BAC-WT - Bank of America Warrants

[StubbleJumper]

Hey Folks,

 

This thread on BAC is drifting more and more into investment strategies.  I'm going to start another board entitled "Strategies", and in there I will start another thread for you guys to continue this conversation.  I want to keep the BAC thread related to BAC news, events, etc.  So if you don't mind, please carry this discussion over on that board.  Cheers and thanks!

 

 

Sanj,

 

The security and the strategy are intertwined.  I don't think you can (or should) really separate the two.  FWIW, one of the best threads in the past couple of months has been TWA's thread on BRK LEAPs.  If you didn't understand BRK and the buyback policy, there'd be no way you'd ever touch the LEAPs.

 

Just my perspective.

 

SJ

[Parsad]

Hey Folks,

 

This thread on BAC is drifting more and more into investment strategies.  I'm going to start another board entitled "Strategies", and in there I will start another thread for you guys to continue this conversation.  I want to keep the BAC thread related to BAC news, events, etc.  So if you don't mind, please carry this discussion over on that board.  Cheers and thanks!

 

 

Sanj,

 

The security and the strategy are intertwined.  I don't think you can (or should) really separate the two.  FWIW, one of the best threads in the past couple of months has been TWA's thread on BRK LEAPs.  If you didn't understand BRK and the buyback policy, there'd be no way you'd ever touch the LEAPs.

 

Just my perspective.

 

SJ

 

I received a couple of complaints that the thread is just too onerous to sift through now, so I thought that was the only real way to keep it directly relevant to BAC, while strategies could be discussed in a separate board.  Try it, see if you like it...if not, we'll go back to the way it was.  Cheers!

[valuecfa]

Countrywide Asks Court to Undo MBIA Ruling:

 

http://www.bloomberg.com/news/2013-03-12/bofa-s-countrywide-asks-appeals-court-to-undo-mbia-ruling.html?cmpid=yhoo

 

Cheers!

 

This appeal was filed a long time ago. It's just that the oral arguments finally took place. I only mention this b/c it is not necessarily indicative of any new developments between the two parties.

[mcliu]

Sorry, I know we have a new thread, but I just wanted throw my 2 cents in here.

 

I couldn't really follow Eric's idea about the 13% as the cost of borrowing, so I thought about it a different way, that seems to make sense to me, would like to hear your thoughts.

 

When you buy a warrant, you're essentially paying the premium $5.65 and the present value of the $1.30 difference between the strike and the current price ($13.30 strike minus $12.00 current price). So the total cost is somewhere around $6.85. This cost allows you to borrow the $12.00 (that you would have otherwise needed to pay to purchase the stock) for 5.8 years, which works out to around a 10% borrowing cost.

[ERICOPOLY]

I may be looking at this the wrong way - but I am getting a 2-year option leverage cost that is a bit above the warrants. 

 

25 is the warrant-common break-even - ignoring the dividend readjustment but also ignoring dividends on the common - which is probably the right way to look at it (the readjustments should cancel each other out).  That implies an annualized cost of leverage of about 13%.

 

The two-year option at $2.10, ignoring dividends, gives you a 10% cost of leverage.  But the two-year options don't benefit from the dividend adjustment.  So the leverage cost of the options is 10% plus lost dividends over the next two years.

 

If you wanted to make an apples-apples comparison, one could use the post-adjustment strike and shares/warrant and compare that to the options.  Guessing at an $11 strike and 1.2 shares/warrant I get a break-even at $19 versus the common stock - implying a leverage cost of 8% plus lost dividends over the next 6 years (stock price at 12.06, warrant price at 5.54 as write).

 

Now of course we don't expect the bulk of the capital return in the next two years - so the 2015 options look ok in that regard.  But unless I am way off, the warrants look a little cheaper than the options.

 

EDIT: since you're paying for dividend protection up front, options could be cheaper over the next two years since serious dividends won't kick in until later.

 

Is this totally wrong?

 

I just posted a reply to this in the strategies section. 

[jrallen81]

For my $0.02, I'd like to keep the threads together. I care about both company news and opinions on how to best participate in the potential upside.

 

thanks,

 

jrallen81

 

 

[ERICOPOLY]

Sorry, I know we have a new thread, but I just wanted throw my 2 cents in here.

 

I couldn't really follow Eric's idea about the 13% as the cost of borrowing, so I thought about it a different way, that seems to make sense to me, would like to hear your thoughts.

 

When you buy a warrant, you're essentially paying the premium $5.65 and the present value of the $1.30 difference between the strike and the current price ($13.30 strike minus $12.00 current price). So the total cost is somewhere around $6.85. This cost allows you to borrow the $12.00 (that you would have otherwise needed to pay to purchase the stock) for 5.8 years, which works out to around a 10% borrowing cost.

