Transcript Slide 1

PUBLIC-PRIVATE
INVESTMENT
PROGRAM (PPIP):
Will it Ever Arrive or Will RTC-Type Asset
Sales Programs Return?
By Holland & Knight LLP
Presentation by Lawrence J. Wolk, Esq.
Partner - Holland & Knight
Former Assistant General Counsel –
Resolution Trust Corporation/Federal Deposit Insurance Corporation.
June 16, 2009
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6/9/09
Holland & Knight Financial Recovery Team
Lawrence J. Wolk
Partner, Holland & Knight (Washington DC and New York)
t: 212-513-3529
e: [email protected]
Lawrence J. Wolk is a partner in the New York and Washington, D.C.
offices of Holland & Knight LLP. Mr. Wolk practices in the real
property area, emphasizing public and private sector transactions and
commercial real estate finance as well as single-and multi-asset, multistate acquisitions, mortgage financing and sales. This practice has
included the negotiation and documentation of public/private
partnership transactions, construction, permanent, and multi-state
loans, sales, acquisitions, and other public and private development
and projects.
From 1992 to 1995, Mr. Wolk served as the Assistant General Counsel
at the Resolution Trust Corp., the senior-most real estate legal position
within the agency. Mr. Wolk had senior legal responsibility for the
disposition of billions of dollars worth of real estate-related assets.
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Holland & Knight Financial Recovery Team
Additional Members
Jose “Joe” Sirven – Partner, Miami
t: 305-789-7784 e: [email protected]
Mr. Sirven has practiced in the corporate, mergers and acquisitions, banking, and international fields for over 25
years. He has represented large publicly owned corporations, global and regional financial institutions, privately
held entities, and governments in connection with a variety of business issues involving nearly every country in
Latin America and the Caribbean and throughout Europe and Asia.
Steven B. Nesmith – Partner, Washington DC
t: 202-457-5908 e: [email protected]
Mr. Nesmith is a Partner in the firm's Public Policy & Regulation Group. Mr. Nesmith served as Assistant
Secretary for Congressional and Intergovernmental Relations in the U.S. Department of Housing and Urban
Development. He was a Sub–Cabinet member and principal advisor to the Secretary, Deputy Secretary and senior
staff on legislative affairs, regulatory issues and policy matters affecting Federal, state and local governments, and
public and private industry groups. As a senior Administration Official, he also served as a member of the
President’s Leadership Team.
Kerry S. Kehoe – Partner, Boston
t: 617-854-1451 e: [email protected]
Mr. Kehoe is a member of the firm's Business Law Department and concentrates his practice in insolvency matters
and corporate finance transactions. Mr. Kehoe has represented debtors, secured creditors, trustees, and creditors'
committees in bankruptcy proceedings; and lenders and borrowers in out-of-court workout and restructurings. In
corporate finance transactions, Mr. Kehoe has represented financial institutions and borrowers.
Suzanne E. Gilbert – Partner, Orlando
t: 407-244-1142 e: [email protected]
Ms. Gilbert practices in the areas of business and commercial litigation, real estate litigation, and bankruptcy and
creditors' rights. Ms. Gilbert has experience representing clients in commercial disputes in federal, state and
bankruptcy courts. A large portion of Ms. Gilbert’s practice involves real estate litigation, including contract
disputes, boundary disputes, title issues and mortgage fraud. Additionally, she has represented financial institutions
and other entities in a variety of matters, including workouts, lender liability claims, fraudulent transfers, and
preferential transfer actions. Ms. Gilbert has represented both debtors-in-possession and creditors in Chapter 11
and Chapter 7 cases.
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PUBLIC-PRIVATE INVESTMENT PROGRAM
AN OVERVIEW
What is PPIP?
A $500 billion to $1 trillion plan to purchase Legacy Assets
Which government agencies are involved?
The U.S. Treasury Department (Treasury) in conjunction with the Federal Deposit
Insurance Corporation (FDIC) and the Federal Reserve
How will PPIP be funded?
Equity: $75 billion to $100 billion in Troubled Assets Relief Program (TARP) capital
supplemented by capital from private investors
Debt: Purchase money financing for acquisition of assets by PPIF is guaranteed by FDIC
(Legacy Loans Program) and provided by Treasury (Legacy Securities Program)
What are Legacy Assets?
