WASHINGTON -- The Resolution Trust Corp. plans to sell troubled assets from failed savings and loans by securitizing them - with money and expertise from private-sector partners.
The resulting preferred stocks and bonds, some of which will be overcollateralized to obtain high ratings from Moody's Investors Service and Standard & Poor's Corp., will then be offered for sale to banks and big investors.
'Multiple Investor Fund'
The bailout agency will launch the innovative program, dubbed the "multiple investor fund," next week when it selects a team of financial firms to ante up between 25% and 75% of the equity needed for the deal and begin pooling $2 billion of assets from HomeFed Bank and Cleveland-based Transohio.
Both are huge thrifts that were taken over by the RTC this summer. The securities are expected to come to market in December.
"I'm sky-high about this deal," said Lamar Kelly, the RTC's executive vice president for asset sales. "If this is successful, we will replicate this structure and use it repeatedly and go out of business at wrap speed."
The RTC has been securitizing pools of performing loans, becoming one of the largest issuers of mortgage securities in the process. But the agency has never securitized loans that are not being repaid on time, which is one reason it is seeking outside help.
The agency has had no problem attracting interest. It has been negotiating with six teams of companies that want in on the first deal, and will pick one after bids are submitted on Friday.
Companies are bidding as teams because the sponsor must provide working capital and workout expertise in addition to underwriting the securities.
The six teams are:
* Banc One Management and Consulting Corp with Morgan Stanley and a minority-owned investment banking firm, Glaves & Associates.
* GE Capital Corp. with Goldman, Sachs & Co., Kidder, Peabody & Co., and J.E. Robert Co., as asset management firm in Alexandra, Va.:
* Keystone Inc., owned by billionaire Robert Bass, with Merrill Lynch & Co. and Cargill Financial Services.
* SunAmerican, Los Angeles, with First Boston Corp. and Eastdil Realty.
* JMB Realty Corp., Chicago, with Bear, Stearn & Co. and First Nationwide Bank.
* Aldrich, Eastman & Waltch, Boston-based pension fund managers, with Midland Data Systems.
If more than one company submits an attractive bid, the RTC could select a second sponsor and start two deals at once, Mr. Kelly said.
He said the sponsors will be selected using three criteria: They must be able to work out the loans, bid high for the assets, and buy a big piece of the deal.
To illustrate how one of these multiple investor funds will work, here's a hypothetical example:
Assets with a book value of $2 billion are pooled from a group of failed thrifts. Due-diligence experts hired by the RTC put a current value on the loans of, say, $1.1 billion.
The companies selected to sponsor the fund have already bid a price for each category of loans in the pool, say 80% of the current price on mobile-home loans and 100% of the value on multifamily loans. Say the overall bid averages out to 90% of the current price of $1.1 billion, or $1 billion.
The sponsor and the RTC would both put equity in the deal. In this hypothetical case $200 million would come from the private-sector companies and $100 million from the agency.
The $700 million balance would come from institutional investors who buy securities backed by the loans.
About $300 million of the securities might be issued as five-to seven-year bonds with AA or AAA ratings. These bonds would pay a fixed interest rate, likely to average 110 to 120 basis points over government securities with similar maturities.
This debt would be rated investment grade because it would be repaid first and it is unlikely that $2 billion in loans could not generate enough cash to cover these investors.
The agency has been negotiating with six teams of companies.
In fact, the asset valuations are conservative, according to Michael Jungman, a vice president in the RTC's capital markets division. That means, recoveries on the loans are likely to be more than predicted.
This overcollateralized senior debt is expected to appeal to banks.
"We would certainly expect banks to be major buyers," said Mr. Jungman. "It will be high-rated, short- to medium-term debt."
The remaining $400 million in securities may take a variety of forms such as nonrated debt or preferred equity, he said. The private-sector sponsors will make that call.
But this second tier of securities will be paid back after the senior debtholders get their money. Thus, these securities are riskier and will carry a higher interest rate.