Bidding on the $33 billion of Signature Bank’s commercial real estate loans closed last Thursday, and winners may be chosen as soon as today.
But insiders say a closely watched slice of that portfolio — $15 billion in loans on New York’s deteriorating rent-stabilized housing — might not sell this round.
When the Federal Deposit Insurance Corporation launched the sale in September, it broke the failed bank’s debt into 14 pools. Investors could bid on a minority stake in the debt, but the FDIC would maintain majority ownership. Its rationale was to protect affordable housing.
Three of the pools held Signature’s commercial real estate debt — office and retail properties, hotels and market-rate apartment buildings. Two pools were open to bank bidders only, and nine contained the rent-stabilized loan book, according to a source.
The commercial real estate debt drew “tremendous interest,” said Thomas Galli, a partner at Duane Morris who is representing some bidders.
Institutional heavyweights, including Blackstone, KKR, TPG and Goldman Sachs, reviewed bidding materials on the Signature loans, the Wall Street Journal reported.
But the nine rent-stabilized pools were shunned by potential bidders.
“I’m shocked at how few calls I’ve gotten on the rent-regulated pools,” said Galli, who 15 years ago represented private equity firms in bids on FDIC-held loans during the Financial Crisis.
When New York Community Bank took over much of Signature after its collapse but declined to pick up its commercial loans, industry observers dubbed that debt “toxic waste,” given the snub and the declining values of rent-stabilized buildings.
“The FDIC knows there’s a spotlight on them.”
Still, insiders expected the loans to be available at enough of a discount to attract bids. The FDIC maintained a 95 percent interest in the rent-stabilized pools, marketing just 5 percent to private parties, said Zachary Rothken, an attorney who specializes in rent stabilization.
Sources say the FDIC organized the rent-stabilized pools by performance so the most distressed debt could be discounted appropriately.
But one provision governing the sale may have screened out potential bidders. Firms with “any interest whatsoever” in a borrower or asset tied to a debt pool were barred from bidding on it, Galli said. A similar provision was used in FDIC loan sales during the Great Recession, he noted.
The FDIC likely implemented the guardrail to prevent firms from gaming the bidding process to pay cents on the dollar for loans on their own buildings, the attorney said.
The FDIC did not immediately respond to a request for comment.
Signature was the largest bank lender to New York rent-stabilized landlords. A plethora of prospective bidders may have previously borrowed from Signature, partnered with a firm that did, or lent to a borrower or on a property tied to debt in the pool. Any of those transactions would disqualify them.
“That must be why so many otherwise qualified entities did not show up to bid,” Galli said.
Less competition typically means lower bids. If the FDIC thinks the top bid isn’t high enough or doesn’t like a bidder’s business plan, it can cancel the bidding and reschedule it, Galli said.
But a delay could hamper the government agency’s twin goals in the sale.
Typically, the FDIC’s sole aim is to obtain the best net present value, meaning the highest bid. But this sale is unique in that the FDIC has also cited its “statutory obligation” to protect lower-income tenants.
Tenant groups have been pushing for a sale to a lender willing to hold landlords accountable for building maintenance, said Will Depoo, a senior campaign organizer at the nonprofit Association for Neighborhood and Housing Development.
“The FDIC knows there’s a spotlight on them,” Depoo said.
The Community Housing Improvement Program’s Jay Martin noted that mandating rent-stabilized landlords, who operate on capped revenues, to make repairs would only make it harder for them to pay their debts.
The FDIC isn’t set up to manage assets. The longer it holds the loans on rent-stabilized buildings, the more those properties figure to deteriorate. Valuations have already plummeted by up to 40 percent, leaving some owners underwater on their mortgages.
Letting buildings decay runs afoul of the FDIC’s statutory obligation, and the more owners fall behind on payments, the less the FDIC will fetch for the debt.
It’s possible all of the rent-regulated pools will sell in this round. If any pool draws multiple competitive bidders, they will be asked for best and final offers and the high bidder will win.
The FDIC’s projected closing date for all of the pools is Dec. 21, sources said.