DDR Ddr Corp.

Just three days after the first commercial-mortgage bond deal in more than a year hit the market, the next one came out Thursday.

Bank of America Large Loan Trust 2009-FDG, as the deal will be called, is a $460 million issue backed by a single, seven-year, fixed-rate non-recourse loan to entities of Fortress Funds. The loan is secured by the borrowers' fee interest in 44 office and industrial properties in Florida, easement interests along a 351-mile railway corridor, and fee interests in parcels adjacent to the rail corridor.

The prospectus, seen by Dow Jones Newswires, indicates that this deal is not eligible for funding through the Federal Reserve's Temporary Asset-Backed Securities Loan Facility, or TALF. Bank of America Corp. (BAC) confirmed this.

This will be a real test of investor interest in commercial mortgages, which have been on a downhill ride for more than a year. The pace of delinquencies is rising rapidly across all property types, with concerns that the coming holiday season may drive more retailers and companies into trouble.

As a result, investors have stayed away from commercial mortgage bonds, which is why the Fed extended its TALF program to these securities. This week the strong investor demand for the first issue from Developers Diversified Realty Corp. (DDR) seems to have rekindled issuers' confidence. This rapid issuance of the next commercial mortgage bond has caught even market participants by surprise. Many had believed that after more than a year of dormancy, when no new deals were issued, it would take months to put together a new deal.

The Fed extended the deadline on the TALF program for new commercial mortgages to next June in order to give time for loans and deals to be put together.

However, the first TALF-eligible, $400 million commercial bond that sold on Monday saw a surge of investor response - so much so that the bookrunner, Goldman Sachs, is said to have revised the price guidance on the issue to tighter risk premiums a few times. The triple-A-rated $323 million portion of the deal sold at 140 basis points over swaps after having started at about 200 basis points over swaps.

The spread compression on the DDR deal drove it away from its target audience, said Jim Harrington, senior portfolio manager at Ryan Labs Asset Management, who had looked at buying the bond.

Much of the participation in the DDR deal came from unleveraged money - such as pension funds, banks and insurance companies, said Derrick Wulf, portfolio manager at Dwight Asset Management.

"It shows that investors want to buy a conservatively written deal without worrying about ratings that may be subjected to revision," he said.

The Bank of America deal now offers these buyers another chance to get in the game.

"The Bank of America deal coming in the shadow of the DDR deal is another test for CMBS," Harrington said.

It puts forth the possibility that a well-constructed CMBS deal can be sold without government support.

Already this theory had gained currency with the release of data earlier this week that showed only $72 million of the $323 million, triple-A rated tranche of the DDR deal was bought using cheap loans from the central bank.

"It suggests that the commercial mortgage bond market doesn't need TALF money, if the deal is conservatively written," said Wulf.

- By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; prabha.natarajan@dowjones.com

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