https://www.wsj.com/finance/banking/western-alliance-sues-jefferies-7b0614f9?siteid=yhoof2
Western Alliance’s Stock Plunges After It Sues Jefferies Over $126 Million Loan
Bank says it will charge-off the loan as fears mount in the world of private credit
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Western Alliance said it had taken steps to minimize financial pain. PATRICK T. FALLON/AFP/GETTY IMAGES
Shares of Western Alliance WAL -8.27% dropped double digits Friday after the regional bank sued Jefferies Financial Group JEF -12.43% over a soured $126.4 million loan tied to bankrupt auto supplier First Brands Group.
The Phoenix-based company alleged breach of contract and fraud and said it would charge off the loan. The lawsuit was filed against Jefferies and its subsidiary Leucadia Asset Management in New York Supreme Court.
Western Alliance Bancorp. said it had been informed by Jefferies that it wouldn’t repay the loan, which had been collateralized by accounts receivable purchased from First Brands Group.
Western Alliance shares sank nearly 14%. Jefferies’s stock was down more than 9% and on track for its lowest close in more than two years.
“I’m not going to speculate as to what’s going on at Jefferies as to why they couldn’t make payments,” Western Alliance Chief Executive Ken Vecchione said on a call with analysts after the suit was filed. “We were very surprised that they decided to pull back. To me, it’s quite shocking.”
Wall Street has been on edge about private credit, with several high-profile funds facing withdrawals. The worries have been brewing since last year after troubles at First Brands and other firms set off fears about credit stress that could be lurking in the funds. Jefferies had deep ties to First Brands, the Journal reported. Last month, a British mortgage company became another black eye for private credit.
On the Friday call with analysts, Vecchione said the notice from Jefferies came a week before it was supposed to receive its next payment from Jefferies. He said he met with Jefferies CEO Richard Handler this past Sunday “to emphasize that collaboration was preferable” but that “litigation is the path that Jefferies left us with.”
In a statement, Jefferies said it believed the lawsuit “is without merit” and that the involved fund had acted in good faith and with goodwill to the bank.
Other bank stocks fell more than 4% on Friday, more than the broader market.
“This is not a new cockroach,” said Casey Haire, a bank analyst at Autonomous Research. “This is one that we thought we had put behind us and it’s rearing its ugly head.”
Western Alliance said it had taken steps to minimize financial pain from the most recent charge-off, such as the pursuit of $50 million of securities gains and $50 million of incremental expense savings.
Western Alliance was caught up in other credit turmoil last year in a lawsuit by fellow regional bank Zions Bancorp. That suit revealed that Western Alliance had sought to recover roughly $100 million from a set of borrowers that were accused of fraud.
On Friday, Western Alliance pointed to a $25 million fraud insurance policy against that reserve. It said the reserves still appeared to be appropriate and that it would revisit them, as well as any related charge-offs.
