evidently prepared to proceed with a traditional securitization.

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