 

I've replied in the strategies section.

[Parsad]

Sorry, I know we have a new thread, but I just wanted throw my 2 cents in here.

 

I couldn't really follow Eric's idea about the 13% as the cost of borrowing, so I thought about it a different way, that seems to make sense to me, would like to hear your thoughts.

 

When you buy a warrant, you're essentially paying the premium $5.65 and the present value of the $1.30 difference between the strike and the current price ($13.30 strike minus $12.00 current price). So the total cost is somewhere around $6.85. This cost allows you to borrow the $12.00 (that you would have otherwise needed to pay to purchase the stock) for 5.8 years, which works out to around a 10% borrowing cost.

 

I've replied in the strategies section.

 

I hope this works, otherwise you are going to be posting that over and over!  ;D  We'll try it for a couple of days.  If it doesn't work, I'll get rid of that board and move everything back here.  Thanks Eric!

 

[meiroy]

No Leaks yet about the dividend and buy backs?.

 

 

Countrywide Asks Court to Undo MBIA Ruling:

 

http://www.bloomberg.com/news/2013-03-12/bofa-s-countrywide-asks-appeals-court-to-undo-mbia-ruling.html?cmpid=yhoo

 

Cheers!

 

I'm surprised.  I think payouts may be lower than I expected, otherwise banks would be chomping at the bit to leak information.  Or perhaps because JPM wanted to release earlier, the Fed cracked down on the banks and warned them not to release before they do.  Cheers!

 

http://www.cnbc.com/id/100550813

 

My understanding from the last paragraph is that the banks will only find out about it today, hence no leaks.

 

[racemize]

I thought they had had an initial indication on their plans last Thursday, so that they could resubmit if they failed.

[meiroy]

I thought they had had an initial indication on their plans last Thursday, so that they could resubmit if they failed.

 

You're right.

 

[fareastwarriors]

http://www.bloomberg.com/news/2013-03-14/credit-suisse-battles-bofa-in-booming-state-loans-brazil-credit.html

 

 

.Bofa Battles Credit Suisse for 50% Markups on State Loans

 

[MYDemaray]

Here's the release: http://newsroom.bankofamerica.com/press-release/corporate-and-financial-news/bank-america-plans-repurchase-5-billion-common-shares-and

[obtuse_investor]

And here is the full report from the Fed, titled Comprehensive Capital Analysis and Review 2013: Assessment Framework and Results http://federalreserve.gov/newsevents/press/bcreg/ccar-2013-results-20130314.pdf

[Sunrider]

Well I suppose the nice thing is that the 8.x% Prefs gone in may should bring a benefit of perhaps >300m annualised, 3c a share perhaps. No need to wonder at what price they buy that back and what it does :)

 

 

[Shane]

From the prospectus:

In the case of a pro rata repurchase of common stock. A “pro rata repurchase” is defined as any purchase of shares of our common stock by us or any of our affiliates pursuant to any tender offer or exchange offer subject to Section 13(e) or 14(e) of the Exchange Act, or Regulation 14E thereunder, or any other offer available to substantially all holders of our common stock. If we effect a pro rata repurchase of our common stock, then the exercise price will be reduced to the price determined by multiplying the exercise price in effect immediately prior to the effective date (as defined below) of such pro rata repurchase by a fraction of which (A) the numerator will be (i) the product of (x) the number of shares of our common stock outstanding immediately before such pro rata repurchase and (y) the market price of a share of our common stock on the trading day immediately preceding the first public announcement by us or any of our affiliates of the intent to effect such pro rata repurchase, minus (ii) the aggregate purchase price of the pro rata repurchase, and (B) the denominator will be the product of (i) the number of shares of our common stock outstanding immediately prior to such pro rata repurchase minus the number of shares of our common stock so repurchased and (ii) the market price per share of our common stock on the trading day immediately preceding the first public announcement by us or any of our affiliates of the intent to effect such pro rata repurchase. The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares immediately prior to such adjustment by the quotient of (x) the exercise price in effect immediately prior to the pro rata repurchase giving rise to the adjustment divided by (y) the new exercise price as determined in accordance with the immediately preceding sentence. For the avoidance of doubt, no increase to the exercise price or decrease in the number of warrant shares deliverable upon exercise of a warrant will be made pursuant to this adjustment provision.

 

The “effective date” of a pro rata repurchase means (a) the date of acceptance of shares for purchase or exchange by us under any tender offer or exchange offer that is a pro rata purchase or (b) the date of purchase of any pro rata purchase that is not a tender offer or an exchange offer.

