WASHINGTON — For failed-bank bidders, the end of the sweetheart deal may be at hand.

During the financial crisis, the Federal Deposit Insurance Corp. has routinely guaranteed 80% of the potential losses on assets at scores of failed banks, a bargain for those trying to enter or expand their reach in the banking market.

But in one of its most recent deals — TD Bank's purchase of three Florida banks on April 16 — the FDIC agreed to cover only half the losses, a significantly less generous arrangement.

Though an 80% guarantee is likely to remain the norm in the near term, the FDIC is expected to do more deals like the one with TD Bank.

"We would expect that as the market continues to improve the terms of the loss-share transactions will change and that the amount of risk an acquirer will be willing to assume will increase," said James Wigand, deputy director in the FDIC's division of resolutions and receiverships.

Being able to strike tougher deals is something of a mixed blessing for the FDIC.

On the one hand, it means asset values are improving and that the agency is likely to attract higher bids, which in turn would lessen the cost of failures to the Deposit Insurance Fund. On the other, many bargain-hunters may be turned off by such terms, leaving fewer bidders for failed banks.

"The more risk associated with the acquisition, the more it may make some private investors less willing to bid," said Gregory Lyons, a partner at Debevoise & Plimpton LLP.

TD Bank, not the FDIC, suggested the 50%-50% loss split. The $140 billion-asset subsidiary of Canadian-owned Toronto-Dominion Bank saw the Florida banks as crucial to its plans to expand in the state and wanted to offer a very competitive bid to ensure it won, experts said. Reducing the potential cost to the FDIC was a way to make the deal attractive to the agency.

It was the second time in recent weeks that the FDIC has trimmed the amount of its guarantee. Last month, it announced it would no longer offer a 95% guarantee once losses exceeded a threshold.

"To the extent that we see other bidders being aggressive like that, then it does reflect a shift in buyers' attitudes towards the assets that they're assuming," said Kevin Stein, a managing director in Friedman, Billings, Ramsey Group Inc.'s FBR Capital Markets and a former associate director in the FDIC's resolutions division.

But some said private-equity investors and others may be turned off as this trend continues in failed-bank deals.

"Their interest will diminish," Jeffrey Gerrish, a former FDIC counsel and now a lawyer at Gerrish McCreary Smith in Memphis, said of private investors.

Some bidders have already lost interest, he said, since the agency removed the prospect of 95% coverage. "They're pretty much risk-averse. When this first started, the loss-sharing was great for them. … As the deals become less attractive from a return standpoint, these folks will find other places to put their money," he said.

Kip Weissman, a partner in Luse Gorman Pomerenk & Schick, said the 80% coverage is an attractive option for investment teams looking to enter commercial banking but that more conservative loss-sharing may work only for established banking players.

A 50-50 loss-sharing agreement "may not be the template for all deals, but what it says is, if there's a competitive deal then you may have some buyers that take a little more risk," he said. "It really changes the economics for various classes of bidders, especially private-equity. When you get an 80% guarantee of something that you bought for 60% [off the purchase price], you have a guaranteed win. You're guaranteed to make money. The significance of this is, now you're no longer guaranteed."

Whereas a traditional bank may be willing to exchange higher short-term risk for the long-term growth of assuming core deposits, Weissman said, a private-equity firm needs the asset discount to make gains. "They're not as focused on the liabilities," he said. "They're really thinking about these assets and how they can slice and dice them and sell them. It makes the economics different."

In addition to the $3.42 billion-asset Riverside National Bank in Fort Pierce, Fla., TD Bank also bought $393 million-asset First Federal Bank of North Florida in Palatka and $90 million-asset AmericanFirst Bank in Clermont.

The assets covered by the loss-sharing agreement for all three institutions total $2.2 billion. Under the deal, the FDIC agreed to cover 50% of the losses up to $442 million at Riverside National, after which the agency would cover 80%. It is covering 50% of the losses on the first $58 million at First Federal and $18 million at AmericanFirst.

The FDIC's loss-sharing deals have become a regular feature in the past two years as the number of failures has spiked and the agency has tried to lure private-sector bidders for their damaged portfolios.

But observers said that, as the market recovers, the agency's loss-sharing agreements may start to cover even less, to a point where certain failed-bank deals could lack any loss guarantee whatsoever. By law, the FDIC must accept the bid that would be the "least-cost" resolution of a failure.

"They'll go as low as the market will bear," said Gerrish. "They have a statutory mission to do what's least costly. My guess is, they're testing to see where that point is. It probably will vary from deal to deal depending on the size of the target and the size of the acquirer and what the actual dollar risk is to an acquirer versus their capital account."

Ralph "Chip" MacDonald 3rd, a partner in the Jones Day law firm in Atlanta, said the loss-sharing agreements may also taper off as other tactics the agency has recently employed bear fruit, including forming public-private partnerships to buy assets from receiverships after a bank has failed.

"They're getting more confident that they can dispose of those through their structured loan sales," MacDonald said. "If they can dispose of them and still meet their least-cost test, they're less concerned about using loss-sharing. … They have alternatives that they feel are working pretty well on resolving assets."

The FDIC's Wigand agreed.

"We always test a bid at the time of resolution against what we would expect to realize from a post-receivership asset sale," he said. "We have raised the bar, so to speak, of what is acceptable at" the point of "resolution to pass the cost test. As a result, if a bid does not exceed the cost of liquidation at the time of resolution, then we have other channels which we will use to market and sell the asset portfolio, and the prices that we've obtained in those channels we feel more comfortable and confident about."

But those solutions may not necessarily include private equity, MacDonald added.

"Some of the PE people feel like the market for failed banks is a little saturated at the moment, in that there's so much interest it's not the opportunity it once was," he said.

Wigand said as the market improves and the outsized profits investors could earn from a failed bank at the height of the crisis are unattainable, traditional bidders will have the upper hand on private-equity.

"Private-equity buyers will have to adjust their expected rates of return to be competitive with strategic buyers," said Wigand.

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