The new stock would be issued in exchange for preferred shares currently held by investors. The bank’s shares have been battered recently amid fears about the effect of the debt crisis in Europe and other worries that have been hanging over financial companies.
The exchange, which could involve up to 400 million common shares, could allow the bank to raise $2.76 billion, based on Thursday’s closing price of $6.91.
Brian T. Moynihan, the bank’s chief executive, has long maintained that additional share sales are not necessary to raise capital. Bank officials said the move was not driven solely by the need to increase its capital cushion, but was also an opportunity to reduce debt and interest expenses.
The plan was outlined Thursday in a filing with the Securities and Exchange Commission. A decision is not final, but the bank is likely to go ahead with the exchange shortly, according to one official.
By saving money on interest payments on the preferred shares, the move to issue new common shares would not reduce earnings and could actually add to earnings in the short term, the bank said in its filing.
In addition, swapping shares of common stock for the preferred shares will add to the bank’s Tier 1 capital base, because under international regulatory standards preferred stock does not count as common equity while common stock does.
Because the preferred stock is trading below par value, Bank of America can buy it back from investors at a price above where it is trading, yielding a gain for those shareholders. But because it is still below par, it allows Bank of America to book a gain on the difference.
“We want to exchange one form of capital, which is very expensive, for another, which counts toward our Tier 1 common equity on terms that are economically favorable to us,” said Jerry Dubrowski, a spokesman for the bank. “Our goal is to have the strongest balance sheet we can have, and this is an important step.”
Shares of Bank of America have fallen nearly 50 percent in 2011, as the bank faces tens of billions of dollars in liabilities for its role in the subprime mortgage mess as well as a slowdown in other parts of its business. Further increasing the number of shares outstanding from the current level of 10.1 billion is unlikely to win favor with investors. As a result, Bank of America’s stock fell nearly 2 percent in after-hours trading.
This is the second time this week that the company has reversed course. On Tuesday, Bank of America announced it was calling off plans to impose a $5 fee on debit cardholders after an uproar by consumers as well as politicians in Washington.
Under Mr. Moynihan’s leadership, Bank of America has been busy shedding noncore assets and raising capital. In August, it sold half its stake in the China Construction Bank, adding $3.5 billion to Tier 1 capital. It is now the nation’s second-biggest bank, having recently lost the top spot to JPMorgan Chase.
The billionaire Warren E. Buffett invested $5 billion in the company in August by buying preferred shares. That deal did not count toward Tier 1 capital but was widely seen as a crucial endorsement of Bank of America’s management team amid growing doubts among investors. His shares would not be affected by the bank’s latest plan.
Shareholders are sensitive about issuing new common stock because it dilutes the bank’s earnings per share. In this case, the dilution equals about 4 percent. Bank of America’s share count exploded after the financial crisis of 2008, because the company used stock to buy Merrill Lynch and also issued shares to pay the government back for two bailouts totaling $45 billion.
The deal with Mr. Buffett could cause a 5 percent dilution and that, along with the 4 percent dilution from the plan announced Thursday, means “shareholders are being nickel and dimed here,” said Chris Kotowski, an analyst with Oppenheimer.
Article source: http://feeds.nytimes.com/click.phdo?i=f2d3a5fc900c3e2aae6516f6f1ef7518
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