On March 23, 2009, the Obama administration announced plans for two federal programs designed to jump-start bank lending and securitization markets through unique public-private partnerships and committed up to $100 billion in TARP money to fund such programs. Pursuant to the so-called “Legacy Loans” program, private investors -- armed with the guarantee of the Federal Deposit Insurance Corporation (“FDIC”) and equity from the U. S. Department of the Treasury -- can bid for and acquire pools of loans and other assets that banks and other depository institutions insured by the FDIC are looking to purge from their books. Such purchased assets would be held by a public-private investment fund (a “PPIF”) controlled by the private investors but with the Treasury as a silent partner. On March 26, 2009, the FDIC announced a public review and comment period expiring on April 10, 2009. Although the finer points of the program are yet to be determined, the broad brush-strokes of the Legacy Loans program include the following:
Identification of Eligible Asset Pools. FDIC-insured banks, thrifts, and other depository institutions (referred to as “Participant Banks”), working with their regulators and the FDIC, can identify loan assets they would like to sell to a PPIF. Other types of commercial and residential lenders beyond the jurisdiction of the FDIC are excluded from selling assets in this program, as are non-U.S. banks and lenders. In a telephone conference held for banks on August 25, 2009 (the “Bank Call”), officials with the FDIC indicated that these asset pools would initially contain performing and non-performing loan assets, but could expand later to cover other assets such as real estate. It is expected that each pool will initially contain loan assets from only one Participant Bank, but eventually loan assets from multiple Participant Banks could be pooled together for one sale. Currently, there are no limitations on the size of pools or loan assets that can go into the pools and loans of any type are open for consideration.
Valuation and Pricing of Eligible Asset Pools. Once an Eligible Asset Pool has been identified for sale, the FDIC will consult with a private third party valuation firm to analyze the Eligible Asset Pool and determine the opening bid price, the amount of debt to be incurred by the PPIF that the FDIC will guarantee, and the respective equity allocation in the PPIF between the private investors and the Treasury. On the Bank Call, FDIC officials indicated that the valuation firm would likely handle the entire auction process as well, including set-up and management of virtual data rooms where potential investors could conduct diligence on the loan assets prior to the start of the auction. The ratio of the equity component to the acquisition debt guaranteed by the FDIC with respect to each Eligible Asset cannot exceed 6 to 1.
Auction of Eligible Asset Pools to Eligible Private Investors. While Private investors wishing to bid on an Eligible Asset Pool must be pre-approved by the FDIC, the details of the application and approval process are unknown at this time except for the following:
(i) Investors are permitted to join together prior to making a bid but not thereafter;
(ii) Investors cannot be affiliates of the Participant Bank selling the Eligible Asset Pool nor does the FDIC want more than 10% of the private capital in a PPIF held by private investors affiliated with the Participant Bank. On the Bank Call, the FDIC officials indicated that the term “affiliate” would likely be given the same meaning used in the Federal Bank Holding Company Act: “controlling, controlled by or under common control with”; and
(iii) Investors will be required to make a refundable cash deposit of 5% of the amount of the bid on the Eligible Asset Pool.
Once the winning bid is determined, the Participant Bank will have the option to accept or reject the bid. If accepted, the private investor(s) with the winning bid would form the PPIF with the Treasury and complete the purchase of the Eligible Asset Pool.
Formation of PPIF. Although specific details on the formation of the PPIF and the respective rights of the private investors and the Treasury are not yet promulgated, it is expected that the Treasury will not hold more than 50% of the equity in the PPIF and will receive warrants in return for its equity investment (the specific terms of such warrants are also unknown at this time). The PPIF will be managed solely by the private investors who are permitted to retain asset managers or servicers approved in advance by the FDIC. FDIC officials expect that the Participant Bank will initially continue to service the loan assets after their sale to the PPIF, but the PPIF will have the ability to replace the Participant Bank at any time.
Issuance of Debt by the PPIF; FDIC Guarantee. It is expected that the Participant Bank selling the Eligible Asset Pool will take back a purchase money note from the PPIF backed by the FDIC’s guarantee and senior in order of repayment to the equity stakes. In return for its guarantee, the FDIC will retain a direct lien on the loan assets in the Eligible Asset Pool. Alternatively, the PPIF might obtain financing from a third party source guaranteed by the FDIC and pay all cash to the Participant Bank for the purchase. In connection with the closing, a portion of the sales proceeds will be set aside in a Debt Service Coverage Account to make payments on the PPIF’s debt and to cover servicing and other operating expenses. The Participant Bank will be entitled to receive the escrowed funds once the Debt Service Coverage Account becomes fully funded from cash flow on the asset pool.
Fees and Expenses. In addition to an annual fee paid by the PPIF to the FDIC for its guarantee, the FDIC will also assess annual administrative fees for its oversight of the PPIF. The FDIC and the Treasury are to enter into an agreement to allocate the costs and expenses involved in the operation of the program.
To post comments regarding the Legacy Loans Program, please visit the FDIC site.
To learn more about the new Legacy Loans Program, see our PDF chart by clicking the "Download PDF" link to the left.
If you have any questions about the new Legacy Loans program, please contact one of our lawyers.