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By Alex Zylberglait, September 18, 2009 8:00 am

In summary…

Term Asset-Backed Securities Loan Facility (TALF)

• TALF was expanded in May to include highly rated commercial mortgage-backed securities (CMBS). Spreads on AAA-rated CMBS have since narrowed dramatically.
• At its first subscription date in July, the legacy CMBS component of TALF received requests for $670 million in loans. All but one of the bonds submitted were accepted as collateral for TALF loans.
• Two REITs are expected to soon test the new CMBS component of TALF, with each projected to borrow up to $600 million against assets in their portfolios. A substantial amount of the capital raised will likely be utilized to pay down maturing debt.
• As a result of the lengthy ramp-up time for this program, TALF has been extended through March 31, 2010, for existing CMBS and through June 30, 2010, for newly issued CMBS.

A growing number of large property owners, investors and lenders will take advantage of the program by year end.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, September 16, 2009 9:00 am

Term Asset-Backed Securities Loan Facility (TALF). TALF was originally established to provide financing for the purchase of newly issued, consumer-related, asset-backed securities such as credit card debt and auto loans. In May, the government expanded TALF to include highly rated new and legacy CMBS in an attempt to help clear up lenders’ balance sheets and increase new commercial mortgage originations. At the announcement of TALF’s expansion to include CMBS, spreads narrowed dramatically. After peaking at more than 1,200 basis points over swaps in the first quarter of 2009, spreads on AAA-rated CMBS declined to approximately 600 basis points by late May. Spreads ticked up in the weeks that followed, after Standard & Poor’s (S&P) announced that changes to its risk-assessment methodology could result in mass downgrades of once highly rated CMBS. More recently, S&P reversed its position and restated the ratings on some of the loan pools. Spreads for AAA-rated CMBS have since declined to 450 basis points over swaps, the lowest point since October of last year. Such fluctuations are indicative of the complexity and uncertainty still impacting the pending solutions for restarting the CMBS market.

• Multiple deals adhering to TALF’s strict guidelines are under way. In order to qualify for TALF, CMBS must have the highest credit rating available from at least two approved ratings agencies. Furthermore, the mortgage pools must consist solely of fixed-rate loans underwritten on current NOIs and valuations; construction loans are not eligible. Major lower-leverage owners such as REITs stand to benefit directly from the program. While developers and smaller private investors are unlikely to reap direct rewards from TALF, they should ultimately benefit from greater availability of debt capital as the credit markets begin to function normally.
• One of the first TALF offerings of newly issued CMBS could involve Developers Diversified Realty (DDR), a retail REIT. DDR is expected to borrow a combined $600 million against two pools of assets in its portfolio. The properties in these pools should qualify, because they are considered relatively low-risk, even in light of the current economic situation, since they offer stable cash flows and are occupied mostly by discount retailers. Furthermore, many of the properties in these pools are reported to be unencumbered at present, and the resulting loan-to-value ratio will be around 40 percent. Vornado Realty Trust is also reported to be assembling a TALF-eligible CMBS deal to raise between $550 million and $600 million for the REIT.
• The legacy CMBS component of the TALF program received requests for $670 million in loans at its first subscription date in July. After reviewing the requests, the Fed approved all but one of the 36 bonds submitted as collateral for TALF loans.

Of the many government programs, TALF appears to hold the most promise for freeing up capital for commercial real estate lending in the near term. Since it can take a few months to organize a TALF-eligible CMBS deal, the program is off to a slow start, but the wheels are now in motion, and a growing number of large property owners and lenders will take advantage of the program by year end. While TALF was set to expire at the close of 2009, the program was recently extended to March 31, 2010, for existing CMBS and June 30, 2010, for newly issued CMBS.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

Comments (1)

By Alex Zylberglait, September 14, 2009 10:24 am

The potential for significant commercial real estate-related losses tied to maturing mortgage debt has emerged as a considerable risk due to constrained credit markets. As a result, government initiatives to improve commercial real estate credit, particularly the commercial mortgage-backed securities (CMBS) market, have been established. At its peak in 2007, CMBS accounted for nearly 40 percent of the increase in new commercial and multi-family mortgage debt outstanding nationwide. In mid-2008, CMBS issuance came to a standstill, and the void in the marketplace has clearly taken a toll on the commercial real estate sector.

The securitization of commercial mortgage debt should spread the risk associated with a pool of loans to many investors globally. Furthermore, because the debt is sold, lenders are able to replenish capital, thereby enabling new loan originations. During the liquidity boom, issuers of mortgage-backed securities (MBS) passed all risk to investors, so underwriting standards of the underlying loans were not closely monitored. When it became evident that the ratings agencies missed the mark in assessing the risks associated with some CMBS, demand for the product fell sharply. The escalation of the recession into a global financial crisis eliminated any hope for a quick turnaround of the securitized debt market. Over the next year, modifications to the securitization model will be necessary in order to restore investor confidence in CMBS. It is possible that changes will be mandated as part of the new administration’s proposed regulatory reform.

Modifications to the securitization model are likely to include requirements for originators to maintain some level of economic interest in CMBS. This, in turn, should encourage lenders to uphold responsible underwriting standards. Freddie Mac recently drew upon this new model for its first offering of K Certificates in June. The $1 billion securitization of multi-family debt marked the first CMBS to clear the pipeline in a year. Unlike traditional CMBS, however, Freddie Mac is guaranteeing the senior bond classes. Based on the program’s initial success, Freddie Mac could move forward with another securitization later this year.

Over the remainder of 2009, government programs should be instrumental in stimulating demand for traditional existing and newly issued, highly rated CMBS. This should, in effect, mark the starting point for clearing lenders’ balance sheets and eventually lead to increased lending capacity for new commercial mortgage loans.

Government programs to jumpstart commercial mortgage lending have been modified in recent months, both in terms of size and scope, but they continue to move forward and appear on track to be operational by this fall.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.