No matter how bad the assets are performing, the Resolution Trust Corporation can be expected to make its first securitization of nonperforming loans an attractive investment, according to Brian Smith, executive vice president of the Savings and Community Bankers of America.
Given the RTC's previous successes in securitization, it will be able to construct a deal in which the return on the underlying assets is enough to cover the return on any securities backed by them, Smith said.
The RTC plans to sell its first securities backed by nonper-forming loans in the private market in September or October, according to Kenneth Bacon, head of the RTC's securitization program.
This program, which will be formally announced this week, will be followed a few months later by the launch of the RTC's Multiple Investor Fund, another securitization program for nonperforming loans that will be brought public.
"It's certainly an interesting approach and the RTC has been extremely conservative in reserving on its securitizations," Smith said. "Moreover, some of the most experienced people are involved as potential investors. The first deal is sure to be an attractive one."
The RTC's Series N (for nonperforming) is separate. It will differ from the Multiple Investor Fund, in which the RTC will securitize loans using funds from private-sector firms to create equity in the pool, Bacon said.
Both series will construct pools that hold both equity and debt. But while the Multiple Investor Fund win use private sector firms to provide part of the equity, the securities will be issued to the public. The first few issues of Series N will be privately placed, although the series could be brought public in the future, Bacon said.
Also, the capital structure in the Multiple Investor Fund will be more complex, and the RTC hasn't yet determined its equity position. The RTC's portion of the equity could range between 25% and 75%, depending on how the structure is set up. In Series N, the RTC plans to retain 75% of the equity.
The two programs address different issues, will attract different investors and will use different markets, Bacon explained. Because securitization of nonperforming assets is a new area, different approaches should be tried, he added.
The first issue in Series N is due before the end of the third quarter. Although the final amount of the issue has not been determined, the first pool will consist of between $200 million and $400 million in nonperforming assets. Lehman Brothers will lead-manage the "N," or nonperforming, series for the RTC.
The structure will differ from a typical mortgage-backed security, in which loans are simply pooled into a trust and payments are collected on the loans, Bacon said. Instead, the RTC's portfolio will be structured to hold both equity and debt. The debt will consist of securities issued from previously nonperforming loans that have been restructured to pay. The equity component will be assets held or funds obtained when assets are sold off by the RTC.
In this way, the RTC "leverages its equity balance," according to Bacon. It is not simply a matter of issuing debt, he said. The series is dcsigned so that the agency can liquidate its portfolio of nonperforming loans while retaining the "upside" potential in the assets. The portfolio of nonperforming assets requires active management, Bacon added. different from the more passive management of a typical mortgage-backed security.
Bacon did not specify the type or maturity of the notes to be issued in the privately placed Series N but said that they were in the "same genre" as the Multiple Investors Fund. The fund will have the capability of issuing different types of securities, with five- and seven-year notes mentioned by RTC officials at different times.
RTC President and CEO Albert Casey gave some details of the securitization program when speaking before the Thrift Depositor Protection Oversight Board recently. He said that RTC will set up a special purpose trust of triple-B-minus- and A-minus-rated five- to seven-year debt securities to be backed by nonperforming loans, of which 25% will be purchased by an asset manager, with the RTC retaining the balance-a reference to Series N.
Meanwhile, the first issues from the Multiple Investor Fund are not expected until December. In that series, private sector firms will provide between 25% and 75% of the equity needed. The RTC will also contribute an undetermined amount of equity. Two billion dollars in assets from failed thrifts, HomeFed Bank and Transohio, will be placed into one of the first pools. The RTC will select the private sector firms to participate shortly.