Two weeks after its initial announcement of the Public-Private Investment Program (PPIP),1 Treasury released additional details yesterday regarding the Legacy Securities portion of the PPIP. Since the original March 23 press release, which was vague on details of the Legacy Securities program, speculation about the program’s specifics and criticism of the program’s parameters have been swirling among media outlets and industry participants. Although yesterday’s announcements shed light on some aspects of the program, there still remain several important unresolved questions.

The Legacy Securities program, announced as part of the larger PPIP (including the Legacy Loans aspect administered by the FDIC), contemplates pairing private investment funds (PPIFs) with Treasury capital on a one-to-one basis to purchase Legacy Securities (previously colloquially referred to also as “toxic assets”). The PPIFs will purchase Legacy Securities from financial institutions looking to dispose of such securities, but finding no secondary market due to the credit and liquidity crisis hampering our financial markets. As contemplated by the March 23 announcement, Legacy Securities are limited to residential (non-agency) and commercial mortgage-backed securities that were issued prior to January 1, 2009, and that held a AAA rating at the time of issuance.

Under the revised guidance, fund managers now have until 5:00 p.m. ET on April 24, 2009, to apply to manage a PPIF.2 Under the previous guidance, Treasury limited the number of PPIFs to five, and required that each fund manager demonstrate a current portfolio of assets under management equaling $10 billion or more in market value. This raised the ire of industry participants, who argued this limited participation in the program to only a select few among even the largest investment firms. Under the guidance issued yesterday, Treasury clarified that its initial approval process would target five fund managers for approval, each of which would have to satisfy Treasury’s criteria “holistically,” meaning that a manager would not have to meet every prerequisite in order to qualify.

Yesterday’s revised term sheet identifies the following five criteria:

  • Demonstrated capacity to raise at least $500 million of private capital;  
  • Demonstrated experience investing in eligible assets, including through performance track records;  
  • A minimum of $10 billion (market value) of eligible assets under management;  
  • Demonstrated operational capacity to manage the PPIFs in a manner consistent with Treasury’s stated buy-and-hold investment objective, while also protecting taxpayers; and  
  • Headquartered in the United States (although an applicant’s ultimate parent company need not be headquartered in the United States).  

Although this set of criteria is “holistic” in application, it is difficult to imagine that Treasury would select a fund manager without the capacity to raise $500 million of private capital or with less than $10 billion of Eligible Assets under management. Treasury stated that it would be open to considering additional funds with smaller market share after the initial round of approvals, and encouraged small, veteran, minority- and women-owned asset managers to partner with larger fund managers.

The previous guidance was fairly vague on details regarding the critical issue of each PPIF’s capacity for debt financing. Indeed, the most concrete statement was that Treasury would make available senior debt to PPIFs in an amount up to 50 percent (and in some cases 100 percent) of such PPIF’s total equity capital, and that private debt would be permissible subject to unspecified required ratios. The current guidance does not provide significantly more detail or finality on the topic of PPIF debt, other than to expressly prohibit Treasury debt financing for PPIFs whose investors have voluntary withdrawal rights and to outline three possible scenarios that Treasury is contemplating in terms of debt financing:

  • No Treasury debt financing – leverage limited to Legacy TALF,3 any other Treasury program or debt financing raised from private sources;  
  • Leverage limited to senior secured Treasury debt financing (up to 100 percent of the PPIF’s total equity capital) – no additional debt from any source permitted; and  
  • Unsecured Treasury debt financing (up to 50 percent of the PPIF’s total equity capital) – additional leverage permitted through Legacy TALF or any other Treasury program or debt financing raised from private sources, subject to “total leverage requirements and covenants to be agreed upon.” There are no further details on what the scope of such leverage requirements or covenants would be.

Treasury also made a point in the revised guidance to distinguish its Legacy Securities program from the Legacy TALF program which was announced simultaneously with the Legacy Securities program on March 23. TALF, which was originally announced in November of last year and has been in full operation since early last month, allows private investors to obtain non-recourse debt financing from the Federal Reserve Bank of New York in order to purchase from any holder certain classes4 of asset-backed securities that are rated AAA and were issued on or after January 1, 2009. As part of its announcement on March 23, Treasury indicated that TALF would be expanding at some date in the future to include purchases of Legacy Securities from financial institutions,5 in addition to the current classes of TALF-eligible securities. In yesterday’s announcement, Treasury clarified that, although TALF would be expanded in this manner, TALF would remain a Federal Reserve program, to be administered and monitored by the Federal Reserve, and that investors seeking to participate in either TALF or “Legacy TALF” would be subject to Federal Reserve requirements and restrictions. Furthermore, Treasury clarified that an investor need not be a PPIF in order to participate in Legacy TALF and, similarly, PPIFs would not be required to participate in Legacy TALF. Notwithstanding this clarification, Treasury offered no further details on when or how Legacy TALF would be implemented, nor have we seen anything further from the Federal Reserve on this point either.

Finally, Treasury’s initial announcement indicated that Legacy Securities would include not only commercial and residential mortgage-backed securities, but any other asset-backed securities that were issued prior to January 1, 2009, and had a AAA rating at issuance. Treasury’s announcement yesterday suggests that the current iteration of the Legacy Securities program actually only contemplates mortgage-backed securities,6 with Treasury to consider future expansion. To that end, Treasury stated it would like to solicit comments from PPIF managers regarding expanding the Legacy Securities program to encompass additional asset classes. 4