AMERICAS NEWS: Silver lining

Ever since the Federal Deposit Insurance Corporation (FDIC) closed its first structured sale of failed bank assets in the summer of 2008, the US banking regulator has been on a steep learning curve. Intent on learning the lessons of the Resolution Trust Corporation in the 1990s, the FDIC has carefully orchestrated the sale of assets to private investors, ensuring at every step that taxpayers also enjoyed the upside of loan pools being worked out.

In April, however, the FDIC broke its own mould when it closed on the sale of the second Silverton Bank portfolio to New York-based Square Mile Capital Management and The Blackstone Group. Rather than retaining a majority or equal interest in the pool of 45 hotel mortgages, as traditionally has been the case, the FDIC this time opted to sell the portfolio wholesale, without any government financing.

Part of the reason for the change reportedly was the improving nature of the US capital markets, but the appeal of the first Silverton portfolio, which Square Mile also acquired in June 2010 for 81 cents on the dollar, also is believed to have been a factor. The first pool of 57 loans sold after attracting 214 bids from 37 different groups, according to the FDIC.

Silverton II was little different. Although involving fewer bidding rounds than the first portfolio, Square Mile reportedly faced competition from the likes of Five Mile Capital Partners in collaboration with ex-Square Mile executive Charles Toppino and Alvarez & Marsal, as well as Starwood Capital Group and Lone Star. Square Mile’s winning bid of roughly 80 cents on the dollar was within a few “basis points” of the next best offer, according to people familiar with the matter.

Square Mile co-founder Craig Solomon refused to comment on financial details, but he admitted the process was “very competitive.” In returning to the FDIC bidding table, it was the make-up of the Silverton II loans that once again proved compelling, he said. In contrast to many other FDIC structured sale deals, the Silverton II portfolio comprised just 45 loans secured by properties in one asset class rather than pools of up to 5,400 loans covering mortgages on everything from raw land, offices and partially completed condos to gas stations, churches and car washes. Such a narrowly-focused pool of assets has led some to believe that the wholesale disposition route will be a limited feature of future FDIC structured sales. In addition, roughly 70 percent of the Silverton II first mortgages, which have a face value of $385 million, are classed as performing.

“Silverton was a unique portfolio mainly because it involves a single asset class as security and comprises a manageable number of larger, chunky loans, permitting hands on asset management,” Solomon said. Splitting the equity investment of a rumoured $300 million with Blackstone, Square Mile will manage the day-to-day workout of the loans as it talks with borrowers about restructurings, discounted pay-offs and, in some cases, taking back the assets. “The question as these loans mature over the next two to three years is whether they can be refinanced given the amount of leverage and the state of the capital markets,” he explained. “In some cases that won’t happen, but in many others financing will be available or, by dint of borrower motivation, we will come to a solution.”

Solomon said hospitality would remain a focus for Square Mile, which has acquired more than 100 individual pieces of debt on US hotels over the past 15 months. Retail and multifamily, as well as office in select markets, also are sweet spots for the firm as it continues to invest its $806 million Square Mile Partners III fund, which closed in 2009.

When it comes to the acquisition of first mortgage debt and borrower recapitalisation opportunities, Soloman believes the outlook is good. “Given the amount of maturing debt still on the balance sheets of lenders and the government and the improving but not super-charged CMBS market, there remains a liquidity gap in many asset types and markets,” he said. “It’s not a cycle that is going away anytime soon.”