Canada: U.S. Treasury Seeks To Enhance Credit Market Liquidity Through Public-Private Investment Program And Term Asset-Backed Securities Loan Facility

On March 23, 2009, the United States Department of the Treasury ("Treasury") announced details of its Public-Private Investment Program. Similar to the previously announced Term Asset-Backed Securities Loan Facility ("TALF"), also discussed below, the Public-Private Investment Program is intended to increase the availability of credit in the U.S. economy by facilitating purchases of troubled assets from eligible U.S. financial institutions.

The Public-Private Investment Program is comprised of two main elements:

  • the Legacy Loans Program, to purchase troubled residential and commercial real estate loans ("legacy loans"); and
  • the Legacy Securities Program, to purchase mortgage-backed and consumer credit-backed securities issued prior to 2009 ("legacy securities").

The program may include additional asset classes in the future depending on market demand.

A critical component of the Public-Private Investment Program is the use of public funding, in the form of both debt and equity investments, to help bridge the gap between the price expectations of buyers and sellers. Treasury anticipates generating US$500 billion in purchasing power (with the possibility of increasing to US$1 trillion) to acquire legacy assets by using private capital and US$75 billion to US$100 billion in previously announced Troubled Assets Relief Program ("TARP") capital (to come from the US$700 billion allocated to TARP under the Emergency Economic Stabilization Act (the "EESA")).

It is expected that Treasury will elaborate on many additional details of the Public-Private Investment Program in due course.

Legacy Loans Program

Under the Legacy Loans Program, newly formed public-private investment funds ("Legacy Loan PPIFs") are to purchase legacy loans from FDIC-insured depositary institutions ("Participating Banks") in auctions overseen by the U.S. Federal Deposit Insurance Corporation (the "FDIC"). Participating Banks may not be foreign owned or controlled. While private investors will control Legacy Loan PPIFs, the FDIC will oversee the formation, funding and operation of these entities.

Treasury will provide up to 50% of the equity capital for each Legacy Loan PPIF (subject to yet-to-be-determined minimums) and private investors will bid for the opportunity to contribute the remaining equity capital. As required by the EESA, Treasury will receive an unspecified amount of warrants to acquire additional equity in each Legacy Loan PPIF.

Eligible private investors are expected to include financial institutions, individuals, insurance companies, mutual funds, publicly managed investment funds, pension funds, foreign investors with headquarters in the United States, private equity funds, hedge funds and other long-term investors. Treasury has yet to provide more detailed guidance as to the eligibility of foreign private investors. Private investors may, subject to FDIC approval, form groups prior to the beginning of the auction process. Legacy Loan PPIFs are likely to be structured as partnerships and treated as flow-through entities for U.S. Federal income tax purposes. Foreign investors may want to consider the use of corporate blockers to avoid U.S. return filing requirements.

Private investors are not permitted to participate in any Legacy Loan PPIF that purchases assets from any Participating Bank that either (i) is an affiliate of the investors or (ii) holds 10% or more of the aggregate private capital in such Legacy Loan PPIF. Legacy Loan PPIFs are to have a buy-and-hold investment strategy.

To supplement the private and Treasury equity investment, Legacy Loan PPIFs will issue non-recourse debt, guaranteed by the FDIC, to third-party private investors. FDIC-selected third-party valuation firms ("Valuation Firms") will analyze the legacy loan pools to determine the level of debt that the FDIC will guarantee, up to a maximum 6-to-1 debt-to-equity ratio, and the proposed financing terms and leverage ratios will be disclosed to potential bidders prior to bid submission. Consideration for legacy loans will consist of cash or a combination of cash and debt issued by Legacy Loan PPIFs to Participating Banks and guaranteed by the FDIC. Legacy loans purchased by Legacy Loan PPIFs will collateralize the FDIC guarantees. In consideration for FDIC guarantees, the FDIC will charge yet-to-be-determined annual guarantee fees based on the outstanding Legacy Loan PPIF debt balances. Legacy Loan PPIFs will be required to have committed financing in order to submit bids.

