Kennedy-Wilson Hands PacWest Portfolio to Fairfax for $2.1B

Kennedy-Wilson Holdings (KW), which last month acquired a portfolio of 74 construction loans from struggling regional bank PacWest Bancorp for $2.4B, is handing off the lion’s share of the deal to Fairfax Financial, a Toronto-based insurance company.

KW’s agreement with Fairfax will see the Canadian firm pay $2.1B for 63 of the loans in the portfolio. Kennedy-Wilson said it would fund $100M of the deal, hold a 5% stake, and earn asset management fees from Fairfax, according to an SEC filing.

According to the terms of the deal, Fairfax will invest $200M in Kennedy-Wilson in the form of preferred equity.

KW also disclosed that it has entered an agreement with an institutional investor that will assign KW’s right and obligations to buy 10 of the initial 74 loans to the assignee.

The 10 loans have an aggregate principal balance of $500M. KW won’t hold an investment in the assigned loans but will earn a management fee from the investor, whose identity was not disclosed, to manage the assigned loans for up to nine months, Seeking Alpha reported.

Additionally, upon PacWest receiving certain consents and waivers under the underlying loans and related agreements, the KW and Fairfax partnership has agreed to buy from PacWest two additional real estate construction loans with an aggregate principal balance of $144M, the report said.

The 63 loans being purchased by Fairfax have floating rate interest and currently carry an average interest rate of 8.6%, with more than 70% of the loans secured by multifamily or student housing development projects. The balance of the loans in the portfolio are a mix of industrial, hotel, and life science office properties.

The acquisition is expected to close in multiple parts, with the first tranche expected to close in early June and the rest to occur through June 2023 and early Q3 2023.

Last month, Beverly Hills-based PacWest agreed to a sell the construction loan portfolio to KW $2.4B, a discount of $200M, according to a report in Reuters. As part of the deal, PacWest will have to pay Kennedy-Wilson a fee equal to 0.15% of the total commitments of the loans.

PacWest has lost three-quarters of its market value since the beginning of the banking crisis in March. The bank has been the focus of concerns following the collapse of three other regional banks, Silicon Valley Bank, Signature Bank and First Republic.

According to Reuters’ report, the floating rates allowed PacWest to sell the construction loans at a small discount that reflected a decline in the value of the underlying assets, rather than a rise in interest rates.

In a statement, the PacWest said the agreement is “consistent with the previously announced strategy of PacWest Bancorp to pursue strategic asset sales and focus on our core community banking business.”

In a move to improve its liquidity, PacWest raised $1.4B in March from Atlas Partners by borrowing against some of its assets.