The full version of this story will appear in the May issue of Distressed Assets Investor.

WASHINGTON, DC—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 Tim 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, “FDIC 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 it seems that 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 sparingly used. Kruse says the FDIC realized that directly selling assets 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 going to ultimately 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.

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 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. “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’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.”

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