This is the nineteenth in a series of brief articles that Moye White is sending to its clients and friends to provide practical insight about the opportunities and challenges presented by today's economy.
In an effort to lay the foundations for economic recovery, the U.S. Treasury (UST) announced the Public-Private Investment Program (PPIP) on March 23, 2009. The PPIP is designed to further the country’s recovery efforts by repairing balance sheets throughout the financial system and helping to ensure credit is more readily available to households and businesses.
PPIP offers investment opportunities to businesses of all sizes. Businesses large and small should know how the program works so they can make informed decisions about participation.
The Problem of Legacy Assets. Legacy assets include both real estate loans held directly on the books of banks (“legacy loans”) and securities backed by loan portfolios (“legacy securities”). Legacy assets with declining values have made it difficult for financial institutions to raise new capital and extend credit.
The Solution. PPIP will use $75 to $100 billion in Troubled Assets Relief Program (TARP) capital and capital from private investors, to generate $500 billion in purchasing power to buy legacy assets, with purchases possibly growing to $1 trillion over time. There are two components to the PPIP, one for the legacy loans and the other for legacy securities.
The Legacy Loans Program.
How it works.
Banks will decide which assets, usually a pool of loans, they would like to sell. After identifying these assets, participant banks and regulators should contact the FDIC to express interest in participating in the program. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and UST.
The FDIC will conduct an auction for these pools of loans and the highest bidder will have access to the Public-Private Investment Program to fund 50% of the equity requirement of their purchase.
If the seller accepts the purchase price, the buyer will finance the purchase by issuing debt guaranteed by the FDIC. The FDIC will provide a debt guarantee collateralized by the purchased assets and charge a debt guarantee fee. Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.
Who is eligible to participate?
- Eligible banks include any insured U.S. bank or U.S. savings association. Participant banks must demonstrate to the satisfaction of the UST and FDIC that the contemplated loan pools meet UST and FDIC minimum requirements.
- Private investors are expected to include an array of different investors such as financial institutions, individuals, insurance companies, mutual funds, publicly managed investment funds and pension funds.
- Potential private investors will be pre-qualified by the FDIC to participate in an eligible asset pool auction. Joint bids from pre-qualified investor groups are acceptable, but investors groups will be prohibited once the auction process begins to maintain fairness.
- UST and the FDIC will encourage participation by small, veteran-, minority- and women-owned firms.
As of the date of this email and according to information posted on UST’s website, the FDIC will be seeking public comment and communicating with stakeholders expeditiously and will launch the Legacy Loans Program as quickly as possible.
Legacy Securities Program.
How it works.
This program creates a lending program that will address the broken markets for securities tied to residential and commercial real estate and consumer credit. The program is designed to draw private capital into these markets by providing debt financing from the Federal Reserve under the Term Asset-Backed Securities Loan Facility (TALF) and through matching private capital raised for dedicated funds targeting legacy securities. Non-recourse loans will be made available to investors to fund purchases of eligible assets.
UST will initially approve up to five asset managers with a demonstrated track record of purchasing legacy assets. Managers whose proposals have been approved will have a period of time to raise private capital to target the designated asset classes and will receive matching UST funds under the Public-Private Investment Program. UST funds will be invested onefor-one on a fully side-by-side basis with these investors.
Asset managers will have the ability, if their investment fund structures meet certain guidelines, to subscribe for senior debt for the applicable Public-Private Investment Fund from UST in the amount of 50% of total equity capital of the fund. UST will consider requests for senior debt for the fund in the amount of 100% of its total equity capital, subject to further restrictions.
Who is eligible to participate?
- Fund managers will be pre-qualified based upon criteria that are likely to include:
- Demonstrated capacity to raise at least $500 million of private capital;
- Demonstrated experience investing in eligible assets;
- A minimum of $10 billion (market value) of eligible assets under management;
- Demonstrated operational capacity to manage the funds in a manner consistent with UST’s stated investment objective, while also protecting taxpayers; and
- Headquarters in the United States
- To ensure a diversity of participation, UST will encourage small, veteran-, minority- and women-owned private asset managers to partner with other private asset managers, if necessary, in order to meet the criteria identified above for assets under management and ability to raise private capital.
Applications were due on April 24, 2009 and UST expects to inform applicants of preliminary approvals by May 15, 2009. Applicants will have a limited period of time from preliminary approval to raise at least $500 million of private capital and demonstrate committed capital before receiving final approval from UST.
Businesses should consult with their legal counsel to learn more about the investment opportunities offered under the Public-Private Investment Program and to help them decide whether participation would be in their best interest.
For more information contact: Terri Rithner, John Benitez or Ted White, Chair, Transaction Section at (303) 292-2900.
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