The Federal Deposit Insurance Corporation (FDIC) is considering a new approach to encourage nonbank entities, such as private equity firms, to purchase loans and assets from failed lenders at discounted prices.
This comes in the wake of the FDIC being left with a substantial portfolio of Signature Bank loans after the institution’s collapse, according to a recent report.
Enticing nonbanks with loss-sharing agreements
To attract higher bids and help the FDIC offload assets from collapsed institutions, the regulatory body is exploring the possibility of offering loss-sharing agreements to nonbanks.
Since the FDIC doesn’t regulate these entities, they can’t bid for an entire lender, but they could be enticed to buy loans and assets at a discount.
This week, JPMorgan entered into a loss-sharing agreement with the FDIC when it agreed to assume all of First Republic’s deposits while sharing losses on specific portfolios, including residential and commercial loans.
FDIC collaborates with BlackRock to sell portfolios
Last month, after the collapse of Signature Bank and Silicon Valley Bank, the FDIC hired BlackRock’s financial markets advisory unit to sell two portfolios with face values of nearly $27 billion and $8 billion, as stated on the FDIC’s website.
In a separate development, Credit Suisse announced the purchase of Ecuadorian bonds worth $1.6 billion in a debt-for-nature swap that cost the Swiss bank just $644 million.
Ecuador, facing severe financial challenges, had its bonds trading well below face value as investors anticipated non-repayment. The country has now effectively repurchased its debt at a reduced price through a new loan from Credit Suisse.
Ecuador commits to conservation in Galapagos Islands
In exchange for the debt-for-nature swap, the Ecuadorian government has pledged to spend approximately $18 million annually for the next 20 years on conservation efforts in the Galapagos Islands.
The UNESCO world nature heritage site is home to some of the most pristine nature in the world and was crucial to Charles Darwin’s research before he published his theory of evolution.
Credit Suisse will pay between 53.25% and 35.5% of the issue price for the 2030, 2035, and 2040 bonds. Although the bank initially offered to spend up to $800 million, a recent slump in bond prices meant only $644 million was used.
A new, cheaper-to-service $656 million “Galapagos Bond” maturing in 2041 will replace the old debt. This loan will be partly underwritten by the Inter-American Development Bank (IDB) and the US International Development Finance Corporation, limiting Credit Suisse’s risk exposure.
The IDB approved a financial guarantee of $85 million for a debt swap of $800 million of Ecuador’s sovereign bonds, which could cover the first six quarterly interest coupons if needed.
Credit Suisse, which was recently acquired by Swiss banking giant UBS in an emergency takeover, is the buyer. The deal’s roots were established before Credit Suisse’s near-collapse.
The Zurich-based bank had been under pressure amid scandals that led to significant fund withdrawals from unhappy clients.
Meanwhile, Ecuador is grappling with a political crisis, as the National Assembly seeks to impeach President Guillermo Lasso for alleged embezzlement. Lasso denies the allegations, and the political turmoil has contributed to a slump in bond prices.
