On March 23, 2009, the Treasury Department (the “Treasury”) announced the creation of a Public-Private Investment Program (“PPIP”), moving forward on earlier economic stabilization efforts to remove toxic assets from financial institution balance sheets and re-establish a private-sector market for these troubled assets. The PPIP creates potential opportunities for banks and for investors in connection with the sale and purchase of these assets through two different programs: the Legacy Loans Program and the Legacy Securities Program.
Treasury, in conjunction with the Federal Deposit Insurance Corporation (the “FDIC”), has established the Legacy Loans Program to offer FDIC-insured depository institutions (each a “Participant Bank”) the opportunity to market pools of troubled residential and commercial real estate loans in FDIC-organized auctions. Under the Legacy Loans Program, the private sector and Treasury will partner to fund Public-Private Investment Fund (“PPIF”) vehicles to purchase and manage pooled loans with a combination of equity capital and FDIC-guaranteed debt financing.
The Legacy Securities Program will fund the purchase of certain mortgage-backed securities with a combination of private capital and Treasury capital, which can be supplemented with financing from the Treasury. Additional debt-financing for the purchase of these legacy securities will be available to PPIFs and other private investors from the Federal Reserve through an expansion of the previously-announced Term Asset-Backed Securities Loan Facility (“TALF”) program. This memorandum briefly summarizes key points of the component programs as outlined by the Treasury to date, with an emphasis on the Legacy Loans Program.
Legacy Loans Program
Under the announced Legacy Loans Program, PPIFs will purchase bank-owned real estate loans through an auction process which will be overseen by the FDIC. Private investors will bid for the opportunity to contribute up to 50% of the equity for the PPIF, and the winning bid for the equity share will set the implied value of the equity share held by Treasury. The FDIC will determine a level of debt that it would be willing to guarantee for each asset or pool of assets to be sold (up to a 6-to-1 debt-to-equity ratio), which debt financing would supplement the equity capital to establish the total bid price for a particular pool of assets.
Bank Participation – Sale of Loans
- Participant Banks are to register interest with the FDIC and coordinate with their primary regulators to identify pools of loans to promote for sale. “Eligible Assets” are currently proposed as loans from FDIC-insured depository institutions, whose supporting collateral is situated predominantly in the United States and whose characteristics meet certain minimum requirements to be established by the FDIC.
- FDIC will oversee initial due diligence of the accepted Eligible Assets. A Participant Bank’s accepted assets will either stand alone as an asset pool for sale or be combined with another Participant Bank’s assets to form a larger pool (each an “Eligible Asset Pool”).
- The FDIC will select a third party valuation firm (“Third Party Valuation Firm”) to provide independent valuation advice to the FDIC on each Eligible Asset Pool. The Third Party Valuation Firm will estimate Eligible Asset Pool values and advise the FDIC on loan-to-value and debt service coverage for each PPIF.
- For each Eligible Asset Pool to be auctioned, the FDIC will produce an FDIC Guaranteed Secured Debt for PPIF Term Sheet (a “Term Sheet”) proposing financing terms, the leverage ratio supported by the underlying assets, and the terms offered for the FDIC Guarantee, all factors which will be critical to an Eligible Asset Pool’s valuation and sale in the marketplace. The Participant Bank also will be expected to make information available to FDIC and potential PPIF private investors (“Private Investors”), according to pre-established criteria, to facilitate private valuation of Eligible Asset Pools.
Investor Participation – Formation and Funding of PPIFs
The FDIC and Treasury have proposed the creation of PPIFs to purchase Eligible Assets at auctions facilitated by the FDIC. General details provided to date indicate the following process:
- Based on parameters stated in the Term Sheet, a qualified Private Investor will use “pricing expertise” to bid on proposed equity stakes in a PPIF (a “Bid”). Joint Bids from pre-qualified Private Investors are acceptable, but combination of groups/investors will be prohibited once the auction process begins, to maintain fairness.
- The FDIC will select the winning bidder. Treasury will match the winning private equity bid (the “Treasury Match”) and receive warrants from the PPIF as required by the Emergency Economic Stabilization Act.
