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Strategies for Real Estate Debt Market Revival

Learn about Citigroup's keys to restarting real estate debt capital markets, including PPIF and TALF programs, to restore lending confidence. Understand the processes, leveraging, and returns for investors.

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Strategies for Real Estate Debt Market Revival

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  1. CREMidyear 2009 Meetings “Examining the Outlook for Lending” Ralph W. Rose Citigroup

  2. Keys to Restarting the Real Estate Debt Capital Markets • Clean up the System • Restore Ratings Credibility • Bolster Securitized Products Structure • Simplify and Create Transparent Products • Address Regulatory and Accounting Uncertainty • Restore Demand

  3. Seller Asset Pool PPIF Cash flow Waterfall Loans & Saving Associations FDIC Guaranteed Debt Loan 1 Loan 2 Principal US Banks Losses Tsy Equity Investor Equity Credit Unions Banks evaluate eligible asset pools • FDIC will • oversee initial • due diligence • Third party valuation • to determine appropriate • leverage Auction held to receive competitive bids from the private investors Participant bank has option to accept/ reject bid PPIP- Legacy Loans Program • The equity portion will be shared proportionately by Private Investor and US Treasury. The debt portion will be raised by issuing FDIC guaranteed debt (max D/E = 6:1). • Cum losses above (100-Market Value) will be first allocated pro-rata to the equity tranche and then to the debt portion. • Principal Prepayments are allocated pro-rata (based on original leverage structure) • Interest is used to pay Gfee, any admin fee and the debt coupon. Remaining shared between the equity investors. • Equity ROI: • Asset Pool Yield ~ 8%; FDIC Debt yield ~ 5%; Other fee ~ 1%; Leverage = 6:1 • Equity ROI = ((8% - 6%)*Leverage + 8%) = 20%

  4. PPIP- Legacy Securities Program Seller Asset Pool PPIF Cash flow Waterfall TALF Insurance Companies MBS 1 MBS 2 Tsy Loan Principal US Banks Losses Tsy Equity FM Equity (from Pvt. Investors) Mutual Funds • Fund Managers will raise equity capital from private investors and receive matching Tsy equity funding. Tsy also provides loan amount of up to 50% (max 100%) of funds total equity. Additional TALF funding may be available. • Any writedowns above (100-Market Value) will be first allocated pro-rata to the equity tranche, then to the Tsy loan and then to the TALF funding. • Fund cashflows are used to pay Tsy Fee, management fee etc; Interest on Tsy and TALF loan. Remaining shared between the equity investors. Principal Prepayments are allocate pro-rata (based on original leverage structure). • Equity ROI: • MBS Yield ~ 20%; Tsy Loan rate ~ 4%; Other fee ~ 1%; Leverage = 1:1 (assuming no TALF) • Equity ROI = ((20% - 5%)*Leverage + 20%) = 35% FM raises at least $500M • Tsy matches • equal investments • FM can take 50% • to 100% of equity • in Tsy loan • and/orTALF Funding FM Managers control the Process of asset selection, pricing and liquidation Proceeds received by a Fund will be divided between Tsy & Private Investors based on equity contributions

  5. PPIF & TALF Size Relative to the ABS Market Source: Citi. As of January 22, 2009. Agency estimated losses relate to the underlying collateral, not the actual securities. • PPIF and TALF combined up to $2 trillion scope represents a significant portion of the ABS universe.

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