UPDATE:Investors Welcome Commercial Mortgage Deal Without TALF
November 18 2009 - 11:27AM
Dow Jones News
Investors are willing to use their own funds to buy the first
commercial mortgage bond that has emerged in over a year.
The Federal Reserve said late Tuesday that it received only
$72.2 million in loan applications for newly created commercial
mortgage-backed securities through its program to boost this
market.
This "suggests very strong regular investor demand," said
Darrell Wheeler, head of securitization research at Citigroup. "We
expected it was there, but nice to see it confirmed."
The central bank offers investors cheap loans to buy newly
created and existing CMBS through its Term Asset-Backed Securities
Loan Facility, or TALF, program.
For the first time, the program has included a new commercial
mortgage bond, a $400 million deal from Developers Diversified
Realty Corp. (DDR). The total TALF-eligible portion of the deal was
worth $323.5 million.
Interest in the deal was strong because it surfaced after such a
long gap. "There was a crowd created by curiosity," said Jim
Harrington, senior portfolio manager at Ryan Labs Asset Management
in New York. Traditional CMBS buyers like insurance companies and
banks bought the deal, he said.
"They, along with crossover buyers who invest in all structured
product, eventually bought the deal," Harrington said.
The risk premium paid on the triple-A-rated class of the DDR
deal was 140 basis points over swaps, or a tighter yield than the
market had initially anticipated.
Healthy investor demand for the issue narrowed the risk premium
by about 60 basis points from the 200-basis-point area that was
expected, Harrington noted.
TALF also allows for the purchase of existing securities. The
Fed received $1.42 billion in so-called legacy requests for
existing CMBS.
The central bank reserves the right to use its discretion in
awarding these loans requests, and not all securities that satisfy
its terms may qualify for its loans. Last time, the Fed
unexpectedly rejected five securities without any explanations.
This confounded investors and market participants, and likely
affected participation this time.
Wheeler of Citi said he was "not surprised by either figure,
given the rejections last month and the fact that we see real cash
investor demand for new 2009 originated collateral."
The TALF program hasn't been as effective in the commercial
mortgage arena as it has been with consumer loan-backed deals. More
than $90 billion in TALF-eligible asset-backed securities have sold
so far this year.
To give banks more time to put together new deals, the Fed
extended the TALF program to June 30, 2010, for newly issued CMBS
and to March 31, 2010, for all other TALF-eligible bonds. The
program was initially set to expire at the end of this year.
The Fed will announce the closing, and its acceptance of the
current set of loan applications on Nov. 25.
-By Anusha Shrivastava, Dow Jones Newswires; 212-416-2227;
anusha.shrivastava@dowjones.com
(Prabha Natarajan also contributed to this article.)
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