NEW YORK--(BUSINESS WIRE)--KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Banc of California, Inc. (NYSE: BANC). Additionally, KBRA affirms the senior unsecured debt and deposit ratings of BBB+, the subordinated debt rating of BBB, and the short-term debt and deposit ratings of K2 for its subsidiary, Banc of California, N.A. The Outlook for BANC's long-term ratings is Stable. KBRA also maintains its Watch Developing status for PacWest Bancorp (NASDAQ: PACW) and its subsidiary, Pacific Western Bank, including a senior unsecured debt rating of BBB, subordinated debt rating of BBB-, preferred stock rating of BB, and short-term debt rating of K3 for PacWest Bancorp, and deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 for Pacific Western Bank.
Key Credit Considerations
On July 25, 2023, Banc of California, Inc. and PacWest Bancorp announced the signing of a definitive merger agreement, pursuant to which the companies will combine in an all-stock transaction, whereby PACW will merge into BANC, while BANC’s subsidiary, Banc of California, N.A., will merge into Pacific Western Bank (“PWB”), with the surviving entities operating under the Banc of California name and brand. The current expected closing date is late 2023 or early 2024. The transaction includes a commitment to invest in $400 million of new common equity of the combined company by affiliates of funds managed by Warburg Pincus, LLC (“Warburg”) and certain investment vehicles managed or advised by Centerbridge Partners, L.P. (“Centerbridge”). Upon completion of the proposed transaction, the combined entity shareholder base will be comprised of the following: PACW ~47% / BANC ~34% / new investor group ~19%, while the combined entity will largely retain BANC’s current leadership as its executive team, including BANC’s current CEO Jared Wolff, as well as BANC’s newly appointed CFO and Chief Credit Officer remaining in their current roles.
KBRA considers the proposed merger to be a strategically favorable one, with the addition of prominent institutional investors as significant prospective shareholders also beneficial to the future combined company's creditor profile. As described in some detail below, the planned sale of select assets and paydown of higher cost funding sources, together with the new equity, is expected to result in an attractive core funded, solidly capitalized, institution. Acknowledging that the assessment of integration risk is always an important consideration in evaluating any bank merger, the proposed BANC / PACW combination reflects a somewhat unique, intercompany institutional knowledge that was publicly noted to be a facilitator of the merger agreement, and we think should serve to partially mitigate integration challenges. Notably, prior to becoming CEO of BANC, Mr. Wolff had held multiple executive roles during a 10-year tenure with PACW; initially as the company’s General Counsel and culminating as the President of Pacific Western Bank. Additionally, BANC’s current CCO had previously served as the CCO at PACW and Pacific Western Bank up until 2014.
With respect to anticipated pre-merger actions, which are focused on better positioning the combined company’s balance sheet, the projected paydown of $13 billion in aggregate wholesale funding by the two organizations, if completed as communicated by the companies, would leave BANC with a predominantly core funded profile, including core deposits representing ~90% of total deposits and ~85% of total funding. As part of the planned balance sheet repositioning, roughly $7 billion in lower-yielding assets are expected to be sold, which will, upon completion, provide immediate benefits to the combined entity’s NIM outlook and, subsequently, earnings (estimated 170 bps improvement to NIM). The fair value mark on the loans to be sold (BANC’s ~$1.8 billion SFR and ~$1.6 billion multifamily portfolios) is included in the anticipated $500 million aggregate mark assigned to BANC’s total loan portfolio ($140 million of which is expected to be accreted back into earnings over the next 6 years – this includes no accretion from the mark on sold loans). The $400 million proposed equity raise (which includes warrants received by both Warburg and Centerbridge investors) is strategically meant to offset the significant mark on assets sold ($3.4 billion in loans and $3.6 billion in AFS securities), giving the company a pro forma CET1 ratio of >10%. The combined entity is expected to have total assets of approximately $36 billion, total loans of $25 billion, and total deposits of $31 billion.
While we consider there to be a high likelihood of the merger being completed efficiently, we also currently consider BANC’s ratings to be reasonably well positioned within their current categories, and to remain as such even in the event our assumptions around merger close are proven to be incorrect. Accordingly, in addition to the affirmation of BANC’s ratings, the maintenance of a Stable Outlook is appropriate. Continuation of the Watch Developing status for PACW during the period prior to merger close is considered most appropriate at this juncture.
Rating Sensitivities
The successful completion of the merger would result in a resolution of PACW's Watch Developing status, maintaining BANC's current ratings and Outlook for the combined company. Should the merger not close as planned, KBRA would revisit PACW's stand-alone ratings.
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Methodologies
Financial Institutions: Bank & Bank Holding Company Global Rating Methodology
Disclosures
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.
