By Tom Braithwaite in New York
Bank of America is planning to issue about $2.8bn of new shares in a move that will dilute the embattled bank?s existing shareholder base.
The potential equity issuance of up to 400m new shares – which would replace more expensive preferred stock and debt in a process that takes advantage of the depressed value of the company?s borrowings – was disclosed in BofA?s quarterly filing to the Securities and Exchange Commission. The filing also revealed the bank could have to post almost $10bn in additional collateral against derivatives contracts if it suffers fresh credit rating downgrades.
Brian Moynihan, chief executive, had said he did not want to raise new capital because the bank could reach the higher levels by retaining earnings and selling assets. ?We simply could not continue on a course of diluting our shareholders to raise capital,? he said in August.
The company said the potential issue of shares did not mean he was reneging on this pledge because the new stock will replace existing preferred shares and debt. It said it made sense to buy back debt and preferred shares, which carry guaranteed dividend and interest payments and are therefore more expensive for the bank than common equity, whose holders do not have a guaranteed pay-out.
?The uncertainty in the market evidenced by, among other things, volatility in credit spread movements, makes it economically advantageous at this time to consider retirement of issued junior subordinated debt and preferred stock,? the bank said in its SEC filing.
The bank weathered a turbulent summer, marked by severe share price declines on fears over its mortgage losses and litigation and concern over its capital levels, which have to be reinforced to meet new levels required by Basel III, the tougher framework for banks agreed by international regulators.
In a passage in the filing that underscored the sensitivity of US banks to ratings actions – a week after a series of credit downgrades pushed MF Global into bankruptcy – BofA said it could be forced to pledge more collateral on derivatives contracts if it suffered another ratings cut.
Moody?s last downgraded the company at the end of September from A2 to Baa1 and held the outlook at negative. BofA said it could be required to post an additional $3.2bn in collateral as a result of that downgrade. It said a further downgrade to its long-term senior debt ratings would require up to $5.1bn in additional collateral, while a two-notch downgrade would require $6.6bn.
BofA posted cash and securities collateral of $87.8bn for its derivatives positions at the end of September, a substantial increase from the end of last year, when it posted $66.9bn.
BofA shares closed 19 cents, or 2.8 per cent higher, at $6.91.
? The Financial Times Limited 2011