Participating Banks, working with their primary bank regulators, are to identify to the FDIC pools of eligible legacy loans to be auctioned. Eligible legacy loans (and the collateral supporting such loans) must be situated predominantly in the United States. Participating Banks must satisfy Treasury and the FDIC that the pools of legacy loans meet Treasury's and the FDIC's unspecified, agreed upon minimum requirements. Among other services, Valuation Firms will provide asset pool valuation advice to the FDIC. The FDIC will conduct the auctions for the private investor equity component of PPIFs, with bidders paying a refundable cash deposit of 5% of their bid value to participate in the auction. Bidders will reimburse the FDIC for expenses incurred in conducting the auctions as well as oversight expenses. Upon the FDIC's selection of a winning bid, the Participating Bank may accept or reject the bid. Debt and equity financing for each Legacy Loan PPIF will occur at the closing of each purchase.

Under both the Legacy Loan Program and the Legacy Securities Program (discussed below) each Legacy Loan PPIF and Legacy Securities PPIF, among other things, must agree to waste, fraud and abuse protections to be specified by Treasury and the FDIC. Executive compensation restrictions, however, will not apply to passive private investors in Legacy Loan PPIFs and Legacy Securities PPIFs, although it is unclear whether executive compensation restrictions will apply to non-passive private investors.

Legacy Securities Program

Under the Legacy Securities Program, Treasury will select approximately five potential private sector asset managers ("Fund Managers") to manage legacy securities PPIFs ("Legacy Securities PPIFs"). Treasury requirements for such Fund Managers include headquarters in the United States, a minimum of US$10 billion in market value of legacy securities under management, demonstrated capacity to raise at least US$500 million in private capital, demonstrated legacy securities investment experience and demonstrated operational capacity to manage PPIFs consistent with Treasury's investment objectives. Fund Manager applications are due April 10, 2009, and preliminary Treasury approval of Fund Managers is expected by May 1, 2009. Final Treasury approval of a Fund Manager will be dependent on the applicant obtaining at least US$500 million in private capital commitments in a limited period of time after receiving preliminary approval. The criteria for Fund Managers are such as to exclude all but a very limited number of market participants.

Private investors will form a private investment vehicle (the "Private Vehicle") to be managed by the Fund Manager and will invest in a Legacy Securities PPIF side-by-side with Treasury. As required by the EESA, Treasury will receive an unspecified amount of warrants in the Legacy Securities PPIFs (although the amount of Treasury senior debt financing will in part determine the terms and amounts of such warrants). Although Treasury has not yet provided eligibility criteria for private investors, it has indicated the importance of including retail investors.

As with Legacy Loan PPIFs, Legacy Securities PPIFs are likely to be structured as partnerships and treated as flow-through entities for U.S. Federal tax purposes, and foreign investors may want to consider the use of corporate blockers to avoid U.S. return filing requirements.

Treasury has identified a long-term buy-and-hold strategy as the Legacy Securities PPIF investment strategy, although Treasury will consider other limited trading investment strategies. The term of a Legacy Securities PPIF may not exceed 10 years without Treasury consent. However, Treasury may cease funding its undrawn equity and debt capital commitments to any Legacy Securities PPIF at any time without further obligation.

Private investors may receive voluntary withdrawal rights in the Private Vehicle, subject to certain Treasury restrictions, including a prohibition on withdrawals prior to the third anniversary of the first investment by the Private Vehicle. However, Treasury will not provide debt financing to any Legacy Securities PPIF that has a Private Vehicle that gives private investors the right to withdraw.

So long as private investors do not have withdrawal rights, Fund Managers may obtain non-recourse Treasury senior debt secured by legacy securities in an aggregate amount not to exceed 50% of total Legacy Securities PPIF equity capital, although requests for debt financing up to 100% will be considered. Purchases of legacy securities may also be financed through the TALF, other Treasury programs or private sources so long as Treasury equity capital and Private Vehicle capital are leveraged proportionately with private debt financing. Senior debt financing will accrue interest at a yet-to-be-determined annual rate and will be payable in full on the termination date of the Treasury capital term. The TALF will be expanded to permit non-recourse loans to be made to Legacy Securities PPIFs to fund legacy security purchases. The criteria and terms of such TALF loans have not been specified. Senior debt will be structurally subordinated to any TALF loans extended by the Federal Reserve Bank of New York ("New York Fed").

Fund Managers may charge management fees, and such fees will be considered by Treasury in Fund Manager applications. Fixed management fees equal to a percentage of equity capital contributions for invested equity capital will be acceptable to Treasury and will be paid, together with Treasury's share of Legacy Securities PPIF expenses, solely out of Legacy Securities PPIF distributions. Treasury will consider, and has requested suggestions regarding, various structuring matters, including recycling realized capital.

