Financial Asset Sales
Structured Transaction FAQs
What are Structured Transactions?
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 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 these arrangements 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?
Structured Transactions formed since 2008 have been set up as limited liability companies (LLCs). FDIC receiverships convey assets to the LLC and in exchange, the FDIC receives all of the ownership interest in the LLC. Then, through a competitive bid process, the FDIC sells a fractional equity interest in the LLC to a private sector bidder (Private Owner). This fractional equity 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 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 member’s equity interest.
Is financing provided for these transactions?
The earliest LLCs were established on an all cash, all equity basis, however since September 2009, LLCs have included a financing or leverage option in the form of purchase money notes. These notes are issued by the LLC to the FDIC as partial payment 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 Private Owner’s fractional equity interest in the LLC. The notes are initially held by the FDIC and may be sold by the FDIC to third parties depending on market conditions.
The terms of the purchase money 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 purchase money notes before the Members receive any distributions on their equity.
How big is the FDIC's LLC program?
As of December 2015, the FDIC has entered into 35 Structured Transactions, disposing of more than 43,300 assets and $26.2 billion in unpaid principal balance. For closed sale information, please refer to https://www.fdic.gov/buying/historical/structured/index.html.
Provisions in the LLC agreements give the FDIC a Clean-Up Call Option which it can effectuate when the remaining assets in the LLC fall below 10% of the initial book balance (or a prescribed period of time has passed). If the FDIC invokes the Clean-Up Call Option, the remaining assets must be liquidated within a specified timeframe. Two LLCs have been terminated pursuant to these provisions and additional terminations are expected in the near future.
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 Structured Transactions business model, the FDIC possesses certain monitoring and oversight rights pursuant to 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 and minimize loss to the receiverships.
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.