 

Good news for warrant holders?  It seems that even if the company issues stock equal to the amount repurchased (Keeping share count stable) the warrant holders still get a boost from the repurchase by an increased number of shares.  Notice the verbage that these calculations will be made immediately before & after.... so unless the stock awards on those days then no offsetting effect occurs.  Can anyone confirm this?

[MrB]

From the prospectus:

In the case of a pro rata repurchase of common stock. A “pro rata repurchase” is defined as any purchase of shares of our common stock by us or any of our affiliates pursuant to any tender offer or exchange offer subject to Section 13(e) or 14(e) of the Exchange Act, or Regulation 14E thereunder, or any other offer available to substantially all holders of our common stock. If we effect a pro rata repurchase of our common stock, then the exercise price will be reduced to the price determined by multiplying the exercise price in effect immediately prior to the effective date (as defined below) of such pro rata repurchase by a fraction of which (A) the numerator will be (i) the product of (x) the number of shares of our common stock outstanding immediately before such pro rata repurchase and (y) the market price of a share of our common stock on the trading day immediately preceding the first public announcement by us or any of our affiliates of the intent to effect such pro rata repurchase, minus (ii) the aggregate purchase price of the pro rata repurchase, and (B) the denominator will be the product of (i) the number of shares of our common stock outstanding immediately prior to such pro rata repurchase minus the number of shares of our common stock so repurchased and (ii) the market price per share of our common stock on the trading day immediately preceding the first public announcement by us or any of our affiliates of the intent to effect such pro rata repurchase. The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares immediately prior to such adjustment by the quotient of (x) the exercise price in effect immediately prior to the pro rata repurchase giving rise to the adjustment divided by (y) the new exercise price as determined in accordance with the immediately preceding sentence. For the avoidance of doubt, no increase to the exercise price or decrease in the number of warrant shares deliverable upon exercise of a warrant will be made pursuant to this adjustment provision.

 

The “effective date” of a pro rata repurchase means (a) the date of acceptance of shares for purchase or exchange by us under any tender offer or exchange offer that is a pro rata purchase or (b) the date of purchase of any pro rata purchase that is not a tender offer or an exchange offer.

 

Good news for warrant holders?  It seems that even if the company issues stock equal to the amount repurchased (Keeping share count stable) the warrant holders still get a boost from the repurchase by an increased number of shares.  Notice the verbage that these calculations will be made immediately before & after.... so unless the stock awards on those days then no offsetting effect occurs.  Can anyone confirm this?

 

I don't think I follow your point exactly, but if you are inferring that anti-dilution adjustments are triggered by shares as a result of stock option awards then, from memory, there are a few challenges.

 

The share count went from 10Bn to 10.7Bn over the last few years and no anti dilution adjustments were triggered, which is due to the preamble of the relevant schedule to the anti dilution adjustments which lays out aspects of the existing capital structure which will not trigger the anti dilution adjustments, such as existing incentive plans.

 

In the documentation of Buffett's warrant you will find for example, again from memory, that potential dilution from the shares of the A & B warrants do not trigger his anti dilution adjustments.

 

 

Hope it makes sense and please double check, because I have not looked at this for a while.

[Shane]

My point is that in the scenario when buybacks just offset share issuances, warrant holders still benefit while common holders do not.  Does that make sense now?

[compoundinglife]

 

http://www.forbes.com/sites/greatspeculations/2013/03/15/buybacks-unchained-saddling-up-for-bank-of-americas-next-big-run/

[Uccmal]

That formula for adjustments boggles my mind.  I spent a few minutes trying to work out an example to see the effect.  I stalled at the number of warrants... didn't feel like looking them up.

 

 

http://www.forbes.com/sites/greatspeculations/2013/03/15/buybacks-unchained-saddling-up-for-bank-of-americas-next-big-run/

 

This guy lost me when he mentioned he would rebuy based on his fibonacci sequencer. 

 

Anyway, I have been right sizing my position (selling, delevering, taking profits, preparing for the inevitable plunge) again today.  My position still equates to nearly 75000 shares, notional.

[MrB]

My point is that in the scenario when buybacks just offset share issuances, warrant holders still benefit while common holders do not.  Does that make sense now?

Yes, but it sounds like you assume there is a significant adjustment with a buyback or you equate the adjustments with a buyback to that of a dividend. The way I interpret it, it is not the same. Adjustments from buybacks is unlikely to happen and even if the formula is applied the benefit is virtually zero.

So what you are left with is the benefit from the increase in intrinsic value, assuming buybacks are under book value versus the dilution which puts you in the same boat as the common holders.

