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Nov 30, 2009

SERT Alert: November 2009

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New Commercial Real Estate Loan Workout Policy Statement Released

The Federal Financial Institutions Examination Council has released a policy statement (the “Policy Statement”) [1] with guidance on how financial institutions should conduct a prudent commercial real estate (“CRE”) loan workout.

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration and the Federal Financial Institutions Examination Council State Liaison Committee each have adopted the Policy Statement. As noted therein, the Policy Statement:

  • “[U]pdates and replaces existing supervisory guidance to assist examiners in evaluating institutions’ efforts to renew or restructure loans to creditworthy CRE borrowers.”
  • “[I]s intended to promote supervisory consistency, enhance the transparency of CRE workout transactions, and ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound borrowers.”
  • “[A]ddresses supervisory expectations for an institution’s risk management elements for loan workout programs, loan workout arrangements, classification of loans, and regulatory reporting and accounting considerations.”

The Policy Statement contains a list of factors that should be considered when a financial institution analyzes the repayment capacity of a borrower, evaluates a guarantee or assesses collateral values.

The Policy Statement contains several examples of hypothetical CRE loan workouts. These examples illustrate the application of the Policy Statement.

The Policy Statement may be found at: http://www.fdic.gov/news/news/financial/2009/fil09061a1.pdf

Brief Update on the TALF Program [2]

The TALF Program continues to be a significant source of credit for purchasers of commercial mortgage-backed pass-though securities (CMBS) issued before January 1, 2009.

On November 16, 2009, the TALF Program facilitated recovery of new-issue CMBS when $400 million of new commercial bonds were sold in connection with a facility underwritten by Goldman Sachs for Ohio-based developer Developers Diversified Real Estate Corp. $323 million AAA-rated five year notes, the first new-issue CMBS eligible for TALF funding, were met with strong investor interest and were priced at a yield of 3.807 percent (i.e., a 1.4 percentage point premium to the five-year interest rate swap benchmark, down from earlier guidance levels of 1.6 to 1.75 percentage points).[3]

The Federal Reserve Bank of New York (“FRBNY”) has confirmed the amounts of the various TALF Loans that have been made through October, 2009, namely $668,940,185.57 in total on July 16, 2009, $2,148,314,045.09 in total on August 20, 2009, $1,351,097,649.54 in total on September 17, 2009 and $1,930,574,358 in total on October 21, 2009.

In connection with the October 21, 2009 TALF Loan subscription, the FRBNY rejected five classes of CMBS as eligible collateral.[4] In so doing, and without providing further guidance, the FRBNY noted on its website that such CMBS were rejected based on:

  • “[The failure to meet] the explicit requirements specified for legacy CMBS in the TALF program terms and conditions,

    or

  • [T]he New York Fed’s risk assessment of the legacy CMBS, including an assessment of whether the stress value of the legacy CMBS exceeded the requested loan amount.”

Brief Update on the Legacy Securities Program [5]

As of November 5, 2009:

  • Seven of the nine pre-qualified firms designated to serve as fund managers under the Legacy Securities Program met the Program’s requirement to raise at least $500 million of committed equity capital from private investors.
  • Equity capital commitments from private investors for funds to be established under the Legacy Securities Program total $4.09 billion. Under the terms of the Legacy Securities Program, the United States Department of the Treasury (“Treasury”) will match, dollar for dollar, the $4.09 billion to be invested by private investors in the funds. Further, debt financing from the Treasury, in an amount of up to $8.18 billion (i.e., 100% of the total equity from private investors and the Treasury), will be made available to the funds. As a result, funds to be established under the Legacy Securities Program will have $16.36 billion of purchasing power.
  • Treasury anticipates that additional equity commitments will be secured by fund managers in the coming months, possibly resulting in a total of $40 billion in purchasing power for the funds to be established under the Legacy Securities Program.

[1] The Policy Statement was released on October 30, 2009.

[2] Details of the TALF Program may be found on our website, www.seyfarth.com, by clicking the SERT Alert/Strategic Economic Response Team icon.

[3] Information derived from the November 16, 2009 Reuters article entitled, “Developers Diversified ends CMBS Drought”.

[4] Significantly, the FRBNY rejected only one class of CMBS in July, 2009, only three classes in August, 2009 and none in September, 2009.

[5] Details of the Legacy Securities Program may be found on our website, www.seyfarth.com, by clicking the SERT Alert/Strategic Economic Response Team icon. The information contained in this section is derived from a statement issued by the Department of the Treasury on October 5, 2009.