Yesterday, Treasury Secretary Geithner, Federal Reserve Chairman Bernanke and FDIC Chairman Bair issued a joint statement and update regarding the Legacy Securities Public-Private Investment Program (PPIP). Originally announced in February as part of the President’s Financial Stability Plan, the program is designed to provide financial institutions with an outlet for problematic legacy real estate-related assets. Since that time, the agencies have announced a delay in the Legacy Loan Program and have released a conflicts of interest policy for the fund managers participating in the program.
Under the Legacy Securities PPIP, Treasury will invest up to $30 billion in Public-Private Investment Funds (PPIFs) established by private-sector fund managers and private investors. The PPIFs will then purchase legacy securities from financial institutions. The Legacy Securities PPIP will initially purchase commercial mortgage-backed securities and non-agency residential mortgage-backed securities. These securities “must have been issued prior to 2009 and have originally been rated AAA -- or an equivalent rating by two or more nationally recognized statistical rating organizations -- without ratings enhancement….” The securities must be secured directly by mortgage loans, leases, or other assets.
Treasury also announced the selection of the firms that will serve as the PPIP fund managers for the initial round of the program:
- AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC;
- Angelo, Gordon & Co., L.P. and GE Capital Real Estate;
- BlackRock, Inc.;
- Invesco Ltd.;
- Marathon Asset Management, L.P.;
- Oaktree Capital Management, L.P.;
- RLJ Western Asset Management, LP.;
- The TCW Group, Inc.; and
- Wellington Management Company, LLP.
The PPIP fund managers will have up to 12 weeks to raise at least $500 million from private investors for a PPIF and must also invest a minimum of $20 million of their own in the PPIF. Each Legacy Securities PPIP fund manager will receive an equal allocation of capital from Treasury. Treasury will match the equity capital raised by the private investors and will provide debt financing up to 100 percent of the total equity of the PPIF. Following the private capital raise, the fund managers will be able to begin purchasing legacy securities. In addition, PPIFs may “obtain debt financing raised from private sources, and leverage through the Federal Reserve’s and Treasury’s Term Asset-Backed Securities Loan Facility (TALF), for those assets eligible for that program, subject to total leverage limits and covenants.”
Treasury has negotiated a letter of intent and debt and equity term sheets for each fund manager and will continue to negotiate final documentation with the expectation of announcing a first closing of a PPIF in early August. According to the updated FAQs sheet, also released yesterday, the PPIP fund managers have agreed to consent, on behalf of the PPIF, to reasonable requests from servicers or trustees for approval to participate in Treasury’s Making Home Affordable Program or to “implement other reasonable loss mitigation measures (including, but not limited to, term extensions, rate reductions, principal write downs, or removal of caps on the percentage of loans that may be modified within the securitization structure).” Should the PPIF acquire 100% of the residential mortgage backed securities that are backed by a particular pool of residential mortgage loans, the fund manager has also agreed to instruct the servicer or trustee participating in the Making Home Affordable Program to include that pool of residential mortgages in the program. PPIFs will be able to receive their share of any standard investor subsidies payable under the Making Home Affordable and Home Affordable Modification Programs.
With respect to the FDIC’s Legacy Loan Program (LLP), the FDIC announced that it had incorporated the comments it had received on its March proposal and stated that it will “test the funding mechanism contemplated by the LLP in a sale of receivership assets this summer” and that it would “draw upon concepts successfully employed by the Resolution Trust Corporation in the 1990s, which routinely assisted in the financing of asset sales through responsible use of leverage.” The FDIC emphasized that it “remains committed to building a successful Legacy Loan Program for open banks and will be prepared to offer it in the future as needed to cleanse bank balance sheets and bolster their ability to support the credit needs of the economy,” but did not offer any specific timetable for expansion of the program to open banks.