Ares/PacWest: Barclays is strange bedfellow in £2.3bn loan deal

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The only thing “transitory” about high interest rates was their description as such. Capital intermediation is adapting, making strange bedfellows in the process. On Monday, PacWest Bancorp announced it had sold a $2.3bn portfolio of loans to Ares Management for around 90 cents on the dollar in cash, part-financed by Barclays.

Ares manages $360bn which makes it one of the biggest private fund managers in the world. PacWest had some $25bn of deposits as of early May and is one of the most beleaguered regional banks in the US.

Fleeing customers forced it to shore up liquidity by borrowing from Federal Home Loan Bank and the Federal Reserve at rates far steeper than interest paid to depositors. Deposits will not return at scale unless PacWest offers higher interest rates. The bank has therefore decided to retrench. That leaves fringe assets to the likes of Ares.

Ares is using leverage in the form of financing from Barclays to complete the purchase of loans. Private asset managers have not made banks completely obsolete, it appears. But their scale and the kinds of credit they originate is changing.

Corporate lending was previously rocket fuel for PacWest. Its share price soared from $15 to $50 between 2009 and 2021, an era of low-cost deposits.

PacWest has now sold loans backed by various “accounts receivable” weeks after flogging a multibillion-dollar portfolio of construction loans. It wants to focus on being a “community bank”. It will use cash from asset sales to pay off its own pricey debts. 

Ares itself has various credit funds whose strategies demand returns between 5 and 15 per cent. Some may call on modest leverage. Regardless of this, such borrowings bear the inherent extra costs of matching asset and liability durations.

Banks like Barclays are best positioned to be lenders. They are large, heavily regulated and prefer credit types that involve less underwriting than funds like Ares. Like all good rebels, private capital managers are finding benefits from doing business with the establishment.