Goldman Sachs, Citigroup Sell $788.5 Million of Commercial Mortgage Bonds

Goldman Sachs Group Inc. and Citigroup Inc. sold $788.5 million of bonds backed by commercial mortgages in the fourth offering of the debt this year as Wall Street seeks to jumpstart sales.

The largest top-rated portions of the transactions, a $410.6 million slice maturing in 9.86 years, yields 135 basis points more than the benchmark swap rate, according to a person familiar with the offering who declined to be identified because terms aren’t public. Similar debt sold in 2006 and 2007 when sales peaked and underwriting bottomed yields about 320 basis points over the benchmark, according to Deutsche Bank AG data.

The deal is the third to pool loans from multiple property owners this year, and included new features designed to appease investors as banks attempt to revive the $700 billion market. Sales tumbled 95 percent to $11.2 billion in 2008 from a record $234 billion in 2007, according to data compiled by Bloomberg. The changes are a “sharp departure” from past transactions, according to a Deutsche Bank report today.

“The changes were no doubt made to better the structure and make the deal more attractive to investors,” the New York- based analyst Harris Trifon said in the report. “The sheer number of changes makes it difficult to assess how smoothly the deal will function in practice.”

One of the key changes is giving buyers of the highest- rated portions control of who manages troubled loans, a right that has historically been held by investors who buy the riskiest slice, the so-called B piece. Some investors are concerned that those holders may make decisions that favor their own interests when loans go bad.

‘Material Impact’ Unlikely

Stripping control from the buyers most susceptible to losses could make it harder to sell the debt, Trifon wrote.

“With a relatively limited supply and strong demand, this issue in isolation is not likely to have a material impact,” he said. “Assuming the new deal pipeline continues to grow, the market might have a hard time finding enough B-piece buyers willing to participate without some control rights.”

Banks arranged $3.4 billion of securities backed by newly originated commercial mortgages last year, and about $2.49 billion has been issued in 2010, Bloomberg data show.

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net

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