Legacy Securities Public-Private Investment Fund Program

On March 23, 2009, the Obama administration announced plans for two new federal programs designed to jump-start bank lending and securitization markets through unique public-private partnerships and committed up to $100 billion in TARP money to fund such programs.  Pursuant to the so-called “Legacy Securities Public-Private Investment Fund” program, private investors -- armed with debt financing and equity from the U. S. Department of the Treasury -- can acquire certain commercial and residential mortgage-backed securities directly from financial institutions, which would be held by a public-private investment fund (a “PPIF”) entered into by such private investors and the Treasury and run by a private fund manager.  The following are the general terms of the Legacy Securities program released thus far:

Eligible Fund Managers.  Only five private asset managers will be selected by the Treasury to manage the fund vehicles and applications for one of these coveted spots must be submitted no later than April 10, 2009 with preliminary approval to occur by May 1, 2009.  In order to be considered, a fund manager must show a minimum of $10 billion in assets currently under management and a demonstrated ability to raise $500 million in private equity capital.  After receiving preliminary approval from the Treasury, each fund manager must proceed to raise at least $500 million in private equity capital. The fund managers will control all aspects of the pricing and sale of the securities to the PPIF and the investment strategy of the PPIF with respect to the securities once acquired. Fund managers may charge fees to the private investors.

Eligible Financial Institutions. Any financial institution authorized to sell assets to the Treasury pursuant to the Emergency Economic Stabilization Act of 2008 is eligible to sell securities to the PPIF (e.g. banks, insurance companies, pension funds, mutual funds). However, the selling financial institution cannot be an affiliate of the fund manager running the PPIF in question (or any of the fund manager’s affiliates) or an affiliate of the holder of more than 10% of the private capital in the PPIF.

Eligible Assets.  In order to be approved for sale pursuant to this program, the securities must satisfy the following requirements:

(i) Non-agency commercial mortgage-backed securities (“CMBS”) or residential mortgage-backed securities (“RMBS”) issued prior to 2009 and rated AAA or better by two nationally recognized rating agencies and without such rating being based upon credit enhancement;

(ii) The pooled loans standing behind the securities must be directly secured by real property or other assets; and

(iii) The underlying assets standing behind the securities must be predominately located in the U.S.

Eligible Private Investors.  Private investors must be pre-approved by the Treasury to participate in this program, but requirements for eligibility have not yet been determined.  Private investors will be required to hold a minimum 50% equity position in the PPIF.

Formation of PPIF.  Although specific details on the formation of the PPIF and the respective rights of the private investors and the Treasury are yet to be promulgated, there is a requirement that the term of the PPIF not exceed 10 years. Private investors may have the right to voluntarily withdraw from the PPIF after the third anniversary of the PPIF’s first acquisition of securities but, if the private investors elect such withdrawal rights, the PPIF will not be eligible to receive debt financing from the Treasury.  The Treasury will not hold more than 50% of the equity in the PPIF and will receive warrants in return for its equity investment (the specific terms of such warrants are also unknown at this time).

Debt Financing by the Treasury.  In addition to its equity stake, the Treasury is authorized to offer non-recourse debt financing of up to 50% of the PPIF’s total equity capital to be secured by a lien on the securities purchased by the PPIF.  Alternatively, the PPIF may obtain financing from (1) the Federal Reserve Bank pursuant to a Term Asset-Backed Securities Loan Facility (“TALF”), (2) other Treasury programs or (3) a third party lending source.

Fees and Expenses.  The Treasury will have the right to receive management fees and reimbursement for its expenses in connection with the program, but such fees and expenses are to be paid only from of the Treasury’s share of equity capital.