Asset Disposal Hits High Gear
Two big developments in asset disposal today. First, Barclay’s unloaded $12.3 billion of “risky” assets and the Federal Deposit Insurance Corp. finally sewed up a sale of assets through its Legacy Loan Program.
We’ll start with the Barclay’s news:
Barclays PLC Wednesday sought to cut its exposure to volatile credit markets by selling $12.3 billion in risky assets to a new fund managed by two former Barclays executives.
The sale means Barclays will no longer have to record market moves in the value of a portfolio of securities backed by U.S. subprime mortgages and other poorly performing loans that already wiped more than a billion pounds off its profits in 2008.
But it won’t free up any capital because Barclays is extending the new owner, Protium Finance LP, a $12.6 billion loan to finance the sale, and will keep the securities on its balance sheet for regulatory purposes. Loan interest payments to Barclays will come from the securities’ cash flows, and the loan will be secured on the assets.
In exchange for what the bank hopes will be a less-volatile investment, Barclays is giving up any potential upside from securities that in many cases are still making interest payments, suggesting that it expects those payments to tail off over time and that capital wouldn’t be fully repaid when the securities mature.
Group Finance Director Chris Lucas said Barclays has been collecting between $100 million and $120 million each month in interest payments on the portfolio, while the interest rate on the loan will bring in annual returns of less than $400 million.
Now to the FDIC:
The FDIC has signed a bid confirmation letter with Residential Credit Solutions (RCS), the winning bidder in a pilot sale of receivership assets that the FDIC is conducting to test the funding mechanism for the Legacy Loans Program (LLP). The pilot sale was conducted on a competitive bid basis, and final bids were received on Monday, August 31, 2009. A total of 12 consortiums bid to purchase an ownership interest in a limited liability company (LLC), to which the FDIC will convey a portfolio of residential mortgage loans with an unpaid principal balance of approximately $1.3 billion owned by the FDIC as Receiver of Franklin Bank, SSB, Houston, Texas. The pilot sale involves financing offered by the receivership to the LLC using an amortizing note guaranteed by the FDIC. Bidders for the pilot sale were given the chance to bid two different leverage options, 6-to-1 or 4-1, or to submit a cash bid for a 20 percent ownership interest.
The upshot is bidding on distressed assets is going gangbusters. Some auctions of distressed portfolios are seeing literally dozens of bids. As I wrote this morning, what a difference a year makes.