 

[compoundinglife]

That formula for adjustments boggles my mind.  I spent a few minutes trying to work out an example to see the effect.  I stalled at the number of warrants... didn't feel like looking them up.

 

 

http://www.forbes.com/sites/greatspeculations/2013/03/15/buybacks-unchained-saddling-up-for-bank-of-americas-next-big-run/

 

This guy lost me when he mentioned he would rebuy based on his fibonacci sequencer. 

 

Anyway, I have been right sizing my position (selling, delevering, taking profits, preparing for the inevitable plunge) again today.  My position still equates to nearly 75000 shares, notional.

 

Yeah I found that amusing. I posted more for entertainment value and indication that more money will be flowing into BAC positions.

 

I am happy with the results of the capital return but am surprised at how positive it has been received by the market. I was expecting the masses to react negatively to the lack of dividend increase.

 

I hold mostly A warrants, some 2015 $10 calls (rolled over my 2014 calls a while back) and some common. I intend on holding the warrants and common for a long time. Still thinking about what to do with the calls.

[rjstc]

That formula for adjustments boggles my mind.  I spent a few minutes trying to work out an example to see the effect.  I stalled at the number of warrants... didn't feel like looking them up.

 

 

http://www.forbes.com/sites/greatspeculations/2013/03/15/buybacks-unchained-saddling-up-for-bank-of-americas-next-big-run/

 

This guy lost me when he mentioned he would rebuy based on his fibonacci sequencer. 

 

Anyway, I have been right sizing my position (selling, delevering, taking profits, preparing for the inevitable plunge) again today.  My position still equates to nearly 75000 shares, notional.

 

Yeah I found that amusing. I posted more for entertainment value and indication that more money will be flowing into BAC positions.

 

I am happy with the results of the capital return but am surprised at how positive it has been received by the market. I was expecting the masses to react negatively to the lack of dividend increase.

 

I hold mostly A warrants, some 2015 $10 calls (rolled over my 2014 calls a while back) and some common. I intend on holding the warrants and common for a long time. Still thinking about what to do with the calls.

 

Compounding; Curious about what your concern is with the calls?

[compoundinglife]

That formula for adjustments boggles my mind.  I spent a few minutes trying to work out an example to see the effect.  I stalled at the number of warrants... didn't feel like looking them up.

 

 

http://www.forbes.com/sites/greatspeculations/2013/03/15/buybacks-unchained-saddling-up-for-bank-of-americas-next-big-run/

 

This guy lost me when he mentioned he would rebuy based on his fibonacci sequencer. 

 

Anyway, I have been right sizing my position (selling, delevering, taking profits, preparing for the inevitable plunge) again today.  My position still equates to nearly 75000 shares, notional.

 

Yeah I found that amusing. I posted more for entertainment value and indication that more money will be flowing into BAC positions.

 

I am happy with the results of the capital return but am surprised at how positive it has been received by the market. I was expecting the masses to react negatively to the lack of dividend increase.

 

I hold mostly A warrants, some 2015 $10 calls (rolled over my 2014 calls a while back) and some common. I intend on holding the warrants and common for a long time. Still thinking about what to do with the calls.

 

Compounding; Curious about what your concern is with the calls?

 

No concerns really, just when dealing with things that have time constraints I like to have a plan in mind. An idea of what price I would exit and also how long I am willing to hold if they don't work out as well as I thought. 

[rjstc]

That formula for adjustments boggles my mind.  I spent a few minutes trying to work out an example to see the effect.  I stalled at the number of warrants... didn't feel like looking them up.

 

 

http://www.forbes.com/sites/greatspeculations/2013/03/15/buybacks-unchained-saddling-up-for-bank-of-americas-next-big-run/

 

This guy lost me when he mentioned he would rebuy based on his fibonacci sequencer. 

 

Anyway, I have been right sizing my position (selling, delevering, taking profits, preparing for the inevitable plunge) again today.  My position still equates to nearly 75000 shares, notional.

 

Yeah I found that amusing. I posted more for entertainment value and indication that more money will be flowing into BAC positions.

 

I am happy with the results of the capital return but am surprised at how positive it has been received by the market. I was expecting the masses to react negatively to the lack of dividend increase.

 

I hold mostly A warrants, some 2015 $10 calls (rolled over my 2014 calls a while back) and some common. I intend on holding the warrants and common for a long time. Still thinking about what to do with the calls.

 

Compounding; Curious about what your concern is with the calls?

 

No concerns really, just when dealing with things that have time constraints I like to have a plan in mind. An idea of what price I would exit and also how long I am willing to hold if they don't work out as well as I thought.

 

Gotcha. I own both common and 2015 10s and I'm happy with both. Thanks