Structured Transaction FAQ
What are Structured Transactions?
As the term is used by the FDIC, structured transactions are joint ventures or partnerships, between the FDIC as receiver (FDIC) for failed financial institutions and private sector entities, which are designed to facilitate the disposition of assets from failed banks and thrifts. Structured transactions allow the FDIC to retain an interest in the assets, while transferring day-to-day management responsibility to expert private sector professionals who also have a financial interest in, and share in the costs and risks associated with ownership of, the assets. By structuring the partnerships to align the interests of the FDIC with those of its partners, the strategy is expected to achieve greater returns than other conventional sales methods by encouraging management of assets to recognize their long term value.
How do FDIC Structured Transactions work?
Partnerships formed since 2008 have been structured as limited liability companies (LLCs). The FDIC forms an LLC to which assets from one or more failed institutions are conveyed via a contribution or sale agreement. In exchange for the assets, the FDIC receives all of the ownership interest in the LLC. Through a competitive bid process the FDIC then sells an interest in the LLC, typically ranging from 20- 40% (actual percentage is specific to each LLC), to the winning private sector bidder.
The earliest LLCs were sold on an all cash basis. In those transactions the FDIC contributed asset pools, usually subperforming loans, nonperforming loans, and real estate owned (REO). Through a bidding process, a winning private sector bidder paid cash for a specified ownership interest in the partnership and provided asset management services.
Is financing provided for these transactions?
Since September 2009 all the LLCs have included financing or leverage in the form of either amortizing or non-amortizing purchase money notes. The notes are issued by the LLC as partial payment to the FDIC for the assets the FDIC conveys to the LLC. The remainder of the purchase price for the assets is the cash payment received by the FDIC from the winning bidder for the purchase of the winning bidder's interest in the LLC. The notes are initially held by the FDIC and may be sold.
The terms of the notes are established and disclosed to bidders prior to the time at which bids are accepted for the transaction. Some of the notes amortize over time or require periodic interest payments. Other notes are "zero coupon" or "bullet" notes because they do not pay periodic interest or require periodic principal payments until the ultimate maturity date of the notes. Like U.S. Savings bonds, the balance of these "zero coupon" or "bullet" notes due at maturity includes the interest.
The transaction legal documents place a priority on repayment of the debt. Cash proceeds generated from the sale of LLC assets generally must be used to pay down the debt before the partners receive any distributions on their equity.
How big is the FDIC's LLC program?
As of July 2012, the FDIC has closed 32 structured transactions, disposing of more than 42,300 assets and $25.5 billion in unpaid principal balance. Refer to http://fdic.gov/buying/historical/structured/index.html for the most current information.
Who manages the assets?
The private sector entity selected in a competitive bid process to acquire a membership interest in the LLC is required to act as the manager of the LLC and the manager and servicer of the assets. Before bidding, potential bidders must be pre-qualified to ensure, among other things, that the bidder has the expertise and resources to manage and liquidate the assets. The winning bidder is obligated to manage the assets in a manner consistent with industry standards in a way that maximizes their value to the LLC.
What type of oversight does the FDIC have over the LLCs?
As part of the "partnership" business model of the structured transactions, the FDIC, while leaving day to day management of partnership affairs and the assets to its private sector partner, engages contractors to facilitate the FDIC's oversight and to ensure compliance with all transaction documents. Using these contractors and in-house staff, the FDIC regularly conducts on-site reviews of the asset manager's operations. In addition, the manager must adhere to stringent monthly, semiannual, and annual reporting requirements to facilitate the FDIC's oversight of the transaction and asset performance. As an additional monitoring tool, the legal documents provide FDIC with certain consent rights with respect to LLC and manager activities.
Why does the FDIC use Structured Transactions?
The FDIC has a legal responsibility to maximize recovery on the assets of failed financial institutions for which it acts as receiver. The FDIC provides for the offer and sale of assets through structured transactions when it determines that this method of asset disposition is likely to maximize the value of the assets.
Are borrowers affected when assets are disposed of through a Structured Transaction?
When loans or other assets are disposed of through a structured transaction, the documents governing the legal rights and obligations of borrowers do not change. The LLCs which acquire the assets are subject to the terms and conditions of the legal documents governing the asset.