- PPIFs will issue FDIC-guaranteed debt, collateralized by the purchased assets, to expand purchasing power. The PPIF will pay cash or a combination of cash and debt issued by the PPIF to the Participating Bank (the “PPIF Debt”). The FDIC will guarantee PPIF Debt (the “FDIC Guarantee”) up to the leverage ratio stated in the Term Sheet, essentially implying the desired level of PPIF Debt to be the amount of the computed FDIC Guarantee.
- After compiling the winning Bid, Treasury Match, and FDIC-guaranteed debt, the FDIC will present the PPIF offer (the “PPIF Offer”) to the Participant Bank for review. The Participant Bank may accept or reject the PPIF Offer.
- If the PPIF offer is accepted, the PPIF will be formed and will purchase, own and manage the Eligible Asset Pool. The PPIF is expected to obtain control of Eligible Asset Pool loan servicing. PPIFs will pay to the FDIC ongoing administration fees for oversight functions and an annual guaranty fee that the FDIC will allocate in part to FDIC’s Deposit Insurance Fund. Each PPIF must agree to taxpayer protections and government access to records, and each PPIF will be subject to requirements regarding the conduct of their business and compliance with applicable law. PPIFs also will be subject to debt servicing account escrow requirements, initially funded from Participant Bank Eligible Asset sale proceeds.
Private Investors who provide capital to PPIFs are expected to include an array of different investors, including, but not limited to, financial institutions, individuals, insurance companies, mutual funds, publicly managed investment funds, pension funds, foreign investors with headquarters in the United States, private equity funds and hedge funds. Private Investors may not participate in any PPIF that purchases assets from sellers that are affiliates of such investors or that represent 10% or more of the aggregate private capital in the PPIF.
Private Investors must be pre-qualified by the FDIC to participate in an Eligible Asset Pool auction. FDIC has not yet announced qualification criteria. All bids must be accompanied by a refundable cash deposit (“Deposit”) of five percent (5%) of the bid value.
Legacy Securities Program
The Legacy Securities Program will combine private equity capital and Treasury capital with financing from the Treasury and from the Federal Reserve, through the expanded TALF program, to fund the purchase of troubled securities by PPIFs. Treasury has announced plans to approve initially five Fund Managers, each meeting certain pre-qualification criteria such as demonstrated experience investing in assets of the type proposed for the program and demonstrated capacity to raise at least $500 million of private capital. Under recent guidance from Treasury, private investment managers have until 5:00 p.m. EST on April 24, 2009, to apply. The selected Fund Managers will have a limited amount of time to raise the committed private equity capital and will submit proposals for participation in a joint investment program with Treasury in which the private capital raised by the Fund Manager would be matched by Treasury. Treasury will take warrants in the PPIF determined by the amount of debt financing taken. The Treasury may also provide a loan for up to 50% of the equity value of the resulting PPIF (or possibly up to 100% with certain restrictions). Federal Reserve loans would be available under the expanded TALF program. The PPIF will then engage in a purchase program for targeted securities in which the Fund Manager will control the process of asset selection and pricing. Eligible securities would include certain non-agency residential mortgage-backed securities and outstanding commercial mortgage-backed securities, each issued before January 1, 2009 and originally rated AAA. The assets must be secured directly by the actual mortgage loans, leases or other assets, and not by other securities, and must be situated predominantly in the U.S.
Details of the PPIP are still preliminary, and the structure and specific requirements of the component programs are subject to further clarification by the applicable government agencies. We will continue to monitor developments in the PPIP as additional information becomes available.
Please note that this memorandum is not intended to be a substitute for legal advice and should not be construed as such and does not cover all details of the program. We will be happy to discuss any questions you may have or to assist you in the process of investigating participation in the Legacy Loans Program or the Legacy Securities Program. Our contact information is as follows:
Paul Compton – telephone 205-521-8381; email
Dave Dresher – telephone 205-521-8605; email
Johanna Jumper – telephone 615-252-2321; email
David Rutter – telephone 615-252-2346; email
Tracy Thompson – telephone 205-521-8374; email
Paul Ware – telephone 205-521-8624; email
Keith Windle – telephone 205-521-8415; email
Bob Wood – telephone 615-252-2336; email
To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax related matter addressed herein.