First Republic Weighing Up To $100BN In Asset Sales To Repay Emergency Fed, FHLB Loans

Yesterday, when discussing the First Republic Bank Q1 earnings, we said that while the collapse in deposits (which plunged from $170BN to $70BN excluding the $30BN emergency deposit injection by a bank consortium) was scary, the potential saving grace is that FRC still had $170BN in loans, i.e., assets… loans which as Bloomberg previously reported were collateralized largely by largely money-good Hamptons real estate.

In fact, one can argue that after the next recession and the next QE, it will be Hamptons real estate that will once again be the outperformer as a new batch of nouveau-riche billionaires scramble to bid up the supply-limited housing.

The problem, however, is that many of these loans are IO (or Interest-Only), which locks the bank in for a long period of time without any substantial cash inflows (these kick in only after several years). And, of course, First Republic needs cash now in order to not only pay down its existing untenable capital structure, but to survive.

That’s why yesterday we said that one way the company can survive, is if it can sell many/most of its loans at anything close to par, it could actually survive as it could then pay down the Fed, FHLB, JPM and others, and restart operations as an ordinary bank.

*FRC SAYS IT AIMS TO REDUCE RELIANCE ON SHORT TERM BORROWINGS

FRC has $173BN in loans and $70BN in deposits (net of $30BN JPM et al deposit injection). If it can sell loans (many of which are IO loans secured by Hamptons mansions) close to par it may be able to restructure

— zerohedge (@zerohedge) April 24, 2023

Well, it appears we were on to something because moments ago Bloomberg reported that FRC is doing just this, and is “exploring divesting $50 billion to $100 billion of long-dated securities and mortgages as part of a broader rescue plan.”

The report echoes what we said, namely that any sales would help reduce the bank’s asset-liability mismatch, and furthermore, also notes that “potential buyers, including large US banks, could potentially receive warrants or preferred equity as an incentive to buy assets above their market value.”

Ah yes, the market value of said loans – the one disconnect for all those claiming that this is an idiosyncratic FRC crisis, not a systemic one (because heaven forbid other banks are mismarking trillions in loans well above market).

“but… but… FRC is idiosyncratic”

Oh is it? Then sell the $173BN in loans at par today, repay the Fed, and have full deposit coverage.

— zerohedge (@zerohedge) April 24, 2023

The reality is that a potential buyer with a healthy balance sheet wouldn’t even need a sweetener: all they need is the ability to weather the current downturn, and then sell the RE-backed loans during the next housing upturn (courtesy of the Fed’s ZIRP), at which point all purchased loans will be well in the money.

The rest of the story is well-known:

The lender is trying to shore up its balance sheet to avoid being seized by the Federal Deposit Insurance Corp. and clear the path for a possible capital raise, the person said. It may need the US government to facilitate negotiations with some of the country’s largest banks to stabilize the lender as it executes its turnaround, the person added. That would be a much cheaper alternative than a failure of the company.

Following yesterday’s earnings, where the investing public focused on the bank’s collapsing deposits while ignoring the potential capital that the $170BN in loans could generated, First Republic fell as much as 30%. Meanwhile, the shorts are piling on and according to S3 Partners, some 33% of the float is now short.