Private credit to the rescue?

As the legendary Yankee catcher Yogi Berra once said, “It ain’t over ‘til it’s over”. Despite protestations to the contrary by US Federal Reserve chairman Jerome Powell and Jamie Dimon, chief executive officer of JPMorgan Chase – which early this week agreed to take over the ailing First Republic Bank – turmoil in the banking system rages on.

Earlier this week, Bloomberg reported that PacWest Financial, whose shares plunged more than 58 percent in after-hours trading mere days after the First Republic deal was announced, is weighing strategic options, including a possible sale. PacWest has lost 85 percent of its value since the beginning of March, before the collapse of Silicon Valley and Signature banks.

Nor has the situation improved since the Fed issued a mea culpa on its failure to head off the disaster at SVB, with plans to tighten regulation. Other regional bank stocks such as Western Alliance Bancorp are continuing to get hammered.

It’s not likely to stop there. Charles Peabody, a founding partner and president of independent bank research firm Portales Partners who weeks ago expressed concerns about PacWest, reiterated his expectation, initially voiced in March, that hundreds of community and small and regional banks would fail over the next few years.

But who will come to the rescue?

“The government’s been absorbing all the credit hazards of the last decade and they’re in no position to negotiate,” Peabody says. He thinks JPMorgan got a sweetheart deal on the $50 billion loan the FDIC extended to it as part of the First Republic takeover. Although neither the FDIC nor JPMorgan has disclosed the interest rate on the loan, Peabody thinks it was a “submarket rate”.

Meanwhile, the FDIC insurance fund is tapped out and the Fed is bankrupt, according to a recent article by Thomas Hogan, former chief economist for the Senate Banking Committee and currently senior research faculty at the American Institute for Economic Research. Indeed, the Fed is suffering from the same imbalance that afflicted SVB and others. The central bank is paying more interest on bank reserves and overnight reverse repurchases than it earns on its $8 trillion securities portfolio, Hogan says, amounting to a loss of $228 billion per year.

Private credit, on the other hand, is mopping up. Apollo’s Atlas credit firm (snapped up from Credit Suisse in February) has been helping to prop up PacWest, by extending a $1.4 billion repo loan at the handsome rate of 8.5 percent, with a big pre-payment penalty, according to Peabody. The bank’s other emergency borrowings include the Federal Home Loan Banks, the Fed’s Bank Term Funding Program and brokered Certificates of Deposits.

“Does anyone think Atlas (Apollo) will leave its money in a troubled bank if it were to start to fail?” Peabody wrote in a recent note.

Private credit has been the beneficiary of the capital flight from banks, with more transactions coming into non-bank sectors, says Ted Koenig, chairman and CEO of Monroe Capital. “A lot of people in our industry learned a lot from the last big credit crisis in 2008,” Koenig says. “It’s coming in handy now.”

Write to the author at robin.b@pei.group