Thursday, August 4, 2011

FDIC Announces Winning Bidders for its Small Investor Program Maiden Sale

FDIC Structured Sales Summary

Since May of 2008, the FDIC has turned to a “partnership model to sell large numbers of distressed assets (primarily non-performing single family and commercial real estate loans and related real property) held by recently failed financial institutions.”

As of August 2011, the FDIC has closed over 27 structured sale transactions transferring over 39,800 assets and $24.2 billion in unpaid principal balance.

The FDIC has stayed on as a partner in these transactions with the stated goal of capturing upside and appreciation as the loans are worked through and the economy and asset values recover.

The good news is that FDIC structured sales are generating a certain level of public price discovery in the distressed debt markets. The marked down balances provide room potentially for new investors to restructure the loans or liquidate the assets. The ‘reset’ debt levels and/or adjusted real estate asset values may, in the long run lead to healthier, more sustainable and competitive markets.

The First 2011 Structured Sale

In the late spring Commercial Real Estate Direct reported that the FDIC was planning to market $1.5 billion of assets under their structured sales program. No new FDIC sales have been announced this year. The last structured sale from 2010 (RADC/CADC 2010-2 Venture, LLC) closed in January 2011.

In particular, among the assets to be offered, were loans fresh from the January 28 closure of FirsTier Bank. The FDIC sale “involves $300 million of ADC loans on commercial properties in Colorado. They were on the books of FirsTier Bank, a $781.5 million-asset bank in Louisville, Colo.”

Commercial Real Estate Direct also indicated that at the time the FDIC planned to create “two pools, with balances of $160 million and $140 million, and expects to take offers on July 12. Its goal is to make the assets as attractive as possible for small investors...." and is to be known as the FDIC Small Investor Program (“SIP”).

The FDIC Announces Winning Bidders for its Small Investor Program Maiden Sale

On August 4, 2011 the sales of first SIP pools closed. The FirsTier commercial real estate and commercial acquisition, development and construction loans (“CRE/CADC” assets) were sold to Acorn Loan Portfolio Private Owner IV, LLC ("Acorn"). The residential acquisition, development and construction loans (RADC assets) were purchased by HRC SVC Pool II Acquisition LLC (“HRC”).

Acorn is based in Los Angeles, CA and is owned by Calista Corporation, a minority-owned business. As described in their website, “Calista is one of 12 Alaska based Regional corporations established to benefit Alaska Natives who have ties to Lower Yukon and the Lower Kuskokwim River”. Also in the ownership are FACP Mortgage Investments, LLC and entities controlled by Oaktree Capital Group Holdings of Los Angeles. Oaktree specializes in alternative investments. As of June 30, 2011 Oaktree Capital's managed assets totaled $79.5 billion of which $28.2 billion were distressed debt assets.

The FDIC press release indicated that “Acorn paid a total of approximately $25.6 million (net of working capital) in cash for its initial 25 percent equity stake in the LLC holding the CRE/CADC assets; its bid valued the CRE/CADC assets at approximately 65 percent of the aggregate unpaid principal balance (UPB) of such assets. The CRE/CADC assets are comprised of 116 loans with an aggregate UPB of approximately $158 million with the highest concentration in Colorado (96 percent).”

HRC SVC Pool II Acquisition LLC based in New York bought the RADC assets and is an entity controlled by Hudson Realty Capital LLC, also a minority and women owned business. HRC has more than $2 billion of assets currently under management and since the formation of its initial two funds in 2002 the company has closed over $3 billion in transactions according to their website. HRC partnered with Soundview Real Estate, a private equity fund based in Stamford, CT and real estate investor JCR Capital based in Denver.

The FDIC revealed that “HRC paid a total of approximately $14.9 million (net of working capital) in cash for its initial 25 percent equity stake in the LLC holding the RADC assets; its winning bid valued the RADC assets at approximately 43 percent of the aggregate UPB of such assets. The RADC assets are comprised of 97 loans with an aggregate UPB of approximately $139 million with the highest concentration in Colorado (95 percent)."

The bidders could choose from one of two deal structures: “either a leveraged structure (for a 50 percent equity interest) and an unleveraged structure (for an initial 25 percent equity interest)....both winning bids were unleveraged, the Private Owner of each LLC initially will hold a 25 percent Private Owner Interest in such LLC and the FirsTier receivership will hold the remaining 75 percent equity interest until all equity is returned. After the return of equity, the receivership's interest in each LLC will decrease to 50% and the Private Owner Interest will correspondingly increase to 50%."

The FDIC’s stated goal with SIP is to cater to “ the small investor” by offering “smaller sized asset pools and unique structural features to make it more accessible” to smaller investors and to “increase participation in structured sales while maintaining a level playing field for all investors.”