Legacy Security PPIFs will be permitted to purchase eligible legacy securities. Eligible legacy securities are expected to include non-agency residential mortgage-backed securities that were originally rated AAA and commercial mortgage-backed securities and consumer credit asset-backed securities that are rated AAA. Legacy Securities PPIFs may only purchase legacy securities from financial institutions that Treasury is permitted to purchase assets from under the EESA. A Legacy Securities PPIF is not permitted to purchase legacy securities from any seller that is (i) an affiliate of its Fund Manager, (ii) another Fund Manager or its affiliate or (iii) a private investor that has made 10% or more of the aggregate private capital commitments obtained by such Fund Manager. Additional terms of the legacy securities program will be informed by Treasury discussions with Fund Managers. Treasury did not announce how eligible legacy securities will be identified or purchased under the Legacy Securities Program.


Several weeks prior to Treasury's announcement of the Public-Private Investment Program, Treasury and the Federal Reserve Board announced the launch of TALF, which began operations on March 17, 2009. TALF is intended to increase the availability of credit in the U.S. economy by unfreezing markets for asset-backed securities. The Federal Reserve has authorized the Federal Reserve Bank of New York (New York Fed) to lend up to $200 billion (subject to an increase to up to $1 trillion) under TALF.

The New York Fed will provide non-recourse loans to "eligible borrowers" who own "eligible collateral". Eligible borrowers include any (i) business entity organized in the United States that conducts significant activities or operations in the United States (or a U.S.-organized subsidiary of such entity), (ii) a U.S. branch or agency of a foreign bank (other than a foreign central bank) that maintains reserves with a Federal Reserve Bank, (iii) a U.S insured depository institution or (iv) an investment fund (which includes pooled investment vehicles such as hedge funds and private equity funds, and any vehicle that primarily or exclusively invests in eligible collateral and borrows from TALF) that is organized in the United States and managed by an investment manager with a principal place of business in the United States. However, a borrower may not be controlled by a foreign government or managed by an investment manager controlled by a foreign government.

Eligible collateral includes U.S. dollar-denominated cash (i.e., non-synthetic) asset-backed securities that have the highest long-term or short-term investment-grade rating from at least two major nationally recognized statistical rating organizations ("NRSROs") (i.e., Fitch, Moody's and Standard & Poor's) and do not have a credit rating below the highest investment-grade rating from a major NRSRO. U.S. dollar-denominated cash asset-backed securities that are, or for which all of the underlying credit exposures are, fully guaranteed as to principal and interest by the U.S. government are also eligible collateral. The underlying credit exposures must be auto loans, student loans, credit card loans, equipment loans or leases, floorplan loans, small business loans guaranteed by the U.S. Small Business Administration or receivables related to residential mortgage servicing advances, although the classes of acceptable credit exposures may be expanded over time. The underlying credit exposures must not include exposures that are themselves cash or synthetic asset-backed securities, and the expected life for credit card, auto, equipment, floorplan or servicing advance receivables loan asset-backed securities cannot exceed five years. Eligible asset-backed securities must be issued on or after January 1, 2009, with limited exceptions for certain asset classes, and at least 95% of the credit exposures underlying eligible securities must be to U.S.-domiciled obligors.

TALF loans will equal the lesser of par or market value of the eligible collateral, less a haircut of from 5% to 16% depending on the type and expected life of the security. However, if the pledged security has a market value above par, the New York Fed will lend an amount equal to market value – subject to a cap of 110% of par value – minus the haircut. The minimum TALF loan amount is $10 million, and there is no maximum loan amount nor any limit on the number of loans an eligible borrower may request. Borrowers may choose either a fixed interest rate (generally 100 basis points over the three-year LIBOR swap rate) or a floating interest rate (generally 100 basis points over 1-month LIBOR) on each TALF loan, but fixed rate collateral must be pledged against a fixed rate loan and floating rate collateral against a floating rate loan. Interest rates on TALF loans benefiting from a government guarantee will be lower. TALF loans will be secured by a pledge of the eligible collateral and will have three-year terms.

Borrowers may participate in TALF only through primary dealers approved by the New York Fed. Executive compensation restrictions will not apply to TALF participants. TALF loan funds will be disbursed on one day each month through the end of 2009, unless the program is extended by the Federal Reserve. The first TALF loan funds were disbursed in March.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions