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Skadden, Paul Weiss Lead Unusual FDIC Deal for Bad Corus Loans
The American Lawyer
October 08, 2009
Lawyers for private equity funds and other non-bank buyers interested in scooping up failed banks have been very busy in the last year, perhaps none more than a handful of lawyers at Skadden, Arps, Slate, Meagher & Flom. A few months after advising two separate consortia of private buyers in the acquisitions of two struggling banks, Skadden has advised a new group that's picked up a piece of the defunct Corus Bank in a deal with the FDIC, according to the firm and lawyers on the deal.
Paul, Weiss, Rifkind, Wharton & Garrison advised the FDIC on the deal announced Tuesday. The agency took over Corus last month after bad real estate loans and other assets crippled the bank, according to lawyers close to the deal.
Federal regulators have been extremely cautious about allowing private equity funds to buy stakes in banks, partly out of fear that PE funds engage in too much risk to be a significant part of the banking system. But those concerns don't apply here, because Skadden's clients -- headed by Starwood Capital Group and the private equity firm TPG -- aren't buying the deposits or healthy cash assets from Corus. Instead, the group is forking over about $554 million for a 40 percent equity stake in a new joint venture with the FDIC that will oversee the bad real estate loans and assets that drove Corus to the ground, according to Reuters and public records.
The FDIC will own 60 percent of that joint venture and guarantee about $1.39 billion in debt issued as part of the deal, the Associated Press says.
The FDIC previously sold Corus' $7 billion in deposits and about $3 billion in healthy assets to MB Financial in a separate deal, Reuters says. It is unusual for the FDIC to break up a defunct bank in this way, Reuters reports.
Thomas Vartanian, a partner at Fried, Frank, Harris, Shriver & Jacobson who advises high-profile private equity funds, says the arrangement in the Corus deal is something of a mixed blessing for PE funds looking at banks. On the one hand, it shows the FDIC is willing to be "extremely creative" to give private equity funds a piece of the distressed bank market. But it also shows the FDIC remains cautious about opening up depository bank operations to private equity groups, Vartanian says. Real estate loans and other similar assets will only appeal to a certain subset of PE funds, especially those, like Starwood, involved in real estate, Vartanian says. "PE investors who buy companies -- they are not interested in these assets," he says.
The Starwood-led group is investing in the new joint venture in hopes that the bad loans will eventually produce a return, at which point the investors will begin cashing out their equity stake, according to this FDIC guide to the deal (pdf).
William Rubenstein, the lead Skadden partner on the deal, declined to comment. Other Skadden partners on the matter include finance partners Richard Kadlick and David Midvidy, financial institutions partner William Sweet, real estate partners Harvey Uris and Adam Endick, and tax partner Diana Lopo, the firm said.
Skadden has been at the cutting edge of this new private equity-defunct bank work. In May the firm advised a private equity consortium (led by the Blackstone Group and the Carlyle Group) that bought the defunct BankUnited Financial Corp. in an FDIC-brokered auction. (Sweet and Rubenstein took lead roles on that deal as well.) That deal -- in which none of the PE firms bought more than the maximum-allowable 24.9 percent equity in BankUnited -- spurred PE interest in failed banks and pushed the FDIC to announce new guidelines for PE investment in banks.
As we've reported before, Am Law 100 lawyers were unanimous in their criticism of those rules, which, among other things, required higher capital ratios for PE investors. The FDIC took the criticism to heart and loosened the requirements slightly, but the regulations are still strict enough to deter many PE investors who otherwise would be willing to pour their cash into failed banks, according to experts we spoke to last month.
Partner Marc Underberg led the Paul Weiss team advising the FDIC on the Corus deal. Underberg declined to comment on the matter.
Cleary Gottlieb Steen & Hamilton provided separate counsel to TPG, according to lawyers on the deal.
Skadden has represented Starwood on other deals, including the $800 million initial public offering of Starwood's real estate investment trust in August.
This article first appeared on The Am Law Daily blog on AmericanLawyer.com.