2 Types:
1. Legacy Loans: real estate loans and other To Be Determined assets held directly on
the books of banks
2. Legacy Securities: commercial mortgage-backed securities and residential
mortgage-backed securities issued prior to 2009, originally rated AAA, or
equivalent.
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PPIP OVERVIEW
Why is PPIP needed?
Banks hold Legacy Assets which create uncertainty around their balance sheets,
compromising their ability to raise capital and to increase lending.
What are PPIP’s primary objectives?
• Draw new private capital into the Legacy Assets market by providing
government equity co-investment and attractive public financing or guarantees
of financing
• Facilitate higher market pricing of Legacy Assets
• Encourage financial institutions to engage in increased lending activities
• Enhance the ability of financial institutions to raise new capital from private
investors
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PPIP OVERVIEW
PPIP’s Three Basic Principles
1. Leveraging the Impact of the Government Funds
Government (guaranteed) financing and co-investment of equity by
Treasury and private investors will leverage government resources and
incentivize private investment.
2. Sharing of Both Risk and Profits With Private Investors
PPIP enables private investors to invest. Private investors’ loss is capped at
their equity investment. Private investors will share in profits along with the
government.
3. Private Sector Sets Pricing
Private investors will bid at auctions to establish the price of the asset pools
and securities.
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LEGACY LOANS PROGRAM
Funding the Acquisition of Assets
Equity: Treasury capital and private investor capital will be invested
proportionately at the same time in each PPIF
•
Treasury initially intends to provide 50% of equity capital for each
PPIF
•
Treasury and private investors will share profits and losses in
proportion to equity invested
•
Private investors may not participate in any PPIF that purchases
assets from sellers that are affiliates of such private investors
Debt:
Each PPIF will issue debt financing payable to the Participant Bank
guaranteed by FDIC
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LEGACY LOANS PROGRAM
Passive Private Investors
•
The Administration is encouraging the inclusion of the following groups
as private investors:
•
Small, veteran-, minority-, and women-owned firms
•
Mutual funds, pension plans, insurance companies, and other long
term investors
•
Individual investors
•
Private investors must be pre-qualified by FDIC
•
Initial governmental materials indicated that executive compensation
restrictions will NOT apply to passive private investors
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LEGACY LOANS PROGRAM
Participant Banks/Eligible Assets
•
Participant Banks may include any insured U.S. bank or
U.S. savings association
•
Assets comprising each Eligible Asset Pool (Eligible Assets)
and any collateral supporting those assets must be situated
predominantly in the U.S.
•
Asset managers, subject to FDIC oversight, will retain
control of servicing throughout operations
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LEGACY LOANS PROGRAM
Procedure for Purchasing Eligible Asset Pools
FDIC Oversight and Implementation
• A third party valuation firm selected by FDIC will analyze
each Eligible Asset Pool and advise FDIC on, among other
matters, the supportable leverage of the Eligible Asset Pool,
bid structure and asset valuation
• The FDIC-guaranteed debt-to-equity ratio will in no event
exceed 6-to-1
• The FDIC has completed the notice and comment period and
is working to address comments to finalize details of the
program and to establish a start date
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LEGACY LOANS PROGRAM
Procedure for Purchasing Eligible Asset Pools
Auctions
•
FDIC will conduct the Eligible Asset Pool auction
•
Prior to bid submission, FDIC will disclose the proposed financing terms
and leverage ratio that it has established for each Eligible Asset Pool
•
Pre-qualified private investors will bid for the opportunity to contribute
50% of the equity for the PPIF, with Treasury contributing the remainder
of the equity for the PPIF
•
Each bid must be accompanied by a refundable cash deposit (Deposit) for
5% of the bid value
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LEGACY LOANS PROGRAM
FDIC Guaranteed
Purchase Money Debt
• FDIC will determine terms of the financing to be guaranteed by
FDIC
• Financing will be non-recourse
• FDIC debt guarantee will be secured by the Eligible Assets
• Debt will initially be placed at the Participant Bank, which will
have the right to resell the debt
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LEGACY LOANS PROGRAM
Sharing the Responsibility
Treasury will oversee and manage its equity investment in each
PPIF
FDIC will:
• Oversee and manage its debt guarantees
• Oversee the formation, funding, and operation of each PPIF
•
Approve Eligible Asset Pools from Participant Banks
•
Determine Eligible Asset Pool leverage levels
•
Conduct Auctions
