Private Equity Dips Into Its Cash Stockpile for PacWest Deal

Warburg Pincus and Centerbridge Partners are the latest investors to seize on the turmoil engulfing US regional banks with a deal to finance the tie-up of two California lenders.

(Bloomberg) — Warburg Pincus and Centerbridge Partners are the latest investors to seize on the turmoil engulfing US regional banks with a deal to finance the tie-up of two California lenders.

The alternative asset managers are injecting $400 million of equity to facilitate the merger of Banc of California and PacWest Bancorp, a bet that the cash infusion will help the lenders sell assets and rejuvenate the shares that the firms just picked up at a steep discount to book value. They also received warrants to buy more over the next seven years. 

So far, the wager appears to be profitable. The private equity pair agreed to purchase their shares at $12.30 each, and the stock rally after the deal was announced means they are sitting on a paper profit of more than $90 million. On top of that, stock options with similar terms to the warrants they will receive would be worth about $150 million, according to Bloomberg calculations.

Shares of Beverly Hills-based PacWest gained 28.9% to $9.91 at 9:53 a.m. in New York. Banc of California climbed 1.95% to $14.90. 

Private equity firms are among the few investors with the capital and appetite needed to buy assets originated by bigger banks, but they’ve been frustrated in some of their attempts to take advantage of recent industry turmoil that felled several regional banks. US regulators have instead selected other banks to absorb the businesses of the failed lenders, including Silicon Valley Bank and Signature Bank. 

“This $400 million private equity infusion is certainly one of the largest that I have seen in my career since 1992,” said Janney Montgomery Scott analyst Chris Marinac. “There have been several transactions with both strategic investors and private equity over the past 15 years since the Great Financial Crisis — oftentimes the PE component was not 100% and the capital raises were far less than $400 Million.”

Read more: FDIC’s Busted-Bank Sales Leave Private Equity Firms Empty-Handed

Todd Schell, a Warburg principal, will join the board of the combined lender in a transaction that will position the company “for the next leg of profitable growth,” he said in a statement Tuesday.

‘Fair’ Offer

Piper Sandler analyst Matthew Clark called the deal low-risk in a note, adding that Banc of California has an “opportunity to create a more valuable franchise amid dislocation” in the state.

However, a minority of shareholders might not like the deal, and a third-party rival bid could potentially emerge, Wedbush Securities Inc. analyst David Chiaverini wrote.

The deal is a “fair, but not overwhelmingly compelling offer,” he added.

Centerbridge will have a 4% stake in the combined company, and Warburg will own 16%.

Warburg will receive warrants to buy about 15.9 million shares of Banc of California, and Centerbridge will get warrants to purchase 3 million shares — each with an exercise price of $15.375 per share. The warrants have a seven-year term and must be exercised when the share price reaches $24.60 over a specified period.

Read More: What’s the Difference Between a Banc and a Bank?

PacWest stockholders will get 0.66 of a share of Banc of California common stock for each of their shares. The deal is expected to be completed late this year or in early 2024. 

PacWest has been selling assets and exploring options to shore up its balance sheet after the collapse of three California banks and one in New York. It sold a $3.5 billion portfolio of asset-backed loans to Ares Management Corp. and a pile of real estate loans to Kennedy-Wilson Holdings Inc., and it tapped an Apollo Global Management Inc. unit for a financing facility.

Regional banks are shrinking balance sheets as the most aggressive interest rate hikes by the Federal Reserve in decades erode the value on some of their holdings, creating a pipeline of potential acquisitions for alternative asset managers and private credit firms that have billions of dollars of cash at their disposal.

BlackRock Inc. is positioning itself as a source of capital for banks looking to sell assets, Gary Shedlin, the firm’s vice chairman, said in an interview. Blackstone Inc., Apollo and Carlyle Group Inc. are among private equity firms that have looked to snap up loans from defunct banks.

Read more: Blackstone’s SVB Deal That Got Away Shows PE Sidelined in Crisis

In the second quarter, Western Alliance Bancorp sold roughly $4 billion of assets. Meanwhile, U.S. Bancorp is making targeted sales and securitizing auto loans, and Citizens Financial Group Inc. is looking to streamline its balance sheet.

Banc of California had $10 billion of assets at the end of March, making it less than a quarter of the size of PacWest. But it saw relatively small deposit outflows in the first quarter, and its 17% stock drop this year through Monday was mild compared with PacWest’s 54% plunge.

On Thursday, US banking regulators are preparing to release a sweeping plan to tighten capital standards, a move that’s likely to shake loose more assets. Federal Reserve Vice Chair for Supervision Michael Barr has said the largest banks will probably need to hold an additional 2 percentage points of capital — or an extra $2 of capital for every $100 of risk-weighted assets.

(Updates with share price and adds analyst commentary starting in eighth paragraph)

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