Monday, March 23, 2009

Legacy Loans Program Summary of Terms

TO BE NOTED: From FinancialStability.Gov:
Legacy Loans Program
Summary of Terms
The Federal Deposit Insurance Corporation (“FDIC”) and the United States Department of the
Treasury (“UST”) will coordinate public-private investment funds (“PPIFs”) to purchase troubled
and illiquid loans and other assets in substantially sized pools from insured banks and thrifts. These
PPIFs are designed to facilitate buy and hold investment strategies.
Summary of Public-
Private Investment
􀂃 The FDIC will oversee multiple PPIFs which will be established to
own and manage pools of assets. These PPIFs will be vehicles
established to purchase pools of loans and other assets from insured
depository institutions (“Participant Banks”) under criteria established
by the FDIC. Equity in the PPIFs will come from private investors
(“Private Investors”) and the UST. The PPIFs will issue FDICguaranteed
debt to expand purchasing power.
􀂃 The FDIC will provide oversight for the formation, funding, and
operation of new PPIFs that will purchase assets from banks.
􀂃 The UST will be responsible for overseeing and managing its equity
contributions to the PPIF. The FDIC will be responsible for
overseeing the formation, funding, and operation of PPIFs and for
overseeing and managing its debt guarantees to the PPIFs. In its
oversight role, the FDIC will ensure that the same information is
provided to the FDIC and to the UST.
􀂃 The FDIC and UST will enter into an agreement governing allocation
of costs and responsibilities for the functions provided. The FDIC
will be reimbursed for its expenses incurred in providing oversight.
􀂃 PPIFs will finance the purchase of eligible asset pools (“Eligible Asset
Pools” and the assets comprising such pools, “Eligible Assets”) from
Participant Banks by issuing debt guaranteed by the FDIC. The FDIC
guarantee will be secured by the Eligible Assets purchased by the
􀂃 The FDIC will work with Participant Banks, UST, Private Investors
and contractors to administer the auctions of Eligible Asset Pools.
􀂃 Proposed financing terms and leverage ratios for each PPIF will be
established by the FDIC and disclosed to potential investors as part of
the auction process (prior to bid submission).
􀂃 The sale of equity stakes in the PPIFs to Private Investors will
determine the total value of a specific Eligible Asset Pool (in
conjunction with allowed leverage as discussed below).
􀂃 Consideration paid to Participant Banks in exchange for purchased
Eligible Asset Pools will be in the form of cash or cash and debt issued
by the PPIFs. PPIF debt will be guaranteed by the FDIC. Terms of
the debt and debt guarantee will be as stipulated in the FDIC
Guaranteed Secured Debt for PPIF Term Sheet.
􀂃 Debt and equity funding for each PPIF will occur at the closing of
each Eligible Asset Pool purchase.
􀂃 PPIFs will have asset managers for asset management, and servicing
within parameters established by the FDIC and UST. UST and Private
Investors will share profits and losses in proportion to equity invested.
􀂃 The FDIC and UST shall establish governance procedures on the
management, servicing agreement, financial and operating reporting
requirements, exit timing and alternatives for each of the Eligible Asset
Pools. To the extent practicable, standard documentation will be used
for this purpose.
PPIF Capital Structure 􀂃 UST capital and private capital will invest proportionately at the same
time in the PPIF.
Eligible Private
􀂃 Private Investors are expected to include an array of different
investors, including, but not be limited to, financial institutions,
individuals, insurance companies, mutual funds, publicly managed
investment funds and pension funds.
􀂃 Private Investor groups must be approved by the FDIC, and
cooperation between Private Investor groups will be prohibited once
the auction process begins to maintain fairness.
􀂃 UST and the FDIC will encourage participation by small, veteran-,
minority- and women-owned firms.
Selling Bank Application
􀂃 Interested banks should work with their primary bank regulators to
identify and evaluate the Eligible Asset Pools to be sold to the PPIF
and the corresponding financial impact on the Participant Bank from
the sale of such asset pools. Regulators and Participant Banks should
seek to identify and sell assets with a view to restoring maximum
confidence for depositors, creditors, investors and other
􀂃 After identifying a pool of assets to sell, Participant Banks and
Regulators should contact the FDIC to express interest in participating
in the program.
