Financial Asset Sales
The FDIC, as receiver for a failed institution, has a legal responsibility to maximize recovery on assets. In accordance with this responsibility, the FDIC employs a variety of strategies to manage and sell the assets of failed institutions.
In early 2008, the FDIC, drawing on the past success of RTC and FDIC joint venture partnerships in the 1990’s, again turned to the 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. Structured joint venture transactions formed since 2008 have been set up as limited liability companies (LLCs). As of December 2017, the FDIC has closed 35 joint venture transactions, disposing of more than 43,300 assets and $26.2 billion in unpaid principal balance. For information on structured joint venture transactions that have closed, click on: FDIC: Structured Transaction Joint Venture Sales
As the term is used by the FDIC, “Structured Transactions” are joint ventures or partnerships between the FDIC as receiver for failed financial institutions and private sector entities, which are designed to facilitate the disposition of selected assets from failed financial institutions.
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 the assets and share in the costs and risks associated with ownership.
- The receiver forms a LLC (or other entity) to which assets from one or more failed institutions are conveyed via a Contribution and Sale Agreement.
- In exchange for conveying the assets, the receivership obtains all of the equity interest in the LLC.
- The winning bidder (Private Owner) purchases a portion, typically ranging from 20-40%, of the equity in the LLC (actual percentage is specific to each transaction). These types of transactions continue to be offered and sold on a leveraged, unleveraged, or whole loan "all cash" basis.
- Bidders must be pre-qualified, have demonstrated financial capacity and the expertise to manage and dispose of the asset portfolio, and have certified eligibility to purchase FDIC receivership assets.
- In certain cases, the receiver may make funding facilities and pre-funded accounts available to fund construction draws with respect to the assets and working capital needs of the venture. Advances must be repaid from the cash flow prior to the equity owners receiving any distributions.
- Cash flow from the assets, after deducting the monthly servicing fee and advances for such things as taxes, insurance, and property protection expenses, are allocated first to pay off any notes and any other debt outstanding to the receiver and then, to the receiver and the Private Owner, in accordance with their percentage interests.
- Transactions may include a provision that provides for a shift in ownership interests once a stated dollar amount of distributions to the receivership, including the sales price received in a competitive bid sale (Threshold), is reached. Upon reaching the Threshold, the ownership interests of the receiver and Private Owner change. The Threshold and the amount by which the percentage interests change are specific to each transaction and are established and disclosed to bidders prior to the bid date.
- The Private Owner acts as the managing member of the joint venture and is responsible for the management and servicing of the assets conveyed to the venture. The managing member enters into a Servicing Agreement with a qualified servicer to service the assets in a manner consistent with industry standards and to maximize their value to the joint venture.
- The Private Owner receives a monthly servicing or management fee that is specified prior to bid date to pay the servicer and other internal expenses incurred in servicing the assets.
- The Private Owner acting as the managing partner must adhere to stringent monthly, semiannual, and annual reporting requirements.
- Leveraged transactions include financing in the form of either amortizing or non-amortizing purchase money notes issued by the joint venture as partial payment for the assets conveyed by the receiver, in addition to the cash payment from the Private Owner for the purchase of its equity interest. The notes may be guaranteed by the FDIC, in its corporate capacity, should the receiver decide to sell the notes in the secondary market.
- Financing terms are determined by the risk and cash flow characteristics of the joint venture's underlying pool of assets. Although terms are subject to changing market conditions, historical leverage ratios were typically:
- Single Family Residential ["SFR"] ranges from 1:1 up to 6:1 debt to equity.
- Commercial Real Estate ["CRE"] ranges from 1:1 up to 4:1 debt to equity.
- Acquisition, Development & Construction Loans ["ADC"] typically does not exceed 1:1 debt to equity.
- Generally the notes must be paid off before the equity owners receive any distributions.
The FDIC possesses certain monitoring and oversight rights pursuant to the joint venture 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 conducts compliance monitoring of the transactions on a regular basis, in addition to an annual agreed upon procedures review of entity operations.
This notice is provided for information purposes only to alert individuals or business entities that may be interested in participating as a bidder or a member of a consortium of bidders in structured transactions formed by the "FDIC" as Receiver for failed financial institutions.
"Structured Transactions," as the term is used by the FDIC, are joint ventures or partnerships between the FDIC as receiver for failed financial institutions, and private sector entities, which are designed to facilitate the disposition of selected assets from failed financial institutions. 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 the costs and risks of ownership in the assets.
In these transactions, the FDIC contributes loans to a newly formed entity, a limited liability company ("LLC") or other entity, and then sells an equity interest in the LLC to a bidder or consortium of bidders through a closed bid process. The winning bidder becomes the managing partner for the LLC and is responsible for managing and liquidating the assets pursuant to the LLC agreement and other transaction documents.
The FDIC may conduct auctions of equity interest in structured transactions from time to time, depending upon resolution of failed bank assets. The asset pools contributed to structured transactions are generally loans secured by real estate and may include commercial real estate loans, commercial acquisition, development and construction loans, residential acquisition, development and construction loans, commercial loans secured by assets other than real estate, or single family residential loans, and related assets such as real property. In order to attempt to increase the number of participants in the FDIC's structured transactions, the offered asset pools contributed to the transactions may have a combined unpaid loan balance of $100 million or less and be geographically focused (e.g., west, east). The FDIC believes that, by offering geographically focused and smaller dollar pools, it will also support the FDIC's activities to provide opportunities to increase the diversity of bidders or consortiums of bidders.
If you are interested in participating as a prospective bidder in a structured sale, you must be "pre-qualified" in order to receive the initial structured sales notices.
When loans or other assets are conveyed in a Structured Transaction the documents governing the legal rights and obligations of borrowers do not change. The LLCs (or other entity) which acquire the assets are subject to the terms and conditions of the legal documents governing the asset.
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How to Qualify
Learn more about qualifying to buy financial assets.