Publications

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Yesterday the United States Department of the Treasury (Treasury) released additional guidance for potential investors and fund managers interested in participating in the Legacy Securities portion of the Public Private Investment Program (PPIP) initially announced on March 23, 2009. A full description of the Public-Private Investment Program can be found here.

Yesterday's Treasury guidance only addresses the Legacy Securities program and includes additional Frequently Asked Questions and a revised version of the Legacy Securities Summary of Terms (Revised Summary of Terms) and Application for Private Asset Managers (Application), which can be found here. Below is a summary highlighting certain of the key provisions of the updated Legacy Securities program. The definitions of any capitalized terms not defined in this Alert are set forth in the Revised Summary of Terms.

Deadline Extension and Method of Submission

The deadline of the Application has been extended from April 10, 2009 to April 24, 2009 at 5 PM ET. Treasury now expects to inform applicants regarding preliminary qualification no later than May 15, 2009 (rather than the prior deadline of May 1, 2009). Find the updated application here. Treasury requests that all applications be submitted in PDF form via email only.

Clarifications to Application

Treasury has clarified certain aspects of the Application. In the tax considerations section, the request for proposals from applicants for efficient tax structuring for Treasury has been removed and replaced by language related to intended tax consequences applicable to private investors only.

Possible Flexibility on Fund Manager Pre-Qualification Criteria

As set forth in the Summary of Terms released on March 23, 2009, Fund Managers will be pre-qualified based on criteria that are anticipated to include various eligibility requirements, among these a proven ability to raise capital, demonstrated experience investing in Eligible Assets and minimum threshold of Eligible Assets under management. In the additional Frequently Asked Questions released on April 6, 2009, Treasury notes that these criteria will be viewed on a holistic basis, and it is anticipated that failure to meet any one criterion will not necessarily disqualify a proposal.

Troubled Assets Relief Program (TARP) Recipient Participation

Treasury has stated that it seeks proposals from a range of participating institutions to be pre-qualified as Fund Managers, including TARP recipients, and will consider the overall financial health and stability of the applicant as a potential factor in its evaluation.

Additional Pre-Qualified Fund Managers

As previously set forth in the Summary of Terms released on March 23, 2009, Treasury may select more than five pre-qualified Fund Managers, depending on the number of applications deemed to be qualified.

Public List of All Pre-qualified Fund Managers

Treasury expects to provide a public list of the pre-qualified Fund Managers.

Opening the Legacy Securities Program to Smaller Fund Managers

Treasury is considering opening the Legacy Securities program to smaller Fund Managers (e.g., those with less than $10 billion (market value) of Eligible Assets under management) after the initial pre-qualification of Fund Managers.

Opportunities for Small, Veteran-, Minority-, Women-Owned Private Asset Managers

As set forth in the Summary of Terms released on March 23, 2009, Treasury will encourage small, veteran-, minority- and women-owned private asset managers to partner with other private asset managers, if necessary, in order to meet the criteria identified for assets under management and ability to raise capital. Yesterday Treasury set forth the following potential ways these firms can partner:

• Small, veteran-, minority- and women-owned business can team up with any pre-qualified Fund Manager, either as an asset manager, an equity partner, a fund-raising partner or other capacity including providing such services as trade execution, valuation and other important financial services.
• Small, veteran-, minority- and women-owned businesses may partner prior to or after the application deadline and/or the selection of the pre-qualified Fund Managers.

Treasury has stated that it looks forward to innovative proposals from Fund Managers incorporating the foregoing or other potential options.

Pre-Qualified Fund Managers Required to Raise a Minimum Level of Private Capital

In the initial group, pre-qualified Fund Managers will be expected to raise at least $500 million of private capital. It is anticipated that each Fund Manager will have 12 weeks (after being selected as a pre-qualified Fund Manager) to complete the fund raising process and close the Fund. If a Fund Manager fails to raise $500 million of private capital, that Fund Manager would not be eligible for the equity match or debt financing provided by the Treasury. However, as discussed above, Treasury currently anticipates opening the program to smaller Fund Managers in the future, which may result in a lower minimum private capital raising requirement.

