Better set to go public through SPAC; banks tread warily in releasing reserves

Wall Street Journal

SPAC plus PIPE

Better, the startup mortgage lender, “plans to go public by merging with a special-purpose acquisition company, Aurora Acquisition Corp., a SPAC sponsored by investment firm Novator Capital, at a valuation of roughly $7 billion. The transaction could be completed this week. SoftBank, which recently invested $500 million in Better, could put in another $1.3 billion through a PIPE, or private investment in public equity, a common feature of SPAC mergers.”

“Founded in New York in 2014, Better provides home loans for consumers through its website and banks such as Ally Financial. Better had over $850 million in revenue in 2020 and more than $200 million in net profits. Better extended $25 billion in loans in 2020 and $14 billion in the first quarter of 2021 alone.”

Reserves under microscope

Banks and other financial institutions are eager to release loan reserves they added in anticipation of large charge-offs stemming from the COVID-19 pandemic, but “jumping the gun could be dangerous: Lowering reserves too quickly and then needing to rebuild them could hurt companies’ credibility and reduce income, accountants and advisers say.” The issue has been complicated by a new accounting rule, known as Current Expected Credit Losses, or CECL, which requires companies “to forecast expected losses as soon as a loan is issued.”

As a result, “executives at companies including JPMorgan Chase and Citizens Financial are scrutinizing metrics such as credit quality and loan growth to help estimate the level of future reserves amid the continuing economic uncertainty. Investors and analysts are increasingly questioning the banks on when their reserves will go back to pre-pandemic levels.”

Pushing the plastic

“Large credit card issuers that cater to borrowers ranging from the affluent to the subprime say that overall card balances—and thus the firms’ interest income—are falling. To make up for it, issuers are spending more on marketing and loosening their underwriting standards.”

Financial Times

Seeking restitution

JPMorgan Chase and Deutsche Bank are among those being sued by “Malaysia’s disgraced state investment fund 1MDB in an effort to recover more than $23 billion in losses the country said it incurred in its largest corruption scandal. Malaysia’s finance ministry on Monday said 1MDB and subsidiary SRC International filed the suits on May 7 for claims including fraudulent breach of duties, conspiracy and breach of trust.” The country claims the defendants were “unjustly enriched by wrongfully receiving monies from 1MDB or SRC.”

The defendants also include Najib Razak, Malaysia’s former prime minister and founder of 1MDB, and Jho Low, “the Malaysian financier accused of masterminding the embezzlement scandal.”

Smaller piece

The U.K. government plans to “cut its stake in NatWest for the second time in two months, taking advantage of a recent rally in the bank’s share price to bring it closer to a full return to private ownership. U.K. Government Investments, which manages the government’s shareholding, said after markets closed on Monday that it would sell about 5% of NatWest stock,” the Financial Times said.

“It will bring the government’s stake in NatWest, previously known as Royal Bank of Scotland, to about 54.8%, raising the prospect that the bank could be returned to majority private ownership within the year, 13 years after its bailout in the financial crisis brought it under state control. Monday’s placing follows the sale of a similar volume of shares in March, which were bought back by NatWest.”

Elsewhere

Relieved of duty

“Revlon said it had replaced Citigroup as its collateral and administrative agent on a revolving loan facility, months after the bank mistakenly sent $894 million of its own money to repay the cosmetic maker’s lenders,” Reuters reported. Citi is being replaced by MidCap Financial “as part of an amendment to a 2016 loan agreement that extends its maturity nearly a year to May 7, 2024. This facility is different from the one that Citi repaid. Citi assisted with the amendment to the loan facility and earned a fee for its work.”

“In August, Citi had intended to make a small interest payment on Revlon’s behalf, but instead used its own money to repay the cosmetics company’s loan in full. While about $390 million was returned to Citi, a U.S. judge earlier this year ruled that 10 lenders need not repay the remainder. Citi is appealing the decision.”