UPDATE 2-Developers Diversified CMBS seen done at low yields

(Updates yield expectation)

By Al Yoon

NEW YORK Nov 12 (Reuters) - U.S. mall owner Developers Diversified Realty Corp (DDR.N) may sell most of its planned $400 million commercial mortgage bond at yields well below existing issues, according to Thomson IFR on Thursday.

The issue, the first new U.S. commercial mortgage-backed backed security since mid-2008, is being made possible by the Federal Reserve's emergency lending program, the Term Asset-Backed Securities Loan Facility (TALF).

The $323.5 million AAA-rated portion is expected to sell at a 1.45 to 1.60 percentage point premium to the five-year interest rate swap benchmark, or a yield of about 4.21 percent, IFR reported. Underwriter Goldman Sachs at midday lowered the yield premium from a range of 1.60 to 1.75 points, indicating it was seeing good demand from investors.

By comparison, top-rated issues done under relatively conservative underwriting standards in 2004 are selling at premiums in the mid-2 percentage point range, according to Guggenheim Capital Markets.

The deal may signal some relief for the $700 billion commercial mortgage-backed securities market, which became key funding for office, retail and apartment buildings during the real estate boom.

With funding nearly frozen by the lingering credit crunch, borrowers with maturing loans have had to endure grueling negotiations to extend current terms or face default.

Shares of Cleveland, Ohio-based Developers Diversified, which at the end of the third quarter had $4.38 billion in debt coming due through 2012, fell 1 cent to $9.01 in New York.

The company's CMBS may garner tight yields since investors know the Fed has vetted loans backing the debt. But the deal is lacking diversification, being 100 percent retail properties.

Under TALF, investors apply for low-cost non-recourse loans that are backed by the bond collateral. TALF has cut borrowing costs for consumer auto loans and credit cards. (Additional reporting by Ilaina Jonas; Editing by Leslie Adler)