PPIP Funds Purchase $3.4B in "Toxic" Mortgage Securities
By: Carrie Bay
Investment funds capitalized by private equity firms and the U.S. Treasury have bought $3.4 billion in so-called toxic mortgage bonds under the administration’s Legacy Securities Public-Private Investment Program (PPIP).
The Treasury released its initial PPIP report Friday, detailing the first concrete progress made under the program since it was announced nearly a year ago as a means of relieving banks of soured real estate assets.
So far, the PPIP funds have amassed a total of $24.8 billion to buy up mortgage-backed securities (MBS) – $6.2 billion in private capital, which was matched dollar-for-dollar by the Treasury, as well as another 12.4 billion of debt capital provided by the Treasury. About 14 percent of that-$ 3.4 billion-has been deployed to acquire securities that meet the program guidelines, meaning they were issued prior to 2009 and were originally rated AAA before the real estate crash sent values and loan performance plummeting.
As of December 2009, roughly 87 percent of the PPIP portfolio holdings are private residential mortgage-backed securities (RMBS), or $2.97 billion. Thirteen percent of the funds’ bond purchases consist of commercial mortgage-backed securities (CMBS), or $440 million.
The data covered capital activity on all nine money managers originally approved for the program, including TCW Group, which pulled out of the initiative in early January. In a footnote to the report, the Treasury said the
TCW fund’s PPIP holdings had been liquidated and TCW limited partners will be able to re-allocate capital to other funds if they choose.
The report did not give specific breakdowns on how much the TCW fund had already invested under the program, but said, “Treasury did not incur any loss as a result of the termination and currently expects, based on preliminary reports it received from the fund manager, that the TCWPPIF [Public-Private Investment Fund] limited partners (private investors and Treasury) will realize a profit.”
The Treasury also provided details on the performance metrics for each fund, showing individual returns from their inception through December 31. The fund managed by Angelo, Gordon & Co. and GE Capital Real Estate registered the highest rate of return at 3.9 percent.
The Treasury noted in the report that the public-private funds are in the early stages of their three-year investment periods and “early performance may be disproportionately impacted by structuring and transaction costs and the pace of capital deployment.”
“Because of this…at this stage…it would be premature to draw any long-term conclusions about the performance of individual [funds] or PPIP in general,” the report said.
The Treasury explained that PPIP is designed to support market functioning and facilitate price discovery in the mortgage-backed securities markets, allowing banks and other financial institutions to re-deploy capital and extend new credit.
“The investment objective of PPIP is to generate attractive returns for taxpayers and private investors through long-term opportunistic investments…by following predominantly a buy and hold strategy,” the Treasury said.
The max amount of purchasing power of the PPIP program is $40 billion. In aggregate, the funds can employ up to $10 billion in private capital, with a total $10 billion match from the Treasury, and another $20 billion in Treasury debt available for allocation.
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