News + Events
Public-Private Investment Program – Legacy Securities Program
March 25, 2009
On March 23, 2009, the Treasury – in conjunction with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve - announced the initial details of its Public-Private Investment Program (PPIP) which is designed to (i) remove toxic real estate loans and securities from the balance sheets of U.S. depositary institutions, which include banks and thrifts (Participant Banks), (ii) rejuvenate real estate credit markets and (iii) restart the real estate loan securitization market. PPIP is divided into two programs, (a) the Legacy Loans Program dealing with residential and commercial real estate loans held by Participant Banks and (b) the Legacy Securities Program dealing with commercial mortgage backed securities (CMBS) and residential mortgage backed securities (RMBS).
This advisory addresses the Legacy Securities Program, which is an expansion of the Term Asset Backed Securities Loan Facility program (TALF). For more information regarding the Legacy Loans Program, please refer to our advisory that can be found here.
Equity Investment in the Legacy Securities Program
The Legacy Securities Program will facilitate the creation of approximately five new Public-Private Investment Funds (Private Vehicles). Each Private Vehicle will have 50% of the equity provided by Treasury and 50% of the equity provided by a pre-qualified private fund manager (Fund Managers). Private investors may invest directly in the Fund Managers. Treasury equity capital will be drawn down in tranches at the same time and in the same proportion as private equity capital is drawn down. The Private Vehicles will be formed and funded to invest in eligible CMBS and RMBS assets originally issued prior to 2009 with a rating of AAA by two or more nationally recognized ratings organizations at origination.
Debt Financing Available to Private Vehicles
Private Vehicles will be eligible to receive non-recourse senior debt from Treasury, via TALF, equal to 50% of the total equity investment of the Private Vehicles. Treasury will consider requests for senior debt for the Private Vehicle in the amount of 100% of its total equity investment subject to restrictions that have yet to be announced. Since the Legacy Securities Program is an expansion of TALF, the Private Vehicle will be subject to TALF’s three year lock up period for the Treasury debt, pursuant to which the CMBS and RMBS assets must be held by the Private Vehicle. Debt financing is to be drawn down concurrently with drawdowns of equity commitments. It should be noted that Treasury will retain the right to cease funding of committed but undrawn Treasury equity capital and debt financing in its sole discretion.
The Treasury debt will be secured by the CMBS and RMBS assets held by the Private Vehicle. Consistent with the Emergency Economic Stabilization Act of 2008, Treasury will also receive warrants in the Private Vehicles. Fund Managers will make proposals for the term of the Private Vehicle (Treasury Capital Term), to be no greater than ten years and subject to extension with the Treasury’s consent. Loans made by Treasury will accrue interest at an annual rate to be determined by the Treasury and will be payable in full on the termination of the Treasury Capital Term. It should be noted that Private Vehicles may also finance the purchase of RMBS and CMBS assets through any other Treasury program or debt financing raised from private sources; provided, however, that Treasury equity capital and Private Vehicle equity capital must be leveraged proportionately from such private debt financing sources.
Governance of Private Vehicles
The Private Vehicles will be managed by the Fund Managers, which will raise capital from private investors. Fund Managers will control the process of asset selection, asset pricing, asset liquidation, trading and disposition. Fund Managers may charge private investors fees in their discretion; however, Treasury will consider the proposed fees when evaluating applications for Fund Managers. In accordance with TALF guidelines, private investors who invest in a Fund Manager may not voluntarily withdraw their investment prior to the third anniversary of the first investment by such Private Vehicle.
Fund Managers will have to comply with monthly reporting requirements. Prices of eligible assets for reporting purposes are to be tracked using third party sources and annual audited valuations by a nationally recognized accounting firm. Fund Managers will have to provide access to relevant books and records to a myriad of regulators.
A Sample Legacy Securities Program Investment
The following helpful sample investment for the Legacy Securities Program was provided by the Treasury:
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Sample Investment Under the Legacy Securities Program |
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Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program.
Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.
Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.
Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.
Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.
Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched. |
Process for Application for Private Fund Managers
- Demonstrated capacity to raise at least $500 million of private capital.
- Demonstrated experience and track record in dealing with eligible CMBS and RMBS assets.
- A minimum of $10 billion in eligible CMBS and RMBS assets under management.
- Demonstrated operational capacity to manage Private Vehicles in accordance with Treasury’s PPIP objectives.
- Headquarters in the United States.
Detailed application forms may be found at http://www.financialstability.gov and should be submitted no later than April 10. Treasury expects to announce preliminary approvals of Fund Managers on or prior to May 1.
Questions Raised by the Legacy Securities Program
Treasury expects to define final terms and conditions for the Private Vehicles with the help of market participants prior to fundraising. We expect many questions regarding the Legacy Securities Program to be answered by these subsequent Treasury announcements. In the meantime, key open issues include the following:
1. What specific criteria with regard to experience and track record will the Treasury look for in applicants to be Fund Managers?
2. What additional parameters will be placed on the governance of Private Vehicles and their management of RMBS and CMBS assets? Also, what qualifications will be required with respect to permitted investors in the Fund Managers?
3. What is the nature of the warrants in the Private Vehicles to be issued to Treasury?
4. What additional restrictions will be placed on private debt used by Private Vehicles?
Troutman Sanders Role
Troutman Sanders has already assembled an experienced multi-disciplinary team to guide clients through the Legacy Securities Program, as well as other programs established as part of Treasury’s Financial Stability Plan. We look forward to assisting existing clients and new clients with opportunities that will be created through the new Public-Private Investment Program.
Please continue to check our website, as we will continue to follow developments related to Legacy Securities Program and to update this advisory with additional relevant information as soon as it is released. If you have any questions or would like to contact a member of our Legacy Securities Program team, please feel free to call any of the following Troutman Sanders lawyers:
Michael Leichtling Jacob A. (Jake) Lutz
(212) 704-6257 (804) 697-1490
Miles M. Borden Anthony D. Greene
(212) 704-6161 (212) 704-6194