01/08/2010

Colony Wins Auction of Big FDIC Portfolio

Colony Capital has won the bidding for a 40% stake in a $1 billion portfolio of mixed-quality commercial mortgages from the FDIC.

The Los Angeles investment firm agreed to pay 44 cents on the dollar for the stake, or $180 million, according to market sources. The transaction values the portfolio at $448 million. The FDIC, which is retaining a 60% interest in the assets, will supply debt financing for half of Colony's purchase price, reducing the firm's cash outlay to $90 million.

Other bidders included Encore Capital of Dallas and Texas banker Andrew Beal.

The portfolio contains some 1,200 loans with an unpaid principal balance of $1.02 billion that the agency assumed from about two dozen failed banks. About one-third of the loans, by balance, are current. The rest are either nonperforming or subperforming. Land loans make up about one-third of the balance. The rest are backed mostly by retail, multi-family, office, industrial and hotel loans. There is also a smattering of niche and consumer loans.

The sale is the largest by the FDIC since last fall, when it sold a 40% stake in a $4.5 billion portfolio of Corus Bank loans to a Starwood Capital team for $554.5 million, or about 61 cents on the dollar. At the time, some investors questioned whether Starwood overpaid because the two runners-up - a Colony partnership and a joint venture between Related Cos. and Lubert-Adler Partners - both bid around 50 cents on the dollar.

The Corus portfolio encompassed somewhat more than 100 loans, putting the average balance at roughly $45 million. By contrast, the latest portfolio contains much smaller loans, averaging less than $1 million. That made the loans less coveted, resulting in lower bids than for the Corus portfolio.

Colony, which declined to comment, will make the acquisition via its recently formed mortgage REIT and two of its investment funds: the $4 billion Colony Investors 8 and the $900 million Colony Distressed Credit Fund 1. The REIT, called Colony Financial, completed a $250 million IPO last fall and has already deployed nearly two-thirds of that capital.

Bidders for the FDIC portfolio could offer to buy either a 20% stake with no FDIC debt financing or a 40% interest with FDIC financing. Colony opted for the second alternative. It will receive $90 million of debt from the agency, market players said. Colony will work out the portfolio and share the proceeds with the FDIC. Deutsche Bank advised the agency on the sale.

The collateral properties are concentrated in Georgia (30.7% of the total balance), California (14.7%), Nevada (14.4%) and Florida (13.5%). Two-thirds of the portfolio balance is scheduled to mature this year. Only 10 notes exceed $10 million.

Aside from the Corus deal, seven previous "structured sales" by the FDIC over the past two years generated an average winning bid of 25 cents on the dollar, with individual sale prices ranging from 9 to 65 cents. In those seven transactions, the FDIC sold $1.1 billion of participation interests for $274 million.

Investors are now finalizing their due diligence on the next FDIC portfolio, a 367-loan offering being offered via the team of Midland Loan Services and Pentalpha Capital. The bidding deadline, now Jan. 20, has been delayed several times. The Midland/Pentalpha portfolio appears to carry higher risk than the one Colony acquired. About 60% of the total balance is tied to projects that are either stalled or never got off the ground. Most of the loans defaulted at maturity. Some 43% of the pool balance is backed by properties in Nevada, one of the hardest-hit areas in the country. There are also large concentrations in Georgia (17.4%) and California (9.8%). The average loan size is $2.3 million.

The FDIC has also set a Jan. 20 bidding deadline for another structured offering: a $2.6 billion portfolio of residential-construction and land loans. Keefe Bruyette is advising the FDIC on that transaction.

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