􀂃 Eligible banks include any insured U.S. bank or U.S. savings
association. Banks or savings associations owned or controlled by a
foreign bank or company are not eligible. For purposes of this
program, “U.S. bank” and “U.S. savings association” means a bank or
savings association organized under the laws of the United States or
any State of the United States, the District of Columbia, any territory
or possession of the United States, Puerto Rico, Northern Mariana
Islands, Guam, American Samoa, or the Virgin Islands. UST and
FDIC will determine eligibility and allocation for institutions after
consultation with the appropriate Federal banking agency.
􀂃 Participant Banks must demonstrate to the satisfaction of the UST and
FDIC that the contemplated loan pools qualify based upon UST and
FDIC agreed upon minimum requirements.
􀂃 Eligible Assets and any collateral supporting those assets must be
situated predominantly in the United States.
Asset Purchases &
􀂃 Upon determination of an Eligible Asset Pool for sale by a Participant
Bank, the FDIC will oversee initial due diligence, preparation of
required marketing materials and conduct the auction process. The
Participant Bank will make information available to the FDIC and
Private Investors to facilitate the bidding process. FDIC
responsibilities will include the review of received bids and selection of
the winning bids.
􀂃 A third party valuation firm (“Third Party Valuation Firm”) selected by
the FDIC will provide independent valuation advice to the FDIC on
each Eligible Asset Pool. The Third Party Valuation Firm’s analysis
will assist the FDIC in discussions with Participant Banks to determine
the valuation of Eligible Asset Pools, inform initial views on
appropriate leverage and provide information about the structure and
value of bids.
􀂃 Eligible Asset Pools will be purchased from Participant Banks at prices
determined through the auction process for the private capital
component of the PPIF. The price received from the private capital
component will be used to calculate the cash equivalent price of the
Eligible Asset Pool, using the framework provided by the PPIF’s
capital structure and leverage.
􀂃 Potential Private Investors will be pre-qualified by the FDIC to
participate in an Eligible Asset Pool auction. For a bid to be
considered in the auction process, the bid must be accompanied by a
refundable cash deposit (“Deposit”) for 5 percent of the bid value. In
the event that a bid is unsuccessful, or is ultimately rejected by the
Participant Bank, the Deposit will be refunded to the unsuccessful
bidders (subject to their adherence to material terms of the auction
􀂃 Auctions for the private capital component of the PPIF equity will be
conducted by the FDIC. FDIC responsibilities will include the review
of received bids and selection of the winning bid(s). The Participant
Bank will make information available to the FDIC and potential
Private Investors to facilitate the bidding process according to preestablished
􀂃 Once a bid(s) is selected, the Participant Bank will have the option of
accepting or rejecting the bid within a pre-established timeframe.
Governance &
􀂃 PPIFs will be managed within parameters pre-established by the FDIC and
UST, with reporting to the FDIC and oversight by FDIC. The FDIC will
be responsible for providing information required by UST.
􀂃 Private Investors may not participate in any PPIF that purchases assets from
sellers that are affiliates of such investors or that represent 10% or more of
the aggregate private capital in the PPIF.
􀂃 Each PPIF must agree to waste, fraud and abuse protections to be defined
by UST and the FDIC in order to protect taxpayers.
􀂃 Each PPIF will be required to make certain representations, warranties and
covenants regarding the conduct of their business and compliance with
applicable law.
􀂃 Each PPIF will provide information to the FDIC in performance of its
oversight role for the benefit of the UST and FDIC. The FDIC will
provide duplicate reports to the UST.
􀂃 The PPIF also must agree to provide access, as needed, to information
required by the Special Inspector General of the TARP, and the
Government Accountability Office.
Equity Capital
􀂃 Initially target 50 percent of equity capital of each PPIF to be funded
by the UST. Alternatives for USG capital may be adopted so long as
such alternatives do not diminish the collateral protection securing the
FDIC guarantee and are capital neutral compared with the currently
contemplated investment. The UST will not have control rights.
