PacWest Selling Off $2.6B Construction Loan Portfolio
A major regional bank has made a deal to sell off more than half of its construction loans as the continued pressure on regional banks brought on by the collapse of three others this spring is forcing the sale of assets.
PacWest Bancorp agreed to sell a $2.6B portfolio of construction loans to real estate investment firm Kennedy-Wilson Holdings. The sale of the 74 loans, which represents more than half of the $4.6B in construction loans the company had on its books at the end of the first quarter, comes a few weeks after PacWest announced it would pursue strategic asset sales and narrow its focus to community banking.
Kennedy-Wilson Holdings said in a Securities and Exchange Commission filing Monday that it was purchasing the loans at a $300M discount.
Under the terms of the portfolio deal, Kennedy-Wilson Holdings placed $20M in escrow until it completes due diligence, The Financial Times reported. The deal is expected to close in tranches over the next few months. PacWest said in a separate SEC filing that the sale could be expanded to include another six loans worth $363M.
The sale comes as many regional banks continue to struggle against rising interest rates and weakness in some sectors of the commercial real estate market.
Small banks hold 4.4 times more exposure to U.S. commercial real estate loans than their larger peers, according to a report from J.P. Morgan Private Bank. Commercial real estate loans make up 28.7% of small-bank assets compared to 6.5% at large banks, and the report says a significant percentage of those loans will require refinancing in the coming years.
"The small bank lending channel more generally does represent a macro risk, as tighter lending standards and profitability challenges in the banking sector could reduce available financing and raise the cost for small and medium sized businesses," the report says. "But it’s difficult to quantify this risk precisely, and the uncertainty surrounding potential offsets is high."
The deal comes as PacWest, based in Beverly Hills, looks to recover from a loss of deposits and stock value at the start of the year. It reported a net loss of $1.2B with unrealized losses in its securities portfolio totaling $860M in the first quarter. Last month, PacWest brought in investment bank Piper Sandler to help it explore a potential sale, The Financial Times reported.
The bank lost 17% of its deposits, and net interest income shrunk by 13.5% in the first quarter. Its stock price had fallen by nearly 80% since the start of the regional banking crisis that brought down Silicon Valley Bank on March 10.
News of the sale pushed the stock up more than 9% early Monday to above $6 per share. Its year-to-date high was $29.58.
Kennedy-Wilson Holdings, also headquartered in Beverly Hills, focuses on multifamily and office properties in the Western U.S. and United Kingdom. It has around 38,000 multifamily units and 223 commercial properties in its portfolio, according to its website.
There are some signs that the regional banking crisis spurred by Silicon Valley Bank’s collapse in March has begun to fade. Private equity giant Blackstone President Jonathan Gray said during the company’s first-quarter earnings call in April it was pursuing partnerships with regional banks to utilize its insurance capital in “areas like auto finance, home improvement lending and equipment finance.”
Western Alliance also announced last Tuesday that it had grown its deposits by more than $2B in the preceding three months.
"We're not going to make it back to pre-crisis levels anytime soon because we do know that the earnings environment for regional banks will still be impaired, but the period of emergency seems to be dissipating and there's more focusing on the fundamentals," Arthur Hogan, chief market strategist at B. Riley Wealth, told Reuters last week.
