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?
Joint ventures formed since 2008 have been structured as limited liability companies (LLCs). FDIC receiverships convey assets to this LLC and in exchange, the FDIC receives all of the ownership interest in the LLC. Then, through a competitive bid process, the FDIC sells an interest in the LLC to a private sector bidder (Private Owner). This interest, typically ranging from 20- 40% (actual percentage is specific to each LLC), includes the day-to-day management rights of the LLC. The private sector owner is responsible for the resolution and disposition of the LLC’s assets. Net proceeds from this activity are shared between the LLC’s members (Private Owner and the FDIC) based on each members equity interest.
Is financing provided for these transactions?
The earliest LLCs were sold on an all cash basis, however since September 2009, LLC’s included a financing or leverage option 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 resolution of LLC assets generally must be used to pay down the debt before the members receive any distributions on their equity.
How big is the FDIC's LLC program?
As of December 2014, the FDIC has closed 35 structured transactions, disposing of more than 43,300 assets and $26.2 billion in unpaid principal balance. Refer to http://fdic.gov/buying/historical/structured/index.html for closed sale information.
Who manages the assets?
The Private Owner (winning bidder) is required to act as the manager of the LLC and as 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 Private Owner 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 "joint venture" business model of the structured transactions, the FDIC possesses certain monitoring and oversight rights within the LLC legal agreements. To support this effort the FDIC engages contractors to verify 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 conveys assets to LLCs in a structured transaction 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.