PacWest stock jumps after selling $2.6 billion in real estate loans
May 22 (Reuters) – Shares in PacWest Bancorp ( PACW.O ) rose on Monday after the troubled regional lender announced it had agreed to sell $2.6 billion of real estate construction loans at a discount in an effort to improve its balance sheet .
PacWest̵[ads1]7;s shares rose nearly 20% on the deal, giving the Los Angeles-based bank breathing room to deal with a flight of deposits that followed the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank.
PacWest shares have rallied in line with other regional banks over the past two weeks, as investors increasingly believed the worst of the crisis was largely over and that many lenders were fundamentally sound.
The bank’s stock has more than doubled from a record low hit in early May, although its market value has fallen by almost three-quarters since the crisis began in March.
“The market is overreacting and underreacting. And I think the markets have overreacted to the perceived lack of quality of regional banks,” said George Young, portfolio manager at Villere & Co in New Orleans.
“There has been some concern that the market is giving an inappropriate measure of the health of these banks. The banks are generally healthy,” Young added.
PacWest’s share gains helped boost trading in other regional lenders on Monday, with the KBW Regional Banking Index (.KRX) rising 3%. Western Alliance Bancorp ( WAL.N ) rose 10.3%, Comerica Inc ( CMA.N ) rose 3.5%, and Zions Bancorporation ( ZION.O ) rose nearly 5%.
SALE OF REAL ESTATE
PacWest sold 74 real estate construction loans that have an outstanding balance of $2.6 billion to real estate firm Kennedy-Wilson Holdings Inc ( KW.N ) for $2.4 billion — a $200 million discount, a regulatory filing showed on Monday.
Kennedy-Wilson said it will also assume $2.7 billion in potential financing obligations related to the loans and will assume, subject to clearances secured by PacWest, another six real estate construction loans with a balance of about $363 million.
PacWest will have to pay Kennedy-Wilson a fee equal to 0.15% of the total obligations of the loans, according to the filing.
The loans have floating interest rates, which today average 8.4%, significantly higher than PacWest’s fixed-rate loan portfolio, which was put together when interest rates were much lower. The floating rates allowed PacWest to sell the real estate construction loans at a slight discount that reflected a decline in the value of the underlying real estate, rather than an increase in interest rates.
“We believe the decline in risk-weighted assets should offset the loss (from selling the loans at a discount), which should result in modest improvement in regulatory capital ratios,” Wedbush analysts wrote in a note.
The transaction is expected to close in multiple tranches during the second quarter and early part of the third quarter, PacWest said.
PacWest has also said it is exploring a sale of its $2.7 billion loan portfolio, which it expects to complete by next month.
“It takes pressure off the bank from the funding side when they dispose of those loans – they won’t have to use either extensive deposits or borrowing to fund that part of the portfolio,” said Gary Tenner, chief executive of DA Davidson & Co. .
PacWest had indicated in May that it was in talks with potential partners and investors about strategic options. Earlier this month, it said it had provided more collateral to the US central bank to boost the bank’s liquidity.
PacWest raised $1.4 billion in March from investment firm Atlas Partners SP by borrowing against some of the assets, but that deal has not been sufficient to cover all of the bank’s liquidity needs.
(This story has been amended to change the market capitalization decline to “almost” three-quarters from “more than” three-quarters in paragraph 4)
Reporting by Mehnaz Yasmin in Bengaluru; Editing by Krishna Chandra Eluri
Our standards: Thomson Reuters Trust Principles.