DDR CMBS sale attracts strong investor demand

The $400m sale of commercial mortgage bonds by US mall owner Developers Diversified Realty was the first deal to be sold under TALF, following an 18-month dry spell for the CMBS industry.

The $400 million sale of new commercial mortgage bonds by US mall owner Developers Diversified Realty reportedly saw strong investor demand and could be a harbinger of recovery for the CMBS market.

The DDR deal was the first transaction to be sold under the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF) and was one of the first commercial mortgage bond deals in almost a year and a half, according to various media reports.

DDR was able to price the deal below existing levels for the CMBS issues. Its $323 million AAA-rated five-year notes came at a narrower 1.4 percentage point premium to the five-year interest rate swap benchmark, or a yield of 3.807 percent, market sources told Reuters.

Underwriter Goldman Sachs lowered yield premiums from earlier guidance levels of 1.6 to 1.75 percentage points, due to the strong buyer interest, the report added.

Barclays Capital told Reuters the deal was 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”.

The Wall Street Journal cited Jim Harrington, senior portfolio manager of Ryan Labs Asset Management as saying strong investor demand for the issue had narrowed the risk premium by about 0.6 points from the 2.0-point area that was expected.

“Such tight spreads show the strong demand for well-structured, clean deals,” Tony Butler, managing director of broker-dealer and commercial lender RAIT Securities, told the newspaper.

The offering also included two smaller non-TALF-eligible AA-rated and A-rated issues, which priced with 5.75 percent and 6.25 percent yields, and also drew strong interest, according to Reuters.

Developers Diversified, which owns 670 shopping centers in the United States, Brazil and Canada, began discussing the deal in June but faced an arduous task of clearing the collateral with the Fed, sources told Reuters. Some properties may have not made the Fed's cut, the report added, since Developers had been working on a pair of issues totaling $550 million.