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First signs of life in CMBS market in more than a year Print E-mail
Tuesday, 17 November 2009

By Marine Cole

The sale of the first commercial real estate mortgage-backed securities with the backing of the U.S. government is geared to help the whole commercial real estate sector rather than simply bail out Developers Diversified Realty.

Still, the deal is a boon for the real estate investment trust specialized in shopping centers, which is getting cheap financing with taxpayer support.

The $400 million CMBS deal that closed Monday with strong interest from investors is the first transaction in that corner of the securitization market in more than a year. It takes advantage of the Term Asset-Backed Securities Loan Facility, or TALF, which was extended to CMBS over the summer to bring that market back to life.

"We believe the deal is a crucial first step in restarting the private-label CMBS market, which has been closed since June 2008, and channeling a much-needed source of capital to the commercial real estate universe," analysts from Barclays Capital wrote in a note to investors.

Not everybody agrees though. Bloomberg quoted James Grady, a managing director at Deutsche Asset Management, as saying that, while the transaction is a positive move, it won't necessarily lead to a flood of issuance.

"It is a small step in the right direction, but I would caution against making too much out of it," he told Bloomberg. "Clearly there was good demand for this deal. But this is a unique deal and that doesn't mean that another transaction would get similar reception."

DDR, for its part, holds a healthy balance sheet with sufficient cash flow to cover debt maturities, which isn't a characteristic many other REITs can boast of. Despite government support, future CMBS deals within TALF may not be as attractive to other REITs.

DDR's $323 million AAA-rated five-year notes priced at a 1.4 percentage point premium to the five-year interest rate swap benchmark, for a yield of 3.807 percent, according to Reuters, citing market sources. It's not only below initial guidance but also below existing levels for CMBS issues. Other REITs that are more leveraged may have to pay higher yields to meet investors' demand.

So while it's still unsure whether this deal will jump start the CMBS market, it will certainly boost DDR's balance sheet and make the company look like the Goldman Sachs of REITs by taking advantage of government bailouts. Whether it needs them or not.

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