FDIC distressed assets a hot buy for leveraged investors
More than 150 banks failed in 2010, often leaving the Federal Deposit Insurance Corp. as the sole proprietor to some or all of their distressed assets. But it appears that investors are as eager to buy up those loans as the FDIC is to get rid of them. The FDIC's willingness to meet investors halfway in the unwinding of failed bank assets is apparent in how the deals are structured — and ultimately closed. Over the last three years, the FDIC said it sold an estimated $22.4 billion in distressed bank assets through 19 transactions. Investors come to the table after performing due diligence and underwriting on prospective portfolios and bid on the percentage of equity in each deal available for purchase. Buyers can bid with cash or bid on a portfolio with additional leverage. The highest bidder always wins and, in recent transactions, leveraged bids have come out on top. The top three bidders — Starwood Capital, Colony Capital and Rialto Capital — have invested a cumulative $1.3 billion in FDIC failed bank assets. In just one transaction, Starwood became the biggest investor of FDIC loans. The Connecticut-based company bought 101 construction loans for $551 million back in October 2009. The loans were originally held by Corus Construction Venture. The second biggest investor in this sector is Colony Capital who spent approximately $507 million in three purchase transactions. The first was a $91 million purchase of nearly 2,000 commercial real estate loans from a firm called MultiBank. Colony, based in Santa Monica, Calif., then purchased another 1,660 CRE loans for $218 million. In the last deal, which closed in December, Colony invested $198 million in two portfolios containing 755 commercial and residential assets. Colony received 40% equity in all three deals. Miami's Rialto Capital closes out the top three investors with a total $244 million funneled to the FDIC. In February 2010, the firm made two purchases, one for about 5,200 residential loans at $172 million and another for 345 commercial loans at $72 million. Rialto received 40% equity in each. When it comes to investing in FDIC loans, Eric Aronsohn, an analyst and the point of contact on portfolio inquires at Rialto Capital, said his firm is as hungry as it gets. "What attracts us to these portfolios foremost would be the financing," Aronsohn told HousingWire in an interview. "The FDIC is fairly generous with what they offer and it matches the quality of the assets." Paul Fuhrman, principal at Colony Capital, agrees with him. He said the FDIC is a "true seller" in that the agency doesn't price fish individually and is willing to sell assets at market prices. In addition, he mentioned the agency often provides a 50% loan-to-cost ratio and zero-coupon. "Generally, when dealing with the FDIC, you don't have a reserve price," Fuhrman said in an interview, adding that the firm won approximately a third of the loans it pursued in the past two years. "Generally, they are willing to sell at whatever the market clearing price." For example, last January Colony bid $91 million for a 40% equity stake in a portfolio of distressed CRE loans with an outstanding balance or book value of just more than $1 billion. It bid the transaction with leverage offered by the FDIC at a ratio of 1:1, meaning the firm purchased an equal amount of equity and debt from the FDIC. The total imputed cost of the deal was $455 million. If Colony had bought the same amount of equity without a discount, the transaction would have cost the firm $182 million. In the case of Starwood's transaction, which is by far the biggest single deal on the FDIC's books, the total imputed value of the deal was $27.6 billion. At 40% equity, that would have cost Starwood $11 billion instead of the $551 million it actually paid. One other reason that both Colony and Rialto said they find deals with the FDIC attractive (Starwood was not available for comment) is because the risk retention on portfolios is generally ideal, meaning low risk. "The loans we've been buying are largely recourse loans," Fuhrman said. "So not only do we have a claim against the underlying collateral, but also we have a claim against the borrower and any guarantors." Aronshon said that the leverage deal structure is ideal for his company because it gives Rialto the opportunity to hold on to assets a little longer just by paying a little extra. In the end, he said, the cost of capital isn't as high. Both companies said they are still active in the private market for distressed real estate, but plan on bidding with the FDIC in the future. That is, as long as the opportunity fits the firms' standards. "Certainly we plan on staying active," Aronsohn said. "But we don't usually look at pools smaller than nine figures." Write to Christine Ricciardi. Follow her on Twitter @HWnewbieCR.