Retail Investors

Treasury has stated that it looks forward to receiving innovative proposals from Fund Managers to raise equity capital from retail investors.

Possible Expansion of Eligible Assets

The Legacy Securities program is limited to eligible assets that include non-agency commercial backed and residential mortgage backed securities issued prior to 2009. However, Treasury will solicit comment from Fund Managers regarding potential expansion of the Legacy Securities program at a later date to include other asset classes.

Interaction with the Federal Reserve Term Asset-Backed Securities Lending Facility (TALF)

The Legacy Securities program will work together with the TALF program for legacy assets, but they remain separate. The Legacy TALF will be a Federal Reserve lending program with its own set of terms, conditions and eligibility requirements. Legacy TALF will be made available to investors (who meet Federal Reserve eligibility standards) whether or not they participate in the Legacy Securities program. Pre-qualified Fund Managers in the Legacy Securities program may choose to utilize leverage pursuant to the Legacy TALF program, when it becomes operational. A qualified investor utilizing Legacy TALF will do so on the same terms and conditions as a Legacy Securities PPIP investor utilizing Legacy TALF.

Debt Financing

As set forth in the Summary of Terms released on March 23, 2009, each Fund Manager will have the option to obtain for each Fund Treasury debt financing in an aggregate amount of up to 50 percent of a Fund’s total equity capital; provided that Treasury debt financing will not be available to any Fund Manager in respect of a Fund in which the private investors have voluntary withdrawal rights. Treasury will consider requests for Treasury debt financing of up to 100 percent of a Fund's total equity capital subject to restrictions on asset level leverage, withdrawal rights, cash flow priority, disposition priorities and other factors Treasury deems relevant. In addition, Funds may also finance the purchase of Eligible Assets through Legacy TALF, any other Treasury program or debt financing raised from private sources--but Treasury’s equity capital and Investor’s private capital must be leveraged proportionately from such private debt financing sources.

Treasury is currently considering the following three options to aid Fund Managers in the analysis of capital structure alternatives:

• No Treasury debt financing; leverage is limited to Legacy TALF, any other Treasury program or debt financing raised from private sources.
• Leverage limited to senior secured Treasury debt financing (up to 100 percent of a Fund’s total equity capital); no additional leverage permitted.
• Unsecured Treasury debt financing (up to 50 percent of a Fund’s total equity capital) and additional leverage through TALF, any other Treasury program or debt financing raised from private sources, subject to total leverage requirements and covenants to be agreed upon.

Terms of the senior secured and unsecured Treasury debt financing (interest rate in particular) should appropriately reflect total Fund leverage and current market conditions.

Treasury’s Equity Investment

Treasury anticipates providing equity capital up to 100 percent of the private capital raised by the Fund Manager of the Legacy Securities fund. However, the ultimate percentage will be determined on a case-by-case basis. Treasury currently anticipates that the total Treasury debt and equity investment per Legacy Securities fund will be limited to a level to be determined after Treasury’s review of all Fund Manager proposals.

Long-Only Funds; Hedging Investment Positions

Treasury expects the Fund Managers to achieve the Investment Objective set forth in the Summary of Terms by following a predominantly long-term buy and hold strategy. As such, the Legacy Securities PPIFs will be long-only investment funds. Treasury will consider PPIF-level hedging proposals as appropriate such as interest rate hedging programs.

Warrants

The additional guidance provides that the terms and amounts of warrants will be determined in part based on the amount of Treasury debt financing taken and will be evaluated on a case-by-case basis.

Restrictions on the Acquisition and Sale of Eligible Assets by Fund Managers

A Fund Manager may not, directly or indirectly, acquire Eligible Assets from or sell Eligible Assets to its affiliates, any other Fund Manager or any private investor that has committed at least 10 percent of the aggregate private capital raised by such Fund Manager.