Wednesday, February 10, 2010

Lennar vs. the FDIC? Place your bet on Lennar (LEN)



That title sounds overly "adversarial," but hey when it comes to valuing a $3.05billion pool of mortgage loans, someone is a seller and someone a buyer...well in this case they're both in on the deal, but the terms of ownership had to be decided.

Just a few minutes ago, Miami-based homebuilder Lennar (LEN) announced a giveaway deal with the FDIC, by which a subsidiary of Lennar named Rialto Capital Advisors will acquire a 40% state in a $3.05billion loan portfolio.  Shares are up over a percent after hours, as the deal's structure will almost certainly make some big hay for Lennnar.

The rough details:
MIAMIFeb. 10 /PRNewswire-FirstCall/ -- Lennar Corporation(NYSE: LEN and LEN.B), one of the nation's largest homebuilders, today announced the closing of two structured transactions with the Federal Deposit Insurance Corporation ("FDIC").
The transactions represent the purchase of two portfolios of loans with a combined unpaid balance of $3.05 billion.  A subsidiary of Lennar, Rialto Capital Advisors, will conduct the day-to-day management and workout of the portfolios. Lennar acquired indirectly 40% managing member interests in the limited liability companies created to hold the loans for approximately $243 million (net of working capital and transaction costs), including up to $5 million to be contributed by the Rialto management team.  The FDIC is retaining the remaining 60% equity interest and is providing $627 million of non-recourse financing at 0% interest for 7 years. The transactions include approximately 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships.

I'll follow up after the company responds to my request for information, but at first glance it looks like a "necessary evil" for the taxpayer.  (I say the taxpayer because the FDIC is basically insolvent, and will be backed up by the federal government.)  These are likely among the MOST toxic of toxic real estate loans, so Lennar gets a stab at them for a very cheap price - not to mention 7 years of 0% interest financing for the deal.
By my initial estimate, Lennar is paying about 20cents on the dollar (exactly how many remains to be seen) for these loans, and the FDIC will share in the upside of the combined entity.  Hey, no one said the housing crisis would be pretty.  I look forward to more detail coming out on this loan portfolio.
Copyright 2010 AlphaNinja

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