UPDATE:Investors Welcome Commercial Mortgage Deal Without TALF

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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