Wednesday, March 24, 2010

FDIC Taps Advisers for Structured Offerings

cre weekly


The pipeline of structured portfolios planned by the FDIC keeps growing. The agency is said to have just tapped Milestone Advisors of Washington, D.C., to sell a stake in a portfolio of commercial mortgages, and HSBC Securities of New York to handle a residential portfolio.

The latest offerings would bring to six the number of structured portfolios the agency has in its pipeline. Those deals could have a balance of some $5 billion and include a $610.5 million portfolio of residential acquisition, development and construction loans that Mission Capital Advisors is handling. Also included is a portfolio of $1.8 billion of commercial acquisition, development and construction loans and conventional commercial mortgages being marketed through Barclays Capital.

So far, FDIC has completed the sale of 11 structured portfolios with a combined balance of $14.8 billion. It sells only an interest, of 20 to 40 percent, in each, keeping the rest and providing 50 percent financing.

The biggest so far involved $4.5 billion of assets from the failed Corus Bank. An investor team led by Starwood Capital Group paid $554.4 million for a 40 percent stake in the portfolio, valuing it at roughly 45 cents on the dollar.

With the upcoming offerings, the agency has used 10 of the 14 contractors it tapped to help it structure and sell large portfolios of loans. Barclays has handled the most, $6.1 billion, which includes the massive Corus Bank portfolio. And Keefe, Bruyette & Woods has handled the sale of three portfolios totaling $4.1 billion. While the agency is clearly pleased with its structured sales, many investors aren’t, simply because they’ve been pushed out of competing.

A host of investors and investor groups were set up when the economy started nose-diving and banks started failing. Their idea: buy loans at discounts to their face values in the hopes of working them out and profiting. Often, they pursue loans on properties in their geographic region. While motivated by profit, their investments provide price discovery to local real estate markets, which is instrumental for a recovery. Indeed, more than 200 investors bought loans through the agency’s whole-loan offerings.

But the agency is facing an avalanche of bank failures. Since the beginning of last year, it has taken over 169 failed banks and classified another 702 institutions, with nearly $403 billion of assets, as “problem banks.” Selling loans one-at-a-time wasn’t going to hack it. So it’s been selling commercial and residential mortgages through structured offerings and consumer credits through its whole-loan sales effort. By selling only interests in portfolios of assets, the FDIC could benefit if asset values climb.

The bulk of failed-bank assets are transferred to acquiring institutions through loss-sharing agreements, where FDIC insulates the acquirer from 80 percent of the losses generated by assets subject to the agreement. That insulation level could climb to 95 percent under certain circumstances. Some investors who pursued the purchase of individual loans are livid, not only at the agency’s strategy of selling through its structured offerings, but also at the loss-share agreements. “FDIC is hindering the redevelopment of communities,” said one, who noted that assets subject to loss-sharing agreements can’t be sold for seven years. “Markets won’t find their bottoms,” he said. “Their limbo is causing everyone else to remain in limbo.” Said another investor who raised capital to pursue small-balance loans: “I’m not wild about what the FDIC is doing. As a small investor, this is certainly a pain in the behind.” With assets held off the market, “everyone’s in a state of suspension,” said another.

One investor noted that the RTC got hammered by public opinion during its early years for selling assets at what now can clearly be called fire-sale prices. As investors flocked to the agency, they drove prices up to the point that some probably ended up over-paying for assets.

Perhaps, the investor said, the flip is happening today. FDIC’s structured offerings have evidently attracted the big guns with the lure of plentiful assets at low prices. But some indications are that some investors are paying up. For instance, Starwood Capital’s offer for the portfolio of Corus Bank assets was 23 percent higher than the cover, or second-place bid.

Because of the time and money involved in reviewing the hundreds of assets in a typical structured portfolio, some investors might eventually bow out in frustration. If, or when that happens, pricing is sure to suffer.