DDR's Deal Signals Recovery in Credit Market?

Commercial real estate industry has long been  the alleged next leg down for the economy and financial markets. The industry not only has been plagued by defaults, declined occupancy and rent, but also the shut-down of credit market to finance property purchase and development. Since March, the credit market has been gradually easing, as shown by significant drops in credit spread. The recent success in U.S. mall owner Developers Diversified Realty Corp (DDR) in debuting the first Term Asset-Backed Securities (TALF) loan is a further evidence that commercial loan market is back to business. 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.

According to Bloomberg,

DDR's $400 million issue is the first new U.S. commercial mortgage-backed backed security since mid-2008. 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.

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Disclosure: The blog author owns DDR in her personal account as of November 17,2009