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

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

Retaining an interest in these public-private transactions allows the agency to bank on the future cash flow generated by the workout of the assets. Kruse points out, "The FDIC's senior management determined early in the current banking crisis that real estate secured assets it did not convey to an acquiring bank would go through some sort of structured transaction."

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

This strategy was employed during the Resolution Trust Corp. in the first half of the '90s. From 1990 to 1995, the FDIC completed 92 structured transactions with proceeds of $10.7 billion, according to the agency. Compared to the more than 546,786 direct loan sales done at the time, however, the approach was used sparingly. Kruse says the FDIC realized that selling assets directly into a distressed market-as it did back then-didn't reap the most value.

"The FDIC has decided that hanging onto some of the equity in these deals, even on a net-present value basis, is ultimately going to provide them with a better execution, meaning less of a hit to the deposit insurance fund," says Michael F. MacDonald, a senior vice president at Keefe, Bruyette and Woods, who has worked on a number of FDIC bids. Executing structured transactions, Kruse estimates, can take anywhere from four to eight weeks. Private investors that are interested in teaming with the FDIC must meet a host of criteria to be considered a qualified bidder.

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

What the FDIC is typically offering in these structured deals are assets that were left behind by the healthy banks that acquired the failed institutions. About 85% of the banks taken over by the agency have been sold. This means the FDIC can't exactly cherry pick its portfolio and hold onto prime assets that may maximize value, says MacDonald.

Kruse explains that the FDIC offers banks on a whole bank or modified whole bank basis, in the latter the FDIC typically offers only the performing, high quality assets. "If you look back at our structured transactions," he says, "there have been a lot of acquisition/development! construction loans ... you could say they are not the highest quality assets."

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

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

a number of FDIC deals. "The FDIC has digested the volume of assets it took over in 2009 and is about to bring them to market, together with additional volume that they will take over in 2010."

Galli maintains that given current market conditions, the agency is

the only practical opportunity for trade of any meaningful volume of distressed assets. "There remains a fairly significant bid-ask spread among private-sector parties," he says. "There is no bid-ask spread with the structured transaction, the assets are going to the highest bidder." The FDIC, according to Galli, currently has a number of structured transactions on the market for loan portfolios with an aggregate principal balance in excess of $6 billion.

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

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

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

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

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

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

has received a number of calls from institutional investors exploring the prospect of teaming with healthy banks to snap up troubled banks. Upon closing of the acquisition, the investor would gain the entire loan and REO portfolio owned by the failed institution, while the healthy bank would retain the deposits and franchise.

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

This scheme is not without its risks. The FDIC, Galli says, is liable to reject transaction offers that it deems too low or unreasonable. "The FDIC doesn't want to see too much of a sweetheart deal on the sale of a loan portfolio to the private investor," Galli says. "The failed bank that was just sold would then have financial impairments, putting more stress on the FDIC's insurance system." There is indeed a balancing act involved in doing deals with the government-whether they be acquisition joint ventures or structured transactions. Investors must present sound offerings and be ready to jump through a few hoops. But the benefits may outweigh and minor drawbacks, especially for opportunistic players.

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