􀂃 Investors can choose to take less UST equity subject to a minimum to
be determined.
Treasury Warrants 􀂃 Consistent with requirements under EESA, UST shall receive warrants
in the PPIF.
Non-Recourse Debt
􀂃 Third Party Valuation Firm will estimate Eligible Asset Pool values and
advise the FDIC on loan-to-value and debt service coverage for each
PPIF. In assessing the supportable leverage of the asset pool, the
Third Party Valuation Firm will analyze characteristics including
expected cash flows based on type of interest rates, risk of underlying
assets, expected lifetime losses, geographic exposures, maturity profiles
and other relevant factors.
􀂃 Leverage will be determined on a pool-by-pool basis at the FDIC’s
sole discretion, with input from the Third Party Valuation Firm. It is
anticipated that the debt to equity ratio will not exceed 6 to 1 for each
􀂃 FDIC will provide credit support for PPIF financing through
guarantees of debt issued by the PPIF. The FDIC guarantee is
collateralized by assets purchased by each PPIF.
􀂃 Financing terms will be as set forth in the FDIC Guaranteed Secured
Debt for PPIF term sheet.
􀂃 The PPIF will be required to maintain a Debt Service Coverage
Account (“DSCA”) (as stipulated in the FDIC Guaranteed Secured
Debt for PPIF Term Sheet) to ensure that working capital for each
PPIF is sufficient to meet anticipated debt servicing obligations,
interest expenses and operating expenses. A portion of cash proceeds
from the sale of Eligible Asset Pools will be retained until cash flow
from Eligible Asset Pools has fully funded the DSCA, at which point
the escrowed cash will be released to the Participant Bank.
Servicing 􀂃 Servicing will be provided by the Participant Bank, unless otherwise
􀂃 The PPIF retains control of servicing throughout operations, subject
to relevant agreements.
FDIC Fees and
􀂃 The FDIC will be reimbursed for all expenses related to conducting
Eligible Asset Pool auctions.
􀂃 Ongoing administration fees (“Administrative Fees”) will be paid to
the FDIC by PPIFs for oversight functions performed by the FDIC.
􀂃 The FDIC will guarantee debt issued by the PPIFs to Participant
Banks or the market as consideration for Eligible Asset Pool
purchases. In exchange for the debt guarantee, the FDIC will charge
the PPIFs an annual guarantee fee (“Guarantee Fee”). The Guarantee
Fee will be charged based on outstanding debt balances and will be
payable to the FDIC annually upon the anniversary date of the
transaction closing date. The FDIC guarantee will be secured by the
assets in the pool which will be issued as senior debt of the PPIF and
will be senior to the equity provided by the private investors and the
􀂃 A portion of the Guarantee Fee will be allocated to the Deposit
Insurance Fund.
Reservation of Rights 􀂃 The release of this Proposed Summary of Terms and the FDIC’s and
UST’s receipt of any information from a Participant Bank or Private
Investor shall not, in any manner, obligate UST or the FDIC to
perform any act or otherwise incur any liabilities.
􀂃 UST and the FDIC assume no obligation to reimburse or otherwise
compensate Participant Banks or Private Investors for expenses or
losses incurred in connection with this Proposed Summary of Terms
or the submission of an application.
􀂃 UST and the FDIC reserves the right to: (1) modify the requirements
in this Proposed Summary of Proposed Terms or withdraw this
Proposed Summary of Terms at any time; (2) decide not to select any
Participant Bank or Private Investors; (3) reject an application without
inviting the Participant Bank or Private Investors to submit a new
application; (4) negotiate with and select any Participant Bank Private
Investors considered qualified; (5) request, orally or in writing,
clarification of or additional information on an application; (6) waive
minor informalities or irregularities, or a requirement of this Proposed
Summary of Terms; (7) accept any application in part or in total; and
(8) reject an application that does not conform to the specified format
of the application or other requirements of this Proposed Summary of

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