Fed’s loan facility may help resume property bond sales

Source : Business Times – 30 Jul 2009

Fed may lend CMBS buyers up to 85% of the purchase price for TALF securities

Commercial property companies may sell about US$3 billion of mortgage-backed bonds starting in September as part of the government’s programme to revive lending for shopping malls, skyscrapers and hotels.

More than a dozen real estate investment trusts (Reits) are likely to participate in the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF), said Steven Wechsler, chief executive officer of the National Association of Real Estate Investment Trusts. Vornado Realty Trust may raise US$600 million, a person familiar with the matter said on Tuesday.

The transactions would be the first new issues in the US$700 billion US market for commercial mortgage-backed securities (CMBS) since it shut down in 2008 as credit markets froze. Commercial property values tumbled and defaults accelerated. Reits turned to the stock market to raise capital to pay debt.

‘If the first deals are successful, we think we can get US$10 to US$25 billion done in the next six months,’ said Kenneth Rosen, who runs a US$310 million hedge fund in real estate securities and heads the University of California’s Fisher Center for Real Estate and Urban Economics in Berkeley. ‘The current pipeline is about US$3 billion.’

The central bank started TALF in March to help thaw credit by lending to investors who want to buy securities backed by car and credit card loans. The US$1 trillion programme was expanded to include bonds backed by commercial mortgages. Investors who buy the securities submit them to TALF as collateral and the government lends the investor a percentage of the purchase price, subsidising the investment.

Only top-rated securities will be accepted and loans on CMBS purchases must be repaid within five years.

Investors including Morgan Stanley and Colony Capital LLC are raising money to take advantage of TALF. Morgan Stanley completed a US$600 million fund this month, mainly to buy car, credit card and student loans rather than commercial property bonds.

The Fed is expected to lend CMBS buyers up to 85 per cent of the purchase price for TALF securities, said Nareit’s Mr Wechsler.

That may limit the programme’s effectiveness. Many landlords already owe more than their property is worth. TALF may help restart the CMBS market ‘in a very modest way’, said David Twardock, president of Prudential Mortgage Capital Co in Newark, New Jersey. As much as US$500 billion of commercial real estate loans mature this year and about US$400 billion each year for the next several years, said Jeffrey DeBoer, president and CEO of the Washington-based Real Estate Roundtable on July 9 in congressional testimony.

The spread on top- ranked commercial mortgage-backed debt relative to US Treasuries has narrowed 2.47 percentage points to 5.18 percentage points through last week since the Fed said on May 19 it would finance the purchase of CMBS debt sold before Jan 1, according to Barclays plc data. The narrowing reflects investor perception that CMBS risk is diminishing.

‘TALF has been an effective tool for bringing spreads in to reasonable levels,’ said Randy Reiff, president of Spartan Real Estate Capital LLC, a New York-based firm that invests in commercial real estate debt. ‘That’s obviously a critical component in market recovery but by itself is not going to lead to the regeneration of securitised lending on a large scale.’