Friday, February 5, 2010

January 2010: More Billion Dollar Deals- FDIC’s Multibank Structured Transaction closes on 1.7.2010

FDIC Receiverships sold via Public/Private Partnerships

Where did the assets come from and where are the failed bank assets going? What is the structure of the deals?

The following are the transaction details from the FDIC press release:

“The FDIC as Receiver for the failed banks conveyed to the LLC a portfolio of approximately 1200 distressed commercial real estate loans, of which seventy percent were delinquent. Collectively, the loans have an unpaid principal balance of $1.02 billion. Seventy-five percent of the collateral of the portfolio is located in Georgia, California, Nevada and Florida. The participating FDIC receiverships provided financing to the LLC by issuing approximately $233 million of corporate guaranteed notes. Colony Capital paid a total of approximately $90.5 million (net of working capital) in cash for its 40 percent equity stake in the LLC, which equals approximately 44 percent of the unpaid principal balance of the assets. As the LLC's managing equity owner, Colony Capital will provide for the management, servicing and ultimate disposition of the LLC's assets.

The bid received from Colony Capital Acquisition, LLC, was determined to be the offer that resulted in the greatest return to the participating receiverships. All of the loans were from banks that have failed during the past 18 months….closed on a sale of an equity interest in a limited liability company (LLC) created to hold certain assets out of 22 failed bank receiverships.

The sale was conducted on a competitive basis with bids received on December 17, 2009. A total of 21 groups submitted bids to purchase a 40 percent ownership interest in the newly formed LLC. The participating FDIC receiverships will hold the remaining 60 percent equity interest in the LLC.”

The winning bidder was Colony Capital Acquisition, LLC, a division of Colony Capital, LLC. Colony Capital, LLC is a private, international investment firm focusing on real estate-related assets and operating companies globally and has raised $9.2 billion of equity capital since the beginning of 2006.

How are these deals structured?

At sale, the FDIC places the receivership assets into a new entity in partnership with the winning bidder. In the case of the Colony Structured Transaction, Colony purchased a 40% LLC interest for $90.5 million, implying a total equity value of $226.25 million for the deal and a total capitalization of $460 million including the FDIC financing provided.

The Key Points of the Structured Transaction

Bids are taken and LLC Membership Interest is sold to 3rd party (thereafter, the “LLC Interest Holder” or in this case Colony). Bidders must be pre-qualified, have demonstrated financial capacity and the ability to manage and dispose of similar loan portfolios, and have certified eligibility to purchase FDIC receivership assets.

LLC Interest Holder must provide a guaranty of its and LLC’s obligations by a substantial entity that owns a majority interest in the LLC Interest Holder (or such other guarantor as is acceptable to the FDIC). The FDIC financed roughly 50% of the sale or $233 Million the Colony deal.

Cash flows from the loans, after deducting the monthly management fee and advances for such things as taxes, insurance, and property protection expenses, are allocated between the Participant and the LLC, with the Participant entitled to its percentage interest (60% FDIC/40% Colony initially and shifting as specific profit thresholds are reached).

The Receivership (FDIC) has the right to require the sale of all remaining LLC assets when the aggregate unpaid principal balance of the loans has been reduced to 10 percent of the balance at closing or upon the 7th anniversary of the effective date of the Participation and Servicing Agreement whichever occurs first.

These deals are structured for the long term!

FDIC Asset Liquidation Trends

At least two other large Multibank Structured Transactions (structured sales) are currently in process as well as many smaller portfolio sales. Over $30 billion an additional receivership assets are being shed from the FDIC books via structured and unstructured receivership asset sales.

A more significant liquidation method gaining ground is the FDIC’s loss sharing agreement (“LSA”), a preferred method for the FDIC to dispense with failed bank loan portfolios in conjunction with the acquisitions of failed banks. Over $100 billion in LSA asset volume were included in 140 bank failures in 2009 and in January 2010, the 15 US banking institutions shuttered during the month involved a total of $10.9 billion in combined assets and the loss share transactions in 13 of these cases covered a total of $7.3 billion in loans.