May 22 (Portal) – Shares of PacWest Bancorp (PACW.O) soared on Monday after the troubled regional lender announced it had agreed to issue $2.6 billion in home construction loans. Selling dollars at a discount to improve its balance sheet.
PacWest’s shares rose nearly 20% on the deal, giving the Los Angeles-based bank breathing space to deal with the flight of deposits following the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank.
PacWest shares rallied along with other regional banks over the past two weeks as investors became increasingly confident that the worst of the crisis was largely over and many lenders were fundamentally healthy.
The bank’s stock has more than doubled from its record low in early May, although its market value has fallen by nearly three-quarters since the crisis erupted in March.
“The market overreacts and underreacts. And I think markets have overreacted to the perceived lack of quality in regional banks,” said George Young, portfolio manager at Villere & Co in New Orleans.
“There has been some concern that the market is not properly assessing the health of these banks. Banks are generally healthy,” Young added.
PacWest’s stock gain helped boost trading at other regional lenders on Monday, with the KBW Regional Banking Index (.KRX) gaining 3%. Western Alliance Bancorp (WAL.N) is up 10.3%, Comerica Inc (CMA.N) is up 3.5% and Zions Bancorporation (ZION.O) is up nearly 5%.
SALE OF REAL ESTATE ASSETS
PacWest sold 74 real estate construction loans with an outstanding balance of $2.6 billion to real estate company Kennedy-Wilson Holdings Inc (KW.N) for $2.4 billion — a discount of $200 million, as per a official filing on Monday.
Kennedy-Wilson said it will also assume $2.7 billion of potential financing obligations related to the loans and, subject to PacWest-secured approvals, will continue to underwrite six real estate construction loans with an outstanding balance of approximately $363 million.
PacWest is required to pay Kennedy-Wilson a fee equal to 0.15% of the total debt on the loans, the filing said.
The loans carry variable interest rates, which currently average 8.4%, significantly higher than PacWest’s fixed-rate loan portfolio, which was assembled when interest rates were much lower. The variable interest rates allowed PacWest to sell the home loans at a small discount that reflected a decline in the underlying property values rather than a rise in interest rates.
“We believe the decline in risk-weighted assets should offset the loss (from selling the loans at a discount), which should lead to a modest improvement in regulatory capital ratios,” Wedbush analysts wrote in a note.
According to PacWest, the transaction is expected to be completed in multiple tranches in the second quarter and early in the third quarter.
PacWest has also said it is reviewing the sale of its $2.7 billion loan portfolio and expects to complete the sale by next month.
“It relieves the bank on the funding side of selling these loans — it doesn’t have to take on large deposits or borrow to fund that part of the portfolio,” said Gary Tenner, managing director at DA Davidson & Co.
PacWest indicated in May that it was in talks with potential partners and investors about strategic options. Earlier this month it was said that the US Federal Reserve had received additional collateral to increase the bank’s liquidity.
PacWest raised $1.4 billion from investment firm Atlas Partners SP in March by borrowing on some of its assets, but that deal wasn’t enough to meet the bank’s entire liquidity needs.
(This story was resubmitted to change the market value decline from “more than” three quarters in paragraph 4 to “nearly” three quarters.)
Reporting by Mehnaz Yasmin in Bengaluru; Edited by Krishna Chandra Eluri
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