(Recasts, adds analyst comment)
By Nancy Leinfuss and Al Yoon
NEW YORK, Nov 9 (Reuters) - U.S. mall owner Developers Diversified Realty Corp. plans to break the commercial mortgage bond market’s silence of nearly a year and a half, with help from an emergency Federal Reserve lending program, investors said.
The $400 million deal will be the first to be sold under the Fed’s Term Asset-Backed Securities Loan Facility, known as TALF, which aims to lower funding costs in the sector by offering investors funding for the assets.
The deal will be widely watched in the $700 billion market for commercial mortgage-backed securities, which became key funding for office, retail and apartment buildings during the real estate boom.
But CMBS became among the worst hit bonds in 2008, and in May the Fed threw the battered sector a lifeline by including them in its program that reignited lending in consumer-related debt such as auto loans and credit cards.
With funding severely crimped, borrowers with maturing loans have been pleading for extensions of existing terms or face default.
Laying the groundwork has been difficult for Cleveland, Ohio-based Developers Diversified DDR.N and other borrowers trying to use the TALF progam, the investors said.
But it could be an important stepping stone in a market seen by central bankers as one of the biggest risks to the fragile U.S. economic recovery. The market has suffered badly as the deep recession severely cut the rent revenue needed to pay debt service on the bonds.
“The key is you have to get one deal though this whole process,” said Scott Buchta, a strategist at Guggenheim Capital Markets in Chicago. “There’s a lot of ‘what ifs’ because we haven’t had a new issue market for a while.”
Developers Diversified, which owns 670 shopping centers in the U.S., Brazil and Canada, began discussing the deal in June but faced an arduous task of clearing the collateral with the Fed, according to sources. Some properties may have not made the Fed’s cut, since Developers had been working on a pair of issues totaling $550 million.
Lead underwriter Goldman Sachs Group Inc. declined to comment on the deal, which will be sold privately. A Developers Diversified spokesman did not return a call.
The inability to refinance loans has already led to the biggest U.S. real estate bankruptcy by General Growth Properties Inc GGWPQ.PK.
The Fed on Monday said banks reported that more commercial real estate loans have been extended rather than refinanced.
About $570 billion in commercial mortgages are due to be refinanced between 2010 and 2011, according to property researcher Foresight Analytics LLC in Oakland, California. The firm estimates that defaults could cause some $250 billion in commercial real estate losses to the banking sector.
Developers Diversified shares jumped 8.7 percent to $8.60 on Monday. Vornado Realty Trust (VNO.N), which last week said it was considering a TALF issue, gained 4.6 percent to $63.81.
The Developers Diversified deal, which is expected to price next week, includes $323 million of AAA-rated five-year fixed rate securities. It also includes two smaller AA-rated and single-A rated tranches.
Editing by Chizu Nomiyama