Bloomberg News

BofA Says Repaying Buffett May Wait Until 8% Preferreds Redeemed

January 17, 2013

Berkshire CEO Warren Buffett

Warren Buffett announced the injection in August 2011, after the Charlotte, North Carolina-based lender’s stock fell more than 45 percent in eight months on concern that housing-related losses would drain capital. Photographer: Scott Eells/Bloomberg

Bank of America Corp. (BAC:US), the second- largest U.S. lender, said repaying Warren Buffett’s $5 billion investment may wait until the company redeems preferred stock held by other investors getting a higher dividend.

“We’ve got over $5 billion of straight preferred stock that’s got coupons between 8 and 9 percent,” compared with the 6 percent paid to Buffett’s Berkshire Hathaway Inc. (A:US), Chief Financial Officer Bruce Thompson told reporters today in a conference call. “From an expensive-capital perspective, that’s the real expensive piece.”

Buffett announced the injection in August 2011, after the Charlotte, North Carolina-based lender’s stock fell more than 45 percent in eight months on concern that housing-related losses would drain capital. Bank of America stock more than doubled in 2012, the best performance in the Dow Jones Industrial Average, as Chief Executive Officer Brian T. Moynihan targeted cost cuts and sold assets (BAC:US) to boost capital.

The lender’s Tier 1 common capital ratio reached 9.25 percent as of Dec. 31 under the newest international standards, up from about 8 percent six months earlier. Long-term debt fell to $276 billion from $372 billion a year earlier.

“We obviously continue to look at ways to shape the balance sheet,” Thompson said today. “It’s interesting that people always ask about the Berkshire preferred that’s got a 6 percent coupon.”

Bank of America is paying Omaha, Nebraska-based Berkshire $300 million a year. Under the accord, Moynihan agreed to pay a 5 percent premium, or $5.25 billion, to redeem the shares.

Buffett’s View

“Their condition has improved so significantly, and interest rates are so low, that they have the chance to do a number of things in that respect,” Buffett said in an interview this month. “I may like to keep it, but if it makes sense for them to call it, they’re going to call it.”

The lender a year ago sold $2.25 billion of 5.7 percent bonds due in January 2022, data compiled by Bloomberg show. The debt has rallied to 119 cents on the dollar as of yesterday to yield 3.3 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The 2011 deal also gave Buffett 10-year warrants to buy 700 million of the bank’s shares at $7.14 apiece. The lender closed at $11.78 yesterday. Exercising those options at that price would generate more than $3 billion in profit.

Buffett has used Berkshire’s cash hoard (2FA:US) to make investments in firms seeking to bolster their reputations and balance sheets when traditional credit markets tighten. His firm bought $5 billion of preferred shares in Goldman Sachs Group Inc. (GS:US) and $3 billion in General Electric Co. in the depths of the 2008 credit crisis, earning a 10 percent coupon and getting warrants.

Goldman Sachs and GE have redeemed the preferred shares.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net; David Scheer at dscheer@bloomberg.net


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • BAC
    (Bank of America Corp)
    • $17.98 USD
    • 0.05
    • 0.28%
  • A
    (Agilent Technologies Inc)
    • $41.13 USD
    • -0.24
    • -0.58%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus