The FDIC has put the finishing touches on a five-years-in- the-making plan to securitize its commercial real estate mortgages by issuing $761.4 million in asset-backed securities Aug. 10.
The offering was unique in that its guarantor is the Bank Insurance Fund, with no recourse to the government. However, reflecting renewed investor confidence in the health of the banking industry, the deal was over-subscribed by a large margin, according to Wall Street officials. It was cleared for secondary market trading Aug. 12 and some tranches were expected to trade at a premium, according to several Wall Street traders.
The deal was given a rating from Aaa to Baa3 by Moodys, depending on the tranche. Part of the success of the offering was that we were comfortable that the credit enhancement from the Bank Insurance Fund was credible and suitable for an AAA-rated security, said Tad Philipp, managing director for Moodys commercial mortgage finance unit.
A Wall Street official said the FDIC has no immediate plans for follow-through deals, but is pleased with the way the offering was handled and is likely to offer troubled assets again through the asset-backed securities route. The agency, fearful of Securities and Exchange Commission rules and inexperienced in what it can legally say, would not comment.
A key part of the deal is that the only credit enhancement is access to the Bank Insurance Fund for up to 32.5% of the value of the security. The agency put no money upfront to enhance the deal. And unlike most deals, investors will have to depend on an agency in-house counsel opinion that investors have access to the BIF as guarantor.
The offering was made on the day after the agency announced in its latest financial statement that the BIF has $17.5 billion in the till; there was concern in 1991 and 1992 that the government might have to step in to bail out the BIF as it had to do with the Federal Savings and Loan Insurance Corp. in 1989. But the industry has since turned around, due to a plunge in the number of troubled banks, a severe drop in agency reserving for potential insolvent banks and a tripling of deposit insurance assessment rates for insured institutions since 1989.
Other key components in the renewed financial health of the industry are lower costs of funds and a substantive increase in the value of troubled commercial real estate loans, which is how the industry got into trouble in the first place.
The FDIC is not aware of any available statutory or common law defenses that would permit it to avoid its obligations under the limited guaranty, the agency said in the offering statement. In connection with its delivery of the limited guaranty, the FDIC will deliver at closing an opinion of the acting general counsel to the effect that the limited guaranty constitutes a duly authorized, valid and enforceable obligation of the FDIC and that the FDIC is authorized to enter into and perform its obligations under the limited guaranty.
As the FDICs first entry into the mortgage-backed securities market, the program was modeled largely after the RTCs Remic program, all the way down to its required guaranty levels, which will be limited to a maximum of 32.5% of the principal amount of the collateral outstandingthe exact percentage rating agencies have required RTC Remics to maintain for an investment-grade rating.
The first issue, FDIC Remic Trust 1994-C1, consists of $264 million of floating-rate Class I certificates and $497.4 million of fixed- rate Class II certificates. The certificates include a limited FDIC guaranty provided solely by the bank insurance fund against credit losses and other shortfalls because of credit defaults.
The loans backing the certificates were acquired by the FDIC as receiver for the now-defunct American Savings Bank, of White Plains, N.Y., which loans made up roughly 24% of the issue, and Seamans Bank for Savings, of New York, which loans made up about 11%. No more than 3% of the issues mortgages were acquired from any single depository institution.