KBRA Affirms Ratings for Banc of California, Inc. and Withdraws Ratings for PacWest Bancorp
KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3, and also assigns a preferred stock rating of BB for Banc of California, Inc. (NYSE: BANC). Additionally, KBRA affirms the deposit and senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for Pacific Western Bank, which will be renamed and operate as Banc of California, going forward. The Outlook for all long-term ratings is Stable. In addition, KBRA withdraws the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, the preferred stock rating of BB, and the short-term debt rating of K3 for PacWest Bancorp (NASDAQ: PACW) as well as withdraws 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 the former Banc of California, N.A. These ratings actions, which include the resolution of the Watch Developing status for both Pacwest Bancorp and Pacific Western Bank, coincide with the completion of the merger between BANC and PACW.
Key Credit Considerations
On November 30, 2023, BANC announced the completion of its previously planned merger with PACW, pursuant to which the companies combined in an all-stock transaction, in which PACW merged into BANC, while BANC's subsidiary, Banc of California, N.A. merged into Pacific Western Bank ("PWB"), with the surviving entities operating under the Banc of California name and brand. Concurrent with the completion of the merger and consistent with the previously announced capital raise plan, $400 million of new BANC common stock was sold to the affiliates of funds managed by Warburg Pincus, LLC ("Warburg") and certain investment vehicles managed or advised by Centerbridge Partners, L.P. ("Centerbridge") with the combined investments representing roughly 19% of the company's market capitalization (as of December 1, 2023). 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 CFO and Chief Credit Officer (CCO) remaining in their current roles. KBRA considers the merger to be a strategically favorable one by creating a leading California focused commercial banking institution.
Acknowledging that the assessment of integration risk is always an important consideration, 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 and a member of the Board of Directors of Pacific Western Bank. Additionally, BANC's current CCO, had previously served as the CCO for the community banking division at Pacific Western Bank.
As previously stated, as part of the merger, the combined company is to remake its balance sheet through a series of transactions that includes the paydown of approximately $10 billion in wholesale funding coupled with the sale of roughly $7 illion in lower-yielding assets. PACW had begun the process of reducing wholesale funding by allowing the runoff of brokered deposits totaling approximately $2 billion in 3Q23, with an additional $1.4 billion in brokered deposits as well as the $1.3 billion repurchase agreement facility expected to mature and roll off in 4Q23. Additionally, PACW has sold ~$1.5 billion in securities while BANC completed the sale of $447 million in securities as of the closing date. BANC was also expected to complete the sale of its $1.8 billion single-family residential mortgage portfolio on December 6, 2023. The combined company is expected to continue to execute on its plan to reposition the balance sheet through YE23 and into early 2024, including the sale of BANC's $1.6 billion multifamily loan portfolio. The proceeds from the securities and loan sales are expected to be utilized primarily for the repayment of the combined bank's wholesale borrowings, from which, once completed, BANC will emerge with an enhanced funding profile with core deposits expected to comprise approximately 90% of total funding. Furthermore, the execution of the $400 million equity raise was considered to be strategically important in order to offset the marks on assets sold in order for the combined entity to maintain its targeted capital levels including a CET1 ratio above 10%. Finally, while we will continue to closely monitor the company's progress in executing the company's balance sheet repositioning efforts, KBRA favorably views the transaction for both BANC and PACW bondholders.
The Stable Outlook is reflective of KBRA's view that a change to the long term ratings of BANC is unlikely over the near term. With that said, the successful integration of PACW into BANC, coupled with the execution of stated balance sheet activities, materially improving the bank's funding profile as well as the rebuild of BANC's capital ratios aligning more closely with higher rated peers (CET1 ratio above 11%) could result in positive rating momentum over time. Conversely, should capital levels fall below expectations, including a CET1 ratio below 10%, with BANC unable to rebuild capital over a reasonable timeframe, or should BANC be unable to successfully execute the planned deleveraging of the balance sheet that includes paying down a sizeable amount of wholesale funding, negative rating action could occur. In addition, material deterioration of asset quality with elevated credit losses over multiple periods could result in negative rating action.
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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.
Doc ID: 1002811