We understand that the FDIC is substantially changing the loss share formula structure, applicable to all bids made after March 31, 2010. The material changes include:
- Elimination of the “Stated Threshold” and 95%/5% loss sharing basis. Accordingly, all loss sharing will be at a constant 80%/20% split (FDIC/acquiring bank) for all covered assets and all losses.
- Bidders will now be expected to express the Asset Premium (Discount) component of their bid as a percentage of the book value of assets purchased, rather than a fixed dollar amount.
- The “First Loss Tranche” will now be an element to be bid, rather then an amount calculated based on assets acquired and liabilities assumed. Bidders will be expected to express the “First Loss Tranche” component of their bid as a percentage of the covered assets. The “First Loss Tranche” will continue to represent the amount of losses the acquirer will absorb prior to the commencement of loss sharing. Negative bids for the First Loss Tranche will not be accepted, although zero bids will.
- As the “First Loss Tranche” will now be separately bid, the net equity position of the failed bank may cause an initial payment to be due to the FDIC at closing, particularly when assets passing to the acquiring bank exceed the deposit liabilities. (Previously such an acquiring bank merely assumed 100% of the losses until the amount owed the FDIC was exhausted.)
- The Initial Payment will be the sum of the equity adjustment (assets – liabilities), deposit premium bid (in dollars), and the asset premium bid (in dollars). If the result of the calculation is positive, the acquiring bank will be required to wire the Initial Payment to the FDIC, while if it is negative, the acquiring bank will receive a wire of the Initial Payment from the FDIC.
There will also be changes in the shared loss exhibits, primarily clarifications, with conforming changes made to the Purchase and Assumption Agreement. The calculation of the “true-up” will also be modified to incorporate the absence of a published Stated Threshold.
We believe these changes increase the risk associated with bidding on loss share transactions, and may thus result in further widening of the negative bids received by the FDIC.