First CMBS Under TALF Is on the Horizon

The markets are keeping a close eye on a transaction that may jump start the commercial property debt market, even though the Federal Reserve has expressed some uneasiness with the deal.  If the transaction is successful, it could pave the way for the initial sale of commercial mortgage-backed securities (CMBS) under the government Term Asset-Backed Securities Loan Facility (TALF).  The credit-hungry commercial real estate industry is hoping that the debt sale by shopping center owner Developers Diversified Realty Corporation will lead to additional CMBS sales.

Developers Diversified has obtained a $400 million loan from Goldman Sachs Group, Inc., which is intended to be converted into a CMBS offering through TALF.  The Fed, keeping the taxpayers’ best interests in mind, has reservations about financing the transaction since it involves a single borrower.  These are considered riskier than deals involving multiple borrowers, where the risk is spread over different borrowers, building type and even location.

“The Fed is being very conservative, very diligent in reviewing collateral and very risk-averse,” said Frank Innaurato, managing director at Realpoint LLC, a credit-ratings firm.  Currently, the Fed is reviewing the transaction, which involves 28 shopping centers with stable cash flows.  If the Fed says “no” to the transaction, Goldman Sachs is said to be considering selling the $400 million loan outside TALF.

TALF was created to revive the CMBS market, as well as jump start securitized debt markets by offering low-cost financing from the Fed so investors can once again purchase these securities.  The program lets investors borrow as much as 95 percent of the bonds’ value by pledging the securities as collateral – meaning the risk is on taxpayers if there is a default.