U.S. mall owner Developers Diversified Realty Corp snapped a dry spell of nearly a year and a half by selling $400 million of new commercial mortgage bonds on Monday, with help from an emergency Federal Reserve lending program.

The sale was the first deal to be sold under the Fed's Term Asset-Backed Securities Loan Facility, known as TALF, which aims to lower funding costs for issuers by offering investors funding for the purchase of the securities.

The success of the sale was key in the $700 billion market for commercial mortgage-backed securities (CMBS), a crucial funding tool for office, retail and apartment buildings during the real estate boom.

We believe the deal is a crucial first step in restarting the private-label CMBS market, which has been closed since June 2008, and channeling a much-needed source of capital to the commercial real estate universe, said Barclays Capital of the first TALF deal in that segment.

Met with strong investor interest, Developers Diversified was able to price the deal below existing levels for the CMBS issues. Its $323 million AAA-rated five-year notes came at a narrower 1.4 percentage point premium to the five-year interest rate swap benchmark, or a yield of 3.807 percent, market sources said.

Underwriter Goldman Sachs lowered yield premiums from earlier guidance levels of 1.6 to 1.75 percentage points, due to the strong buyer interest.

The deal looked pretty clean from a collateral standpoint and the credit protection, between the over-collateralization and subordination, was incredibly high, said Dan Castro, chief risk officer at Huxley Capital Management in New York.

The offering also included two smaller non-TALF-eligible AA-rated and A-rated issues, which priced with 5.75 percent and 6.25 percent yields, and also drew strong interest.

It was the first deal in about a year and a half, so there was big demand for the small sale, said Castro.

But with funding nearly frozen by the lingering credit crunch, borrowers with maturing loans have had to endure grueling negotiations to extend current terms or face default.

Laying the groundwork has been difficult for Cleveland, Ohio-based Developers Diversified and other borrowers trying to use the TALF program, 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 from commercial properties needed to pay debt service on the bonds.

Developers Diversified, which owns 670 shopping centers in the United States, 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.

The inability to refinance loans has already led to the biggest U.S. real estate bankruptcy, by General Growth Properties Inc .

Recently, the Fed said banks reported that more commercial real estate loans had 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 were up 5.92 percent to $10.37 on Monday. Vornado Realty Trust , which said recently it was considering a TALF issue, gained 2.48 percent to $66.93.

(Additional reporting by Al Yoon; Editing by Leslie Adler)

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