Bank of California announced that it was going to buy PacWest for an all share deal. Warburg Pincus & partners graciously offered to inject $400M at $12.30 into $BANC.
Since the announcement, after the initial surge, the stock has ground lower and is currently just above this $12.30 price level.
If the stock falls below this level, the deal has a high probability of falling apart. Why would the PE companies invest at above market prices?
In this case, $PACW or $BANC or both will head into FDIC receivership given their obvious solvency issues.
I’m thinking of buying puts. What do you degens think? Are we done with bank failures for the year?
This is the announcement: www.pacwestbancorp.com/news-market-data/news/news-details/2023/Banc-of-California-and-PacWest-Announce-Transformational-Mergerand-400-Million-Equity-Raise-from-Warburg-Pincus-and-Centerbridge/default.aspx
The price of $PACW is trading at a small discount to 0.6569 times that of $BANC. 0.6569 is the number of shares of BANC each PACW shareholder gets.
What I know now is that the probability of the deal falling apart is > than it was 2 weeks ago. Without an equity raise, the banks have more of a solvency issue.
I know it’s circular logic but it also makes it self fulfilling. $FRC failed because the stock price drop fuelled the run.
From a technical point of view, the shares shorted and the cost to short is much lower for both banks and the Implied Volatility is low – making the options cheap
Here are the key factors I’m looking at:
- Adjusted EPS is Misleading: The EPS appears distorted by removing losses from selling their loan portfolio.
- Loan Sale Required: They had to sell these loans to fix liquidity issues, making the adjustment seem unfair.
- High-Yield Debt Sold: They sold their most profitable debt, shrinking their net interest margins.
- Depositors Moving Away: With people leaving banks, they can’t reduce rates on time deposits or savings accounts.
- Wholesale CDs Concern: Relying on wholesale CDs for financing is risky and not favored by regulators. These deposits are not even slightly sticky and will flee at the first sign of trouble.
They won’t see profits again until interest rates decrease substantially.
Most importantly, It’s unclear how many banks are depositing at PACW to keep it afloat, signaling possible hidden issues!
Their deposits were down 10+% in the mid-May madness according to their filing, but only down 1% in the quarter ended June 30? How is that possible?
Interesting! The deal doesn’t close until Q1 2024. I remember this article from a few months ago:
www.wsj.com/articles/private-equity-shies-from-backing-banks-even-with-discounts-766cc820
Thoughts?
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.