Financial Asset Sales
FDIC Structured Transaction Fact Sheet
In the early 1990s, the Resolution Trust Corporation (RTC) and the FDIC entered into a number of joint ventures or partnerships with the private-sector to facilitate the disposition of an unprecedented number of assets held by the RTC or FDIC as receiver or conservator for numerous failed banks and thrifts. These transactions were structured to align the interests of the parties and to capture the asset management efficiencies and expertise of the private sector. The strategy yielded higher present value recoveries to the RTC and FDIC than conventional sales methods.
The RTC Partnerships
From December 1992 through October 1995, the RTC created 72 partnerships in the form of limited partnerships and business trusts holding real estate loans and assets with a total book value of $21.4 billion. Under the partnership program, the RTC acted essentially as a passive participant or limited partner (LP), with a private-sector investor responsible for managing and disposing of the assets and acting as the general partner (GP). The RTC aligned the financial incentives for the LP and GP to ensure that the assets in the portfolio would be liquidated in the most cost effective and mutually profitable manner.
The RTC contributed asset pools, usually subperforming loans, nonperforming loans, and real estate owned (REO) and arranged for financing of the partnership, while the GP invested equity capital and asset management services. The financing terms required that cash proceeds generated from the liquidation of assets be applied first to the retirement of the debt (usually bonds held by the RTC). After the debt was paid in full, the partners split the remaining proceeds according to the percentage of ownership each partner held.
The RTC experience demonstrated that partnerships could successfully be used as a vehicle to convey a large volume of assets of varying types and quality to private-sector ownership and management in a relatively short period of time. The partnerships were structured using several different legal forms with RTC holding a range of residual interests. Results achieved through this partnership model were higher than through other multiple-asset cash only sales methods, where assets were sold into a depressed market and discounted for unstable market conditions and a lack of liquidity.
Recent Structured Transactions
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 its past success with partnerships, 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. Since that time, the FDIC has entered into two basic types of structured transactions with private sector investors, with all transactions to date using limited liability companies (LLCs). 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. For information on structured transactions that have closed, click on:
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.
How it works:
- The receiver forms an entity (to date, all LLCs) 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.
- To date two basic types of structured transactions have been created:
- Participation Transactions: In transactions structured between May 2008 and March 2009, the receiver is a participant in the assets themselves. After formation of the LLC and contribution of the assets to the LLC, the LLC entered into a Participation and Servicing Agreement with the receivership, with the receivership typically holding an 80% interest in the assets after the LLC membership interest was sold to the successful bidder. The actual percentage is specific to each LLC.
- Partnership Transactions: Since September 2009, all structured transactions have been in the form of partnerships in which the receiver owns an equity interest in the entity that acquires the assets. Again, to date, LLCs have been used. 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 LLC). These types of transactions continue to be offered and sold on a leveraged, unleveraged, or whole loan “all cash” basis. To date, some form of seller financing has been offered in all of these transactions.
- 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.
- Leveraged LLCs include financing in the form of either amortizing or non-amortizing purchase money notes issued by the LLC 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 LLC’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.
- In certain cases, the receiver may make funding facilities and pre-funded accounts available to the LLC to fund construction draws with respect to the assets and working capital needs of the LLC. Advances must be repaid from the cash flow prior to the equity owners receiving any distributions.
- The Private Owner acts as the managing member of the LLC and is responsible for the management and servicing of the assets conveyed to the LLC. 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 LLC.
- 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.
- 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 acting as the managing partner must adhere to stringent monthly, semiannual, and annual reporting requirements. The FDIC conducts compliance monitoring of the transactions on a regular basis, in addition to an annual agreed upon procedures review of entity operations.