Tuesday, July 21, 2009

Mall Owner Prepares TALF Deals

--Shopping center giant Developers Divresified Realty Corp is trying to raise $600 mil through two bonds sales --It will be backed by two assets pool, each worth of $800 mil, loan to value 40%, consisting 60 shopping centers across the country Developers Diversified's Bond Sales Set to Be First CMBS to Use Program By LINGLING WEI Shopping center giant Developers Diversified Realty Corp. is working on raising $600 million through two bond sales that promise to be a litmus test for one of the government's key economic rescue programs. Those deals are on track to be the first major offerings of commercial-mortgage-backed securities that will take advantage of the Term Asset-Backed Securities Loan Facility, or TALF, program. TALF is designed to jump-start lending by increasing investor demand for securities tied to all kinds of assets, including consumer and commercial loans. As long as banks can move loans off their books by repackaging and selling them as bonds, they will be able to make more loans. CMBS is one of the key tests for the TALF program, introduced by the Federal Reserve in March with the hopes of reviving the securitization markets. Since then the program has been considered a moderate success, helping borrowers including Harley-Davidson Inc. and others raise $65 billion in sales of bonds backed by everything from credit cards to car loans. The Fed has so far made $35 billion in TALF loans to investors buying these securities, which has sparked a market rally, reducing the cost of borrowing for issuers. Federal Reserve Chairman Ben Bernanke told Congress Tuesday that TALF has "been effective," in restarting some consumer-lending markets and suggested the Fed is considering expanding TALF to "some alternative assets." The Fed extended TALF to include newly issued CMBS in June. There have been no deals so far, but a dozen or so new CMBS deals are hoping to take advantage of TALF, according to bankers and investors. Developers Diversified is hoping to close its deals, which have very conservative structures, in the fall. But not everyone is going to benefit from the TALF program. Tight restrictions will bar thousands of small developers and commercial-property owners with heavy debt loads from participating. Among loans that won't qualify: floating-rate mortgages, construction loans or loans secured by properties that are being "repositioned" and don't have a stabilized cash flow. The success of TALF is considered critical for averting what could be a serious upheaval in commercial real estate, further hamstringing the economy. Banks, developers and investors are facing billions of dollars of losses because of frozen credit markets, which drive down property values and drive up loan defaults. Over the past 15 years, owners of office buildings, shopping centers, hotels and other commercial property have become enormously dependent on mortgages that were packaged into securities, sliced up to appeal to buyers with different risk tolerances. Wall Street firms powered that business into a $700 billion market, as big as the markets for securitized auto loans, credit cards and student loans combined. But the credit crunch froze the CMBS market. There have been no new issues for about a year. By contrast, in 2007, there was a record $230 billion of CMBS bonds sold. The deals Developers Diversified has in the works reflect the high bars the Fed, mindful of protecting taxpayers' interest, sets for the type of loan it will accept as eligible for TALF financing. The two pools of assets, valued at $800 million each, consist of some 60 shopping centers across the country. These properties feature stable cash flow because they are occupied by discount retailers that tend to attract more business in a recession from price-minded shoppers. "The assets serve as good collateral for risk-averse lenders," said David Oakes, chief investment officer at Developers Diversified, in an interview Tuesday. The Beachwood, Ohio-based company, which owns more than 700 shopping centers world-wide, hopes to borrow more than $600 million against these asset pools, meaning a loan-to-value ratio of roughly 40%. During the frothy years before the recession, banks were willing to lend as much as 70% of a property's value because the debt could be easily sold as CMBS. With such a large cushion, the two deals likely will be made up of only triple-A-rated bonds, the ones eligible for TALF funding. A conventional CMBS deal, by contrast, was diced up into different flavors of bonds with some rated below investment grade. Developers Diversified hopes to use the proceeds to refinance maturing mortgages and generate new capital through the deals led by Goldman Sachs Group Inc. and Citigroup Inc. The TALF program, Mr. Oakes said, is "helpful for us and very important to help restart one of the important means of financing." Other CMBS deals in the TALF pipeline include those by mall owners Westfield Group and Macerich Co. and office-building owner Vornado Realty Trust, according to people familiar with the matter. These potential deals also are collateralized by multiple properties owned, possibly, by one owner. This reflects the Fed's intention to have a diversified pool of properties and also banks' reluctance to take on "warehouse" risks associated with having to pool together loans from many borrowers. Representatives at Westfield, Macerich and Vornado declined to comment. Most of the TALF deals done this year have been met with strong demand from investors buying the securities both with and without the Fed's loans. Since March the cost of funds for these lenders has fallen by several percentage points in some cases. For investors, the TALF loans have lured new buyers of asset-backed securities to the market with leveraged returns that could be as high as 48%, which was the estimated return under certain conditions for a Sallie Mae offering backed by private student loans in May. Meanwhile, real-estate industry groups are lobbying for the Fed to extend the TALF program beyond its current Dec. 31 sunset date, through the end of next year. "Approving and securitizing a TALF-eligible commercial real-estate loan takes at least three months," says Jeffrey DeBoer, president of the Real Estate Roundtable, the chief lobbying group for the industry. "Unless the government acts soon this potentially positive program will effectively end in mid-September." —Liz Rappaport contributed to this article. Write to Lingling Wei at lingling.wei@dowjones.com

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