We address here further details of the Legacy Loan Program and the Legacy Securities Program, two key components of the Public-Private Investment Program1 announced on March 23, 2009 by the United States Department of the Treasury (Treasury).
On April 9, 2009, the Federal Deposit Insurance Corporation (FDIC) conducted a conference call with potential investors for the Legacy Loans Program.2 Based upon information discussed during such call, we note that:
- It appears that the FDIC is considering establishing, on a pool-by-pool basis, a waterfall for debt repayment, the payment of management fees and for other payments to be made by each Public-Private Investment Fund (PPIF).
- It remains unclear who will provide financing for each PPIF’s purchase of a pool of real estate loans. However, the FDIC is considering having selling banks provide the financing and it has indicated that, in general, the debt structure for each pool would be based upon the “cash-flow characteristics” of each pool.3 The FDIC is considering a variety of terms for such financing. For example, cash flow notes and/or fixed pay notes may be used. Each loan pool will have different repayment characteristics.
- It is anticipated that the “controlling partner” in the PPIF (presumably the private investor side) will make a determination on an asset-by-asset basis as to “what is the best resolution, or what type of restructuring...results in the best return in the interest of” a PPIF and that the “private investor will have the driving force in major decision-making,” subject to ground rules to be established by the FDIC and Treasury. It is contemplated that such ground rules would be included in the bid packages.
- The documents to be executed by the PPIFs in connection with each transaction likely will contain government-driven restrictions and covenants that would “encourage or require” certain actions with respect to the assets in the PPIF’s portfolio. The precise asset management requirements would vary from pool-to-pool.
- It has not yet been decided if banks will be able to auction off mezzanine loans as part of the Legacy Loan Program.
On April 6, 2009, the Treasury released an updated “Frequently Asked Questions” (FAQ)4 sheet regarding the Legacy Securities Program. We note that:
- The Treasury reconfirmed that Legacy TALF5 and the Legacy Securities Program are two separate programs and that Legacy TALF will “be made widely available to investors (who meet Federal Reserve Eligibility Standards) regardless of whether or not they participate” in the Legacy Securities Program. Furthermore, the Federal Reserve will continue to establish its “own set of terms, conditions and eligibility requirements with respect to Legacy TALF.”
- With respect to the Legacy Securities Program, the Treasury is considering the following three capital structure alternatives:
- A fund formed to purchase Legacy Securities (Fund) would not receive any debt financing from the Treasury through the Legacy Securities Program. Leverage for a Fund (i.e., in addition to required equity) would be limited to obtaining a loan from (i) the Federal Reserve through Legacy TALF, (ii) any Treasury program other than the Legacy Securities Program or (iii) debt financing raised from private sources.
- Alternatively, in addition to required equity, a Fund could receive a loan from the Treasury through the Legacy Securities Program in an amount of up to 100% of the total equity capital of the Fund (inclusive of the Treasury’s equity investment in the Fund). Repayment of the loan would be secured by the assets purchased by the Fund and no additional leverage (including from Legacy TALF) would be permitted.
- Alternatively, in addition to required equity, a Fund could receive an unsecured loan from the Treasury through the Legacy Securities Program in an amount of up to 50% of the total equity capital of the Fund (inclusive of the Treasury’s equity investment in the Fund) and the Fund could obtain additional leverage through (i) Legacy TALF, (ii) any other Treasury program other than the Legacy Securities Program or (iii) debt financing raised from private sources, all “subject to total leverage requirements and covenants to be agreed upon.”
- It was previously announced that Funds will purchase securities backed by “mortgages on residential and commercial properties issued prior to 2009 that were originally rated AAA or an equivalent rating by two or more nationally recognized statistical rating organizations without ratings enhancement” (collectively, Eligible Assets). The Eligible Assets must be secured directly by actual mortgage loans, leases or other assets and not other securities. The Treasury has now clarified that Eligible Assets will not include agency mortgage backed securities (i.e., mortgage backed securities that are associated with a government agency).
- Each of the Funds will be “long-only” investment funds (i.e., they must implement a long-term buy and hold strategy). Treasury will consider Fund-level hedging proposals “such as interest rate hedging programs.”
- Treasury is considering opening the program to include additional fund managers. Such a change “may result in a lower minimum private capital raising requirement.” As of now, however, Fund Managers must demonstrate a capacity to raise at least $500 million of private capital.
- Applications for Fund Managers are now due on April 24, 2009 (rather than April 10, 2009) and Treasury expects to inform applicants of preliminary approval determinations on or prior to May 15, 2009.