Private Investors Make Very Leveraged Bet On Asset Value Recovery
The FDIC currently holds approximately $30 billion in failed bank assets from banks that have failed in the past 18 months. The assets held by the FDIC were of such dubious quality that the FDIC was unable to entice acquiring banks to purchase them, despite the generous loss-share transactions offered by the FDIC to institutions acquiring failed banking assets.
As we can see from the FDIC yard sale of dubious assets, even the worst assets have some value and will sell if priced properly.
The Federal Deposit Insurance Corporation (FDIC) has closed on a sale of an equity interest in a limited liability company (LLC) created to hold certain assets out of 22 failed bank receiverships. The winning bidder of the Multibank Structured Transaction was Colony Capital Acquisitions, LLC, Los Angeles, CA.
The sale was conducted on a competitive basis with bids received on December 17, 2009. A total of 21 groups submitted bids to purchase a 40 percent ownership interest in the newly formed LLC. The participating FDIC receiverships will hold the remaining 60 percent equity interest in the LLC.
The FDIC as Receiver for the failed banks conveyed to the LLC a portfolio of approximately 1200 distressed commercial real estate loans, of which seventy percent were delinquent. Collectively, the loans have an unpaid principal balance of $1.02 billion. Seventy-five percent of the collateral of the portfolio is located in Georgia, California, Nevada and Florida. The participating FDIC receiverships provided financing to the LLC by issuing approximately $233 million of corporate guaranteed notes. Colony Capital paid a total of approximately $90.5 million (net of working capital) in cash for its 40 percent equity stake in the LLC, which equals approximately 44 percent of the unpaid principal balance of the assets. As the LLC’s managing equity owner, Colony Capital will provide for the management, servicing and ultimate disposition of the LLC’s assets.
The bid received from Colony Capital Acquisition, LLC, was determined to be the offer that resulted in the greatest return to the participating receiverships. All of the loans were from banks that have failed during the past 18 months. The sale closed on January 7, 2010.
The FDIC provided the financing to the LLC holding the failed bank assets. For $90 million, Colony Capital receives a 40% equity stake in $449 million of face value loan principal, which equates to buying the failed bank assets at 20 cents on the dollar. At this price, Colony Capital obviously sees some value in the failed banking assets. The retention of a 60% equity interest in the failed assets by the FDIC also implies that they see future recoverable value from the failed banking assets. Time will tell if the investment by Colony Capital in junk loans proves to be profitable in the face of ever increasing defaults on commercial and residential loans.
However, given the unrelenting determination by the Federal Reserve, the Treasury and US Government agencies to re-inflate asset values, the owners of Colony Capital may have made a very shrewd bet.