Treasury Department Provides Updated Guidance on Legacy Securities Public-Private Investment Program

January 1, 0001


The U.S. Department of Treasury (“Treasury”) yesterday released additional guidance regarding the Legacy Securities portion of the Public-Private Investment Program (“PPIP”) introduced on March 23, 2009. Under the Legacy Securities Program (the “LSP”), private fund managers selected by Treasury will establish public-private investment funds ("Funds”), in which Treasury proposes to invest equity capital alongside private investors as well as to provide debt financing to acquire, at least initially, non-agency residential and commercial mortgage-backed securities from eligible financial institutions. The LSP is intended to jumpstart the currently highly illiquid secondary markets for such legacy securities, in an effort to facilitate access to liquidity by banks and other financial institutions and stimulate the extension of new credit. Linked here is our memo dated March 24, 2009 summarizing the LSP and the PPIP and analyzing key issues for prospective private investors.

The most recent guidance from Treasury regarding the LSP addresses a number of key issues detailed below:

  • Fund Manager Applications Process: Treasury previously indicated that it would select up to five (though possibly more) private asset managers (the “Fund Managers”) to manage the Funds. The new guidance extends the deadline for the submission of applications by private asset managers from April 10, 2009 to April 24, 2009. In addition, Treasury has indicated that it now expects to inform applicants regarding preliminary qualification on or prior to May 15, 2009 (instead of May 1, 2009). Treasury also clarified that the evaluation criteria for Fund Manager selection will be viewed holistically and that, as a result, an applicant's failure to meet any one criterion will not necessarily disqualify its proposal to serve as fund manager.

  • Fund Manager Fundraising: In its March 23 announcement regarding the LSP, Treasury indicated that Fund Manager applicants would have a limited period of time from preliminary approval to raise at least $500 million of committed private equity capital before receiving final approval from Treasury. In addition, the anticipated time period for fundraising would be considered by Treasury in the Fund Manager selection process. Yesterday, Treasury clarified that it is anticipated that Fund Managers will have 12 weeks after being selected as pre-qualified Fund Managers to complete the fundraising process and close the Fund.

  • Debt Financing Options: The initial Summary of Terms regarding the LSP provided that a Fund Manager would have the option to obtain for its Fund secured non-recourse debt financing from the Treasury in an aggregate amount typically up to 50% of the Fund’s total equity capital, though Treasury debt financing could be extended to up to 100% of the Fund’s total equity capital. In its most recent release, Treasury indicated that it is currently considering the following three options to assist Fund Managers in the analysis of capital structure alternatives:

    • No Treasury Debt Financing — Leverage would be limited to “Legacy TALF” (the proposed expansion of the existing Term Asset-Backed Securities Loan Facility to legacy securities), any other Treasury program or debt financing raised from private sources

    • Leverage limited to senior secured debt financing from Treasury (up to 100% of a Fund’s equity capital), with no additional leverage permitted

    • Unsecured debt financing from Treasury (up to 50% of a Fund’s equity capital), with additional debt financing from Legacy TALF, other Treasury Programs or private sources, subject to total leverage requirements and covenants to be agreed upon

  • Potential Expansion of Eligible Assets: Treasury announced yesterday that, while eligible assets for the LSP will be limited initially to non-agency commercial and residential mortgage-backed securities issued prior to 2009 that were originally AAA-rated, Treasury intends to solicit comment from Fund Managers regarding the potential expansion of the LSP at a later date to include other asset classes.

  • Participation by Small, Veteran-, Minority- and Women-Owned Businesses: The initial release regarding the LSP indicated that, to ensure a diversity of participation, Treasury was encouraging small, veteran, minority- and women-owned private asset managers to partner with other private asset managers, if necessary, in order to meet the criteria for Fund Manager eligibility. In yesterday’s guidance, Treasury clarified that there are several capacities in which such firms may partner with Fund Managers, including as asset manager, equity partner, or fundraising partner or otherwise in connection with the provision of such services as trade execution, valuation, and other important financial services. Treasury also indicated that it will allow smaller firms to partner prior to or after the application deadline, including after the selection of the initial group of pre-qualified Fund Managers. Moreover, Treasury suggested that, in the Fund Manager selection process, it will consider whether and how potential Fund Managers make innovative proposals regarding the inclusion of small, veteran-, minority- and women-owned firms as partners.

  • Related Party Transactions: Although Treasury has yet to define the criteria for determining who will be regarded as an “affiliate” of a private investor, Treasury has now made clear that related party restrictions will only serve to bar a Fund Manager from, directly or indirectly, acquiring or selling eligible assets from or to its affiliates, any other Fund or any private investor that has committed 10% or more of the aggregate private capital raised by the Fund. This suggests that, by contrast to Treasury's earlier announcement, a Fund Manager may acquire or sell eligible assets from or to an affiliate of another Fund Manager.

Additional information regarding the LSP, including Treasury’s press release, the Revised Summary of Terms, the Additional FAQs, the Revised Application for Private Asset Managers, can be obtained as follows:

Press Release:

LSP Revised Summary of Terms:

LSP Additional FAQs:

Revised Application for Private Asset Managers:

PPIP webpage: