PACWP - PacWest Bancorp: Are The 9.6% Yielding Preferreds Still A Buy?

2023-09-11 16:33:53 ET

Summary

• PacWest's preferreds currently offer a 9.6% yield on cost.
• They're also still trading at a discount, this sits at around 20% or 80 cents on the dollar.
• The merger with Banc of California has materially derisked their investment profile.

PacWest Bancorp's ( PACW ) beleaguered Series A 7.75% Series A fixed-rate reset perpetual preferred stock ( PACWP ) seems to have closed out its turbulent chapter with its $1.9375 annual coupon now currently forming a 9.6% yield on cost on the back of a dramatic recovery from double dip lows set earlier this year. This was a period when it seemed they'd be the next California regional bank to collapse. I've owned the Series A through the volatility, but are they still a buy at around $20 per share? It depends. From a macroeconomic perspective, the current discount to their $25 par value will remain sticky on the back of the Fed's higher for longer mantra. The Fed funds rate currently sits at 5.25% to 5.50%, its highest level in 22 years.

T he preferreds are still down 21% over the last year and are currently swapping hands for 80 cents on the dollar. This represents the upside that can still be captured by its holders, who previously faced a now-distant risk of PacWest being placed into receivership. Critically, the all-stock merger between PacWest and Banc of California ( BANC ) will see the consolidated entity take on the liability for the $10 million per quarter in payments to the Series A holders, as there is no change of ownership clause. The main change will be a name change to Banc of California once the merger is closed, as the PacWest name is being dropped in a deal that will see PacWest shareholders receive 0.6569 of a share of Banc of California for each share they own.

The Preferreds Face Less Volatility

Whilst the Series A are less of a clear buy now as they were back in March, they're currently still paying a near-double digit yield on cost and with a near $5 difference to their par value. Further, the merger with Banc of California represents a new dawn as it swaps out the uncertainty PacWest faced from a macroeconomic backdrop that could see further rate increases paired with a recession. Indeed, recent comments from Fed officials that not only is the key rate set to stay higher for longer, but there might be further hikes with current rates not restrictive enough, opening up the specter of further volatility. Critically, any further rate hike will keep the preferreds muted from a price perspective due to the duration effect, as the Series A preferreds are in many ways a halfway house between bond and equity.

Santa Ana-based Banc of California is a $714 million regional bank that has remained profitable through the chaos and volatility of US banking in 2023. The bank has over 27 full-service community banking branches, concentrated in Southern California from San Diego to Santa Barbara and last reported fiscal 2023 second-quarter revenue of $75.66 million , an 11.5% decline over its year-ago period and a miss by $1.88 million on consensus estimates. Critically, net income was $17.9 million , around $0.31 per share, down from $0.34 per share in the year-ago period but a profit nonetheless. The bank last declared a quarterly cash dividend of $0.10 per share , in line with its prior payment and for a 3.2% annualized forward dividend yield.

The New PacWest

This dividend should work out well for PacWest common shareholders who last received a peppercorn dividend of $0.01 per share , in line with PacWest's prior payout and for a 0.5% annualized forward dividend yield. PacWest shareholders will own 47% of the combined company with another 19% expected to be owned by investors in the $400 million equity capital raise, and the remaining 34% to be owned by Banc of California shareholders. The merger will see the consolidated bank become the third-largest bank headquartered in California, with $36.1 billion in assets. It will also have a common equity tier 1 ratio of 10%+ pro forma.

I like that Banc of California realized $74.8 million in noninterest-bearing deposit inflows from new clients, up over 13% from its year-ago comp and roughly in line with first-quarter inflows. This provides a level of pushback against fears that the March collapse of Silicon Valley Bank and the subsequent banking collapses would materially undermine the confidence of depositors in the regional banking system, which faced a near-existential crisis in the first half of 2023.

PacWest has had to sell off a material amount of its assets from a $3.5 billion loan portfolio of high-quality senior secured asset-backed loans sold to Ares Management ( ARES ) and also sold off $1.8 billion of single-family residential loans to JPMorgan Chase ( JPM ). The merger closes off the chapter that saw the US regional banking system face the specter of a sustained flight of depositors to the systematically important banks, with the preferreds set to see the end of volatility that was previously pegged to the quarterly earnings of the previous PacWest. They're now a ticker to be held.

For further details see: