Some 20 years ago, the Federal Deposit Insurance Corp., muchlike today,

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was saddled with a glut of assets from hundreds of failed banks.But lessons learned from those days have led the agency to take aslightly different approach to asset disposition to get more out ofthe deal. "Rather than doing outright whole-loan sales, we sellinto a partnership-type structure, whereby we sell a stake to aninvestor and share in the upside with real estate professionalsthat manage the assets through to resolution," says Timothy Kruse,senior capital markets specialist at the FDIC.

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Retaining an interest in these public-private transactionsallows the agency to bank on the future cash flow generated by theworkout of the assets. Kruse points out, "The FDIC's seniormanagement determined early in the current banking crisis that realestate secured assets it did not convey to an acquiring bank wouldgo through some sort of structured transaction."

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Since late 2008, the FDIC has executed 11 structured loan sales,four of which involved portfolios of commercial real estate-relatedassets. Perhaps the most notable-and the largest-of these dealsinvolved the $1.2-billion sale of a 40% interest in a portfolio ofassets from Corus Bank last October. Throughout the past year,Kruse says, "we have definitely attracted more bidders and priceswere somewhat better than what we expected."

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This strategy was employed during the Resolution Trust Corp. inthe first half of the '90s. From 1990 to 1995, the FDIC completed92 structured transactions with proceeds of $10.7 billion,according to the agency. Compared to the more than 546,786 directloan sales done at the time, however, the approach was usedsparingly. Kruse says the FDIC realized that selling assetsdirectly into a distressed market-as it did back then-didn't reapthe most value.

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"The FDIC has decided that hanging onto some of the equity inthese deals, even on a net-present value basis, is ultimately goingto provide them with a better execution, meaning less of a hit tothe deposit insurance fund," says Michael F. MacDonald, a seniorvice president at Keefe, Bruyette and Woods, who has worked on anumber of FDIC bids. Executing structured transactions, Kruseestimates, can take anywhere from four to eight weeks. Privateinvestors that are interested in teaming with the FDIC must meet ahost of criteria to be considered a qualified bidder.

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"You have to have the capability to work these loans out or beworking in conjunction with someone that can work out the loan,"points out Jeremy W. Hochberg, an associate in the banking lawpractice group at Arnolds & Porter LLC. The law firm hasrepresented a number of bidders during the pre qualificationperiod. "It's an involved process."

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What the FDIC is typically offering in these structured dealsare assets that were left behind by the healthy banks that acquiredthe failed institutions. About 85% of the banks taken over by theagency have been sold. This means the FDIC can't exactly cherrypick its portfolio and hold onto prime assets that may maximizevalue, says MacDonald.

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Kruse explains that the FDIC offers banks on a whole bank ormodified whole bank basis, in the latter the FDIC typically offersonly the performing, high quality assets. "If you look back at ourstructured transactions," he says, "there have been a lot ofacquisition/development! construction loans ... you could say theyare not the highest quality assets."

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High quality or not, the portfolios in these structured dealsare still attracting a growing number of bidders. Kruse says it'sdifficult to say how many more structured transactions will beoffered this year, as it all depends on how many assets are sold toan acquiring bank. But considering that most of the more than 700banks on the FDIC's watch list have massive concentrations ofcommercial debt, if they topple, it could mean a boon forinvestors.

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"The volume of structured transactions in 2010 will besignificantly greater than 2009," predicts Thomas Galli, ashareholder at Greenberg Traurig LLP who has been involved in

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a number of FDIC deals. "The FDIC has digested the volume ofassets it took over in 2009 and is about to bring them to market,together with additional volume that they will take over in2010."

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Galli maintains that given current market conditions, the agencyis

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the only practical opportunity for trade of any meaningfulvolume of distressed assets. "There remains a fairly significantbid-ask spread among private-sector parties," he says. "There is nobid-ask spread with the structured transaction, the assets aregoing to the highest bidder." The FDIC, according to Galli,currently has a number of structured transactions on the market forloan portfolios with an aggregate principal balance in excess of $6billion.

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The FDIC's resolve to dispose of its holdings has certainly madethe agency the most active seller of distressed assets. "When weannounce a transaction, we tend to close it," Kruse points out,"whereas in the private sector, depending on the

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price they get, they may decide not to execute. We will prettymuch always execute and close."

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KBW's MacDonald points out, "The FDIC is not constrained byaccounting and capital rules like the banks. They don't have toworry about what type

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of discount they get on the asset." He continues, "But there areother banks that are starting to look to sell because they've beenable to, with the passage of time, build up greater reserves."

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With stored capital, MacDonald predicts that many now- healthyinstitutions will begin to sweep some non-performing assets oftheir books. Banks, he notes, may also take a page out of theFDIC's playbook and begin offering financing to help loosen theprice on their asset sales.

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Meanwhile, Galli is tuned into an emerging trend that may offeran alternative investment strategy for property players. He sharesthat over the past few months, his firm

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has received a number of calls from institutional investorsexploring the prospect of teaming with healthy banks to snap uptroubled banks. Upon closing of the acquisition, the investor wouldgain the entire loan and REO portfolio owned by the failedinstitution, while the healthy bank would retain the deposits andfranchise.

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"The fundamental elements of the FDIC's structured transactionsare being vetted for the purposes of replicating those structuralelements in a completely private sector deal," Galli observes.

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This scheme is not without its risks. The FDIC, Galli says, isliable to reject transaction offers that it deems too low orunreasonable. "The FDIC doesn't want to see too much of asweetheart deal on the sale of a loan portfolio to the privateinvestor," Galli says. "The failed bank that was just sold wouldthen have financial impairments, putting more stress on the FDIC'sinsurance system." There is indeed a balancing act involved indoing deals with the government-whether they be acquisition jointventures or structured transactions. Investors must present soundofferings and be ready to jump through a few hoops. But thebenefits may outweigh and minor drawbacks, especially foropportunistic players.


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