Summary
The pending Developers Diversified ("DDR") transaction represents, at best, a marginal step in the right direction with respect to getting the CMBS machine back on track. The successful launch of a new CMBS transaction, and placement of the related bonds should be considered a victory given the dearth of CMBS deals over the past +12months. At the same time the nature/characteristics of the transaction and the requirement for government involvement highlight the challenges confronting the sector.
Analysis
The pending DDR transaction, if successfully launched, must be considered a victory when completed. It has has been a long time since a CMBS transaction was successfully launched. If the related bonds are successfully placed with long term holders (i.e. institutional investors) it would signal a continued thawing of the investor sector which will ultimately be necessary to support the commercial real estate sector.
Notwithstanding a successful launch, serious obstacles remain before new issue CMBS is considered back on track:
- The DDR transaction is structured with very low leverage and required government support via TALF. The number of issuers willing to accept such low levels of leverage are quite limited thereby limiting the breadth of true issuance.
- Government support was required to support placement of bonds; absent government support ultimate execution remains uncertain.
- Legacy CMBS issues remain a burden on investors balance sheets; in particular there is great uncertainty as to ultimate recovery levels.
