PacWest shares jump after $2.6 billion real estate loan sale

By Jaiveer Shekhawat and Chibuike Oguh

(Reuters) – Shares of PacWest Bancorp jumped on Monday after the troubled regional lender announced that it had agreed to sell $2.6 billion worth of real estate construction loans at a discount in a bid to improve its balance sheet.

PacWest’s stock rose nearly 20% on the deal, giving the Los Angeles-based bank breathing space to cope with a flight of deposits that followed the collapse of Silicon Valley Bank, Signature Bank (OTC:), and First Republic Bank (OTC:).

PacWest shares have rebounded in tandem with other regional banks in the past two weeks as investors increasingly believe 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 nearly three-quarters since the onset of the crisis in March.

“The market over-reacts and under-reacts. And I think markets have over-reacted to the perceived lack of quality of regional banks,” said George Young, portfolio manager at Villere & Co in New Orleans.

“There’s been some concern that the market is giving inappropriate measurement to the health of these banks. The banks are generally healthy,” Young added.

PacWest’s share gain helped to buoy trading in other regional lenders on Monday, with the KBW Regional Banking Index adding 3%. Western Alliance (NYSE:) Bancorp rose 10.3%, Comerica (NYSE:) Inc added 3.5%, and Zions Bancorporation (NASDAQ:) gained nearly 5%.

REAL ESTATE ASSET SALE

PacWest sold 74 real estate construction loans that have an outstanding balance of $2.6 billion to property firm Kennedy-Wilson (NYSE:) Holdings Inc 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 funding obligations associated with the loans, and will take over, subject to clearances secured by PacWest, an additional 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 commitments of the loans, according to the filing.

The loans carry floating interest rates that currently average 8.4%, substantially 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 small discount that reflected a decline in the value of the underlying real estate assets, rather than the rise in interest rates.

“We believe the decline in risk-weighted assets should offset the loss (from the sale of 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 lender finance loan portfolio, which it expects to have completed by next month.

“It takes pressure off the bank from the funding side as they dispose off these loans – they won’t have to use either extensive deposits or borrowings to fund that part of the portfolio,” said Gary Tenner, managing director at D.A. Davidson & Co.

PacWest had indicated in May it was in talks with potential partners and investors about strategic options. Earlier this month, it said it had posted more collateral to the U.S. Federal Reserve to boost the bank’s liquidity.

PacWest raised $1.4 billion in March from investment firm Atlas (NYSE:) Partners SP by borrowing against some of its assets, but that deal has not been sufficient to meet all the bank’s liquidity needs.

(This story has been refiled to change the market value decline to ‘nearly’ three-quarters from ‘more than’ three-quarters in paragraph 4)