Article prepared by and republished courtesy of our colleagues Jeffrey Hare, John Clarke, John Sullivan, and Adam Dubin; originally published here: https://www.dlapiper.com/en/insights/publications/2023/03/buying-assets-from-the-fdic
In the wake of the appointment of the Federal Deposit Insurance Corporation (FDIC) as receiver for Silicon Valley Bank (SVB) and Signature Bank (SB) on March 10 and March 12, respectively, investors may be considering whether there will be opportunities to acquire failed bank assets. This alert provides a high-level overview of the process for acquiring assets from the FDIC as receiver.
An FDIC insured bank fails when the chartering regulator closes the bank and appoints the FDIC as receiver. Upon its appointment, the FDIC as receiver succeeds by operation of law to all of the assets and liabilities of the bank, ensuring that depositors have access to their insured deposits. To address potential systemic risk arising from the failures of SVB and SB, federal authorities determined that the SVB and SB receiverships would each be handled “in a manner that fully protects all depositors.” The Deposit Insurance Fund (DIF) overseen by the FDIC absorbs the costs of covered deposits. The DIF is funded mainly through quarterly assessments on all insured banks.
By statute, the FDIC is required to resolve failed banks using the method that results in the “least-cost resolution” for the DIF. This means the FDIC’s options must be considered based on whether one approach might cost more to the DIF than other options. In its role as receiver, the FDIC may:
- Negotiate a “whole bank” purchase and assumption (P&A) transaction, in which a financially healthy institution acquires all of a failed bank’s assets in return for agreeing to assume its deposit liabilities. This is the FDIC’s preferred approach because it assures the immediate availability of all deposits, even uninsured, without unnecessary costs to the DIF. Customers of the failed bank, both depositors and borrowers, become customers of the acquiring bank without action on their part.
- Liquidate an institution, meaning that the FDIC issues checks for all insured deposits, dissolves the bank, and sells off the bank’s assets in an attempt to recoup its losses. This is not a preferred approach but can occur when a bank is closed precipitously and the FDIC does not have time, or cannot generate interest, for a P&A transaction.
- Execute an insured deposit transfer, in which the FDIC as receiver transfers a failed bank’s insured deposits to another institution for a fee. This is similar to a liquidation in that the FDIC makes no effort to preserve the failed bank as an ongoing business. Asset sales would also be expected in this type of transaction.
To ensure a fair and equitable process, the FDIC conducts a structured bid process whenever it seeks a third-party transaction. The FDIC as receiver must demonstrate that the transaction it approves and enters into is the least costly transaction among the alternatives, taking into account the cost to pay off the deposits and liquidate the assets from the receivership.
Through a Loan Sale Agreement (which is drafted by the FDIC with limited room for negotiation), the FDIC may sell loans of failed banks in single loan sales or in pools, depending on the size of specific loans and commonality of terms and structures of the failed bank’s loan portfolio. When pooling loans, the FDIC seeks to aggregate assets that share specific criteria such as loan size, performance status, type, collateral, and location, typically through sealed bid sales.
Bidders might inform the FDIC of their preference for pools that meet certain parameters, such as performing commercial real estate secured loans in a specific region, and the FDIC may or may not attempt to offer pools that satisfy those requests. Even if pools are formed that generally comport with a bidder’s requested parameters, any sale by the FDIC as receiver will occur through an open bidding process involving all qualified and interested bidders.
The FDIC makes no representations or warranties in connection with any failed bank loans it sells, thus bidder diligence is critical to determining an appropriate bid amount. The only remedies or recourse provided to the buyer are those set forth in the Loan Sale Agreement. Generally, all risk associated with the loans are passed to the buyer. Once a sale is awarded, it is usually closed within 20 business days.
The FDIC conducts loan sales with the support of the following loan sale advisors:
First Financial Network (FFN)
Mission Capital Advisors
Newmark Knight Frank
The Debt Exchange (DebtX)
Those that may be interested in participating in a loan sale are encouraged to contact each of the loan sale advisors and request to have an account established on the applicable website. Although the FDIC provides a sample copy of the Purchaser Eligibility Certification, each loan sale advisor has its own requirements for granting access to its website and may have different certification forms. Those interested in purchasing loans should review and complete the sample Certification and access each loan sale advisor’s website to collect and complete the requisite forms to open an account.
Persons with accounts on the respective advisors’ systems will receive emails notifying them of an FDIC loan sale when they are made available to the market. Bidders are required to provide an initial deposit (the amount of which is determined by the bid instructions in a given sale) by wire transfer to be able to bid on a specific loan sale. Any other requirements will be defined in the bid instructions.
Other asset purchases
The FDIC also may sell certain debt; equity; mortgage-related, municipal, and other securities; mortgage servicing portfolios; mortgage servicing platforms and related assets; loan origination platforms and related assets; shared national credits (interests in syndicated loans); credit card receivables; and interests in structured transactions (i.e., joint ventures, limited liability companies and other newly-formed entities) involving loans, notes, other evidences of indebtedness and collateral property. The FDIC, as receiver for failed institutions, is required by law to maximize recovery on these assets.
The FDIC uses a variety of strategies to manage and sells assets of a failed institution, including structured joint venture transactions (Structured Transactions). As the term is used by the FDIC, Structured Transactions are joint ventures or partnerships between the FDIC, as receiver, and private sector entities, which are designed to facilitate the placement back to the private sector of selected assets from failed banks. Structured transactions allow the FDIC to retain an interest in the assets, while transferring day-to-day management responsibility to private sector managers who acquire a financial interest in the assets and share in the costs and risks associated with ownership.
The FDIC initiates a Structured Transaction by forming an investment vehicle (typically an LLC) into which it contributes assets from one or more failed institutions in return for the equity interest in the LLC. The winning bidder purchases a portion, typically ranging from 20 to 40 percent, of the equity in the LLC. The future expenses and income will be shared based on the percentage ownership to the purchaser and the FDIC. These types of transactions can be offered and sold on a leveraged, unleveraged, or whole loan “all cash” basis. You can find examples of historic FDIC sale transactions coming out of receivership here.
Those interested in bidding on FDIC sales of these assets will be required to meet certain criteria and are encouraged to initiate the pre-qualification process as soon as possible to avoid delays in access to information on transactions that intentionally move quickly. The first steps for prospective bidders seeking to become pre-qualified are to complete, execute and deliver to the FDIC the following:
- Pre-Qualification Request
- Purchaser Eligibility Certification, and
- Contact Information Form.
The forms can be delivered electronically to email@example.com or in hard copy to: FDIC – DRR/Asset Marketing Section, 3501 Fairfax Drive, Office 3701 – 8048, Arlington, VA 22226-3500.
In order to preserve status as a pre-qualified bidder for certain securities sales, the Pre-Qualification Request and Purchaser Eligibility Certification must be newly executed and delivered to the FDIC every six months.
Pre-qualification does not necessarily allow a prospective bidder to participate in all asset sales, and the FDIC reserves the right to require any prospective bidder to meet additional or different qualification criteria for any particular asset sale at the time of that sale and complete and submit transaction specific qualification requests and materials as well as confidentiality agreements, financial, and other information.
For certain sales of other financial assets (including partnerships and other structured transactions of loans), even if a bidder has been pre-qualified and qualified to receive transaction specific information, the bidder will also be required to provide information regarding financial, managerial, and legal matters by completing the Bidder Qualification Application in accordance with the instructions contained in the Application Guidance and Instructions.
DLA Piper has significant experience advising on acquiring assets from the FDIC. If you would like to discuss or have any questions regarding the topics discussed in this alert or related matters, please contact any of the authors or your relationship attorneys.