Flexibility is key in the face of the crisis, and it’s something the US government is learning fast as it works through the legacy securities part of its Public-Private Investment Program (PPIP). First unveiled in July, PPIP set in place requirements for its nine pre-selected managers to raise at least $500 million of private capital, with a first close expected by the end of September.
Those rules though became increasingly flexible last month, when Marathon Asset Management became the eighth manager to hold a first close on its PPIP fund – well after the 12-week deadline and raising just $400 million, according to a Bloomberg report. Oaktree Capital Management is the only manager not to have held a first close, according to a search of US Treasury press releases, and declined to comment publicly on its activities.
The problems we face are both long and deep, but the [government] programmes are the kindling for the fire
Indeed, the investor interest in the PPIP funds has been strong, according to people familiar with the matter. PPIP has helped tighten spreads on CMBS and RMBS – from their peak of 15 percent over swaps in February to between 3.5 percent to 5 percent over swaps at the end of November – with deals now starting to close, particularly those related to residential mortgage-backed securities.
And with expected returns of around 20 percent levered, and between 13 percent to 16 percent unlevered, there is confidence the government-led programme will generate plenty of opportunities for fund managers, their investors and the US taxpayer.
To date, eight managers, including Angelo Gordon and GE Capital Real Estate; AllianceBernstein; BlackRock; Invesco; Marathon Asset Management; RLJ Companies and Western Asset Management; the TCW Group; and Wellington Management Company have completed first closes raising a total of $5.07 billion of private commitments. The private capital will be matched by a further $5.07 billion of government funding and then doubled with Treasury debt capital to provide $20.26 billion of purchasing power.
Although industry professionals expect more flexibility to come from the government, particularly over the six-month deadline for a final close on PPIP funds, there is a growing sense PPIP – along with its cousin, the Term Asset-Backed Securities Loan Facility (TALF) – are doing the basic job of restoring confidence to the markets.
Indeed even TALF has started to generate positive talk in the industry, following the first issuance of new CMBS under the programme. The $400 million, five-year debt offering from retail REIT Developers Diversified Realty was reportedly so over-subscribed buyers didn’t end up using TALF financing for most of the AAA bonds.
A further 20 to 25 CMBS deals are now in the pipeline, another person familiar with the matter told PERE, with two banks already restoring their securitisation platforms. With debt holders facing potential losses of between $600 billion and $700 billion, according to market professionals, the scale of the problem is immense. But as one veteran remarked at the PERE Forum: New York last month: “The problems we face are both long and deep, but the [government] programmes are the kindling for the fire.”