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LEGACY SECURITIES PROGRAM
Expanding TALF for Legacy Securities
• Intention: To expand the Term Asset-Backed Securities Loan
Facility (TALF) program to include Legacy Securities
• Funding Purchase of Legacy Securities: Non-recourse
loans will be made available by Treasury to investors to fund
purchases of legacy securitization assets
• Not “Toxic” Assets: Legacy Securities include mortgagebacked securities that were originally rated AAA or its
equivalent
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LEGACY SECURITIES PROGRAM
Legacy Securities PPIFs
• Treasury will make co-investment in order to partner with
private investors and support the market for Legacy
Securities
Qualified Fund Managers:
• Private asset managers will apply to be pre-qualified to raise
private capital to invest in Legacy Securities PPIFs with
Treasury
• Treasury originally expected to approve 5 Qualified Fund
Managers with a proven track record – that number has
increased
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PPIP – STATUS AS OF JUNE 2009
Government Perspective
•
PPIP was not solely intended to clean up the balance
sheets of banks but to also provide transparency so that
investors would know the health of banks and would
invest additional capital in the banks
•
The stress tests by the Fed have provided a “forwardlooking” transparency and banks are releasing similar
information to encourage capital investment without need
for asset disposition through PPIP
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PPIP – STATUS AS OF JUNE 2009
Comments received by FDIC in connection with the Legacy Loan
Program have provided FDIC with a better sense of the concerns
of the “marketplace”
•
Many troubled loans are construction loans relating to projects in the
Southeast. These loans do not necessarily lend themselves to
contribution into a PPIP
•
Many Investors do not wish to be identified. FDIC is considering what
percentage of ownership interest will trigger disclosure requirements
•
Reserve – The FDIC has received requests that a reserve be set, which,
if reached, will require the contributing bank to sell the legacy asset to
the PPIP. Bidders do not want to incur due diligence expenses without a
reserve
•
FDIC views third-party valuation as providing a “price discovery” for
FDIC, the Investor and the contributing bank
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PPIP – STATUS AS OF JUNE 2009
Conflicts
•
FDIC will not permit banks to purchase their own assets
•
FDIC considering permitting banks to participate in PPIP as an
Investor in assets contributed by other institutions
What size pool – supersized for Wall Street or downsized for Main
Street?
•
FDIC envisions that pools will average $1 billion, with a
minimum of $500 million (value including financing)
•
For a pool of $500 million, the minimum equity investment (6%)
would be $30 million
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PPIP – STATUS AS OF JUNE 2009
Asset Management Concerns
•
The FDIC is concerned with the ongoing management of the PPIP
assets
Investors must realize that programs which involve taxpayer funds
uniformly bring with them government involvement and
regulations
•
FIRREA in RTC days
•
FDIC has NOT used government funds to date
•
TARP brings restrictions, regulations and rules
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PPIP – STATUS AS OF JUNE 2009
•
Investors not willing to “play” in PPIP until Treasury promulgates
rules with respect to recent legislation so that potential investors
understand all rules and regulations
What does the immediate future hold?
•
FDIC hopes that stress tests encourage increased investment of
capital in banks
•
FDIC instituting RTC-like portfolio loan sales to dispose of assets
of closed banks (this only represents a small percentage of troubled
loan assets) over the next six months
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PPIP – STATUS AS OF JUNE 2009
Structure of loan sales of closed-bank assets to be held
over the next six months by the FDIC
•
Loan assets contributed into an equity partnership
•
Investors bid to become partners with FDIC
•
Different vehicles for different loan products; SPE structure to
differ depending on loan assets being contributed (land loans;
construction loans; loans secured by completed projects)
•
Investor controls entity with 20-40% interest; FDIC a passive
investor with 60-80% interest
•
Upside is shared pursuant to a formula established prior to
bidding
•
Modeled on similar programs utilized by RTC
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PPIP – STATUS AS OF JUNE 2009
Other opportunities to participate in government programs
•
FDIC will likely require more contractors (and
subcontractors) to manage real estate and real estate-related
loans
•
Unless the liquidity problems self-correct, the government
will likely institute program(s), perhaps including
characteristics of PPIP, to incentivize removal of the legacy
assets from the bank balance sheets and otherwise achieve
the goals of the PPIP
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