03/12/2010

FDIC Kicks Off Its Securitization Program

The FDIC's long-awaited program for securitizing real estate assets inherited from failed banks is starting to take shape.

Last Friday, the agency floated $1.8 billion of notes backed by residential MBS from seven collapsed banks. On Wednesday, it conducted its first commercial MBS transaction - a $1.4 billion offering backed by condominium-construction loans, other commercial mortgages and foreclosed properties from Corus Bank. And next week, it is expected to launch an offering backed by residential mortgages. The FDIC is guaranteeing the low-yield bonds in all three offerings and tapped Barclays as the sole underwriter for each.

Meanwhile, the agency is also working on a series of residential and CMBS transactions in which it would provide limited or no guarantees to bondholders. The FDIC is being advised on that effort by Pentalpha, an advisory shop in Greenwich, Conn., and Sandler O'Neill & Partners, a New York investment-banking boutique. The FDIC is close to selecting underwriters for the first deals.

Because of the spike in failed banks stemming from the market downturn, the FDIC has inherited an avalanche of loans, securities and properties. Just as it did during the last major real estate collapse in the early 1990s, the agency is turning to securitization as a way to liquidate or finance some of those assets.

This week's CMBS deal stemmed from the failure of Corus, a Chicago bank brought to its knees by a heavy concentration of condominium-construction loans. In October, the FDIC sold a 40% stake in a $4.5 billion portfolio of Corus assets to a Starwood Capital partnership. The Starwood team put up $553 million of cash, and the FDIC's retained 60% stake equaled a contribution of about $840 million. The FDIC also agreed to provide the FDIC-Starwood partnership with $1.4 billion of low-cost financing, putting the portfolio's value at $2.77 billion.

The bond deal covered the FDIC's financing obligation. Because of the agency's guarantee, the three-class offering was snapped up by investors who usually buy agency mortgage securities or U.S. treasury bonds.

All three classes priced 2 bp lower than initial guidance. The final spreads were 18 bp over eurodollar futures for a 1.6-year tranche, 21 bp over interpolated swaps for a 2.6-year class and 24 bp over interpolated swaps for 3.6-year securities (see Initial Pricings on Page 12).

The collateral pool encompassed 79 loans with a $3.5 billion balance, plus foreclosed properties that secured 26 other loans with an $893 million balance.

The FDIC partnership will use the proceeds to cover future funding commitments of the collateral loans and expenses for construction, leasing and operation of properties.

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