FDIC Structured Sales Program Evolves, Investors Take Advantage

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In January, Sabal Financing Group LP, a Newport Beach, CA-based financing services management firm that specializes in the acquisition and valuation of portfolios of real estate loans, acquired a $204-million portfolio of performing and non-performing loans. The firm would provide loan servicing and asset management for the portfolio.

Consisting of mainly commercial and resident acquisition, development and construction loans, the acquired portfolio was secured by properties across the US, and “represents the distress in the market that is ailing banks across the country and abroad,” according to the firm.

The acquisition was part of a portfolio sale mandated by the FDIC for the assets of more than 50 recently failed banking institutions throughout the US. It was Sabal’s fourth FDIC transaction. In October, the firm acquired a $385-million portfolio of performing and non-performing loans, which was also part of the ongoing structure sales program with the FDIC.

According to an FDIC representative, the structured loan transaction program is still very much being used to sell loans from failed banks, and Sabal isn’t the only one taking advantage. In August, for example, Santa Monica, CA-based Colony Capital acquired a controlling interest in a $607-million portfolio of 760 loans secured by commercial real estate in 25 states throughout the US.

R. Patterson Jackson, CEO of Sabal, tells Distressed Asset Investments that the company is currently bidding on other loan portfolio sales in the FDIC program. “Because of the recent influx in deals flooding the market, deal flow has been strong and we can be selective in our bidding process,” he says. “2012 is looking to be a big year for deal activity,” Jackson adds. “Our goal is to continue acquiring bank loan portfolios at the same rate this year as we did in 2011.”

The FDIC began its structured sale program in earnest with the $1.3-billion loan sale to Residential Credit Solutions back in September 2009, the first transaction under the government’s legacy loan program. At the time, the receiver for Franklin Bank bid for 50% equity interest in the structured sale of the residential mortgage loans.

The deals that have followed, like Sabal’s deal for example, are based on the same model, more or less: the agency forms an LLC to which it contributes the failed bank’s loans and assets. It then auctions an interest in the LLC to a winning bidder while maintaining an equity stake or participation interest in the assets.

But like most other things in today’s ever-changing market, the program has evolved and adapted. The newest component to the program is the investor match program, which the FDIC launched in September to encourage small investors and asset managers to partner with larger investors to participate in the structures transaction sales for loans and other assets from failed banks.

The investor match program—which the FDIC tells DAI is the only changed component to the program that we can expect through the next year—will help to facilitate partnerships in order to bring together sources of capital and expertise. Participants in the program will use a customized database to identify potential collaborations, which will be identified at the sole discretion of the participating firms.

According to the FDIC website, it believes in the value of facilitating a cooperative solution between large investors and small investors and asset managers. The goal of the program is to expand opportunities for participation by smaller investors and asset managers, including minority and women-owned firms, in FDIC structured sales transactions. The program has additional goals that include knowledge transfer and increased effectiveness of execution by small investors and asset managers via enhanced organizational competencies.

According to Pamela Farwig, deputy director of the division of resolutions and receiverships at the FDIC says that “The program is an example of our commitment to ensure that the structured sales transaction process is inclusive of all firms large and small. We believe that expanding the investor pool will assist in minimizing losses to the Deposit Insurance Fund. This innovative strategy will leverage technology to more effectively dispose of assets that the FDIC has inherited through failed bank receiverships.”

The investor match program is part of a larger effort to expand outreach efforts with small investors and is executed via an automated online networking platform, according to the FDIC. The networking platform enables participants to identify potential partners and provides a forum to connect with them. An FDIC spokesperson tells DAI that “it’s working” and “the program has received great interest and participation.”

Sabal’s Jackson says he has participated in the new program. “I think the FDIC has accomplished what it was looking to do—the program encourages certain local investors to participate in the FDIC sale process,” he says. “But the FDIC, like any seller, is looking to find the best partner to work out these assets and to have the expertise to get the best value. Since the FDIC retains the ownership interest in these transactions, they have a highly vested interest to align themselves with the best possible value creators in the market.”

In January, the FDIC closed on the third sale in the program. The competitive bidding process involved the sale of a 25% initial equity stake in a limited liability company formed by the FDIC in its receivership capacity to hold certain loans of the Bank of Whitman, Colfax, WA, which failed on August 5, 2011. The loans transferred to the LLC consisted of 62 performing and non-performing commercial real estate loans, commercial acquisition and development and construction loans, as well as performing and non-performing residential acquisition, development and construction loans. The collateral is located primarily in Washington, Idaho and Utah, and has an aggregated unpaid principal balance of just north of $101 million.

The purchaser of the initial equity stake in the LLC was Leawood, KS-based Mariner Real Estate Partners III LLC, which is a minority-owned business. Mariner paid approximately $13.6 million (net of working capital) in cash for its initial 25% stake in the LLC; its bid valued the loans at approximately 54% of the aggregate UPB. Mariner will provide for the management, servicing and ultimate disposition of the LLC's loans.

The sale was conducted on a competitive basis. Nine groups submitted bids on an unleveraged basis for an initial 25% equity interest in the newly formed LLC. The receivership for the Bank of Whitman will hold the remaining 75% equity interest until all equity is returned. After the return of a multiple of the equity, the receivership's interest in the LLC will decrease to 50% and the private owner interest will correspondingly increase to 50%. The bid submitted by Mariner was determined to be the offer that maximized the value of the loans to the receivership.

The SIP transactions are designed to appeal to small investors by offering geographically concentrated, smaller sized asset pools, according to the FDIC. “The unique structural features allow these transactions to be more accessible to a larger universe of bidders thus increasing participation while maintaining a level playing field for all investors.”