A PPIP Half Turn Goes a Long Way: BofA Researchers
Although Public-Private Investment Program (PPIP) fund managers will likely continue electing a full turn of leverage under the program, half turn funding presents its own benefits, according to market commentary by Banc of America Securities - Merrill Lynch (BAS-ML). The PPIP is divided in two major programs — the securities branch and the loan branch — which together aim to clear mortgage-related securities and other toxic assets from banks’ balance sheets. The program provides federal equity matches for privately raised capital. PPIP allows fund managers to choose between full turn and half turn debt financing, BAS-ML said in late August commentary. With the full turn option, the Treasury provides equity to match the amount of private capital raised, plus debt funding equal to the combined amount. No additional funding can be used in this setup. With half turn funding, however, Treasury provides equity to match the private capital raised, plus debt financing equal to half the combined amount. Third party debt funding may be used in this scenario to supplement Treasury funding, although BAS-ML noted funding for residential mortgage-backed securities (RMBS) through the Term Asset-Backed Securities Loan Facility (TALF) is not yet available. Managers are likely to pursue full turn funding for several reasons: PPIP funding is designed to be long-term, BAS-ML researchers noted, and managers that elect full turn funding can then opt to adopt a half turn, but not the other way around. Half turn funding, on the other hand, amplifies third-party leverage, making it an attractive alternative, BAS-ML said. Treasury matches investor capital commitments with its own equity financing and provides the same amount of financing in debt under a half turn of PPIP funding. For example, $500m in raised capital would result in $1.5bn in investible funds. "PPIP terms allow the fund manager to take the entire pool of investible funds and obtain private funding on that amount. In other words, besides levering up initial equity even further, the Treasury debt can be leveraged too. Being able to use the Treasury’s debt to obtain third party debt financing has the effect of increasing the overall, effective leverage." Despite the prospects offered by half turn funding, the availability of third party funding as well as the leverage ratio of the third party funding remain "valid concerns" to fund managers considering participation in half turn PPIP funding. While legacy RMBS securities are not eligible for funding through the TALF program, BAS-ML said there has been interest in using half turn PPIP funding in conjunction with the TALF program for legacy commercial mortgage-backed securities (CMBS). Write to Diana Golobay.