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BAC-WT - Bank of America Warrants


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Looking at Jan 18 BAC put option, bid at $0.79. If you sell put, you are pocketing the premium, and BAC has to go down 30% for you to not make money. Given the upcoming rate increase, is the buyer of the contract really that pessimistic?

 

Somebody buying a put could be extremely bullish on the stock.

 

You don't know why they buy the put.  One reason could be that they are buying more common shares using debt and they buy the put so that it's non-recourse debt.

 

One never knows.

 

Anyway, I think you made a typo in your post -- 30% is a lot more than 79 cents.

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Looking at Jan 18 BAC put option, bid at $0.79. If you sell put, you are pocketing the premium, and BAC has to go down 30% for you to not make money. Given the upcoming rate increase, is the buyer of the contract really that pessimistic?

 

Somebody buying a put could be extremely bullish on the stock.

 

You don't know why they buy the put.  One reason could be that they are buying more common shares using debt and they buy the put so that it's non-recourse debt.

 

One never knows.

 

Anyway, I think you made a typo in your post -- 30% is a lot more than 79 cents.

 

I was referring to BAC $13 Jan 18 put option. Given that the stock is around $18, and the put option is $79c, if the stock was going down 30%, you'll get put the stock. ($18 * 0.7 = $12.6), but you pocket the premium of $79c, so you are still ahead.

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  • 4 weeks later...
  • 3 weeks later...

Can anyone explain the logic behind the dividend adjustment for the A warrants.  Here are some examples on how the strike price would adjust at different market prices and dividends...

 

Market price 17.15

Quarterly Dividend  .05

Current strike price 13.107

New strike price 13.076

Strike adjustment .0306

 

Market price 17.15

Quarterly Dividend 0.10

Current strike price 13.107

New strike price  13.038

Strike adjustment 0.068

 

Market price 17.15

Quarterly Dividend  .25

Current strike price 13.107

New strike price 12.92

Strike adjustment .183

 

Market price 30

Quarterly Dividend 0.25

Current strike price 13.107

New strike price  13.002

Strike adjustment  .10

 

Market price 10

Quarterly Dividend 0.25

Current strike price 13.107

New strike price 12.79

Strike adjustment .314

 

 

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Just finished reading the article.  Almost choked when I read this:

 

“We spent 100 million some dollars to get the process right for the resubmission,” he said, referring to how much the bank set aside for stress-test improvements, including consultants and new employees, after the Fed’s rebuke. “We took an army and went after it.”

 

 

 

This is like Sarbanes-Oxley on steroids...

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Just finished reading the article.  Almost choked when I read this:

 

“We spent 100 million some dollars to get the process right for the resubmission,” he said, referring to how much the bank set aside for stress-test improvements, including consultants and new employees, after the Fed’s rebuke. “We took an army and went after it.”

 

 

 

This is like Sarbanes-Oxley on steroids...

 

Now imagine being a small bank. Now imagine being a non-bank being held to bank standards. Its pretty rough but a boom for consultants and accountants.

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http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=11082818-5933-12791&type=sect&TabIndex=2&dcn=0000070858-15-000116&nav=1&src=Yahoo

 

Bank of America today announced the redemption of $2.0 billion of trust preferred securities. Beginning in January of 2016 these securities, unlike the corporation’s other outstanding series of trust preferred securities, will completely phase-out from regulatory capital. 

 

As a result of the Bank of America Merrill Lynch merger in 2009, the company recorded a discount to par value as purchase accounting adjustments associated with these securities. Bank of America will record a non-cash reduction to net interest income and to pretax income of approximately $600 million in the fourth quarter of 2015 for the remaining discount to par value. The company expects to realize cash savings from lower funding costs as a result of the redemption.

 

The redemption affects all of the trust preferred securities of each trust listed in the table below. The redemption date for all such trust preferred securities is January 29, 2016, and the redemption price is 100 percent of the liquidation amount per trust preferred security, plus accumulated and unpaid distributions on the trust preferred securities through the redemption date."

 

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is this good news ?

 

happy new year to all

 

 

 

Since TRuPs no longer count as regulatory capital, they effectively play the same role as debt financing in BAC's capital structure.  At 7% or 7.5%, it represents $2 billion of very expensive debt.  BAC can retire the TRups and replace them with lower cost debt, or given their existing comfortable regulatory capital levels, perhaps they can just not be replaced altogether.

 

So, yeah, it's a minor good thing.  The only bad thing is having to recognize a gain on the re-purchase which will trigger an income tax bill for an event which is otherwise of little significance.

 

 

SJ

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is this good news ?

 

happy new year to all

 

 

 

Since TRuPs no longer count as regulatory capital, they effectively play the same role as debt financing in BAC's capital structure.  At 7% or 7.5%, it represents $2 billion of very expensive debt.  BAC can retire the TRups and replace them with lower cost debt, or given their existing comfortable regulatory capital levels, perhaps they can just not be replaced altogether.

 

So, yeah, it's a minor good thing.  The only bad thing is having to recognize a gain on the re-purchase which will trigger an income tax bill for an event which is otherwise of little significance.

 

 

SJ

 

what gain on the re-purchase?  they're not re-purchasing it at a discount.   

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is this good news ?

 

happy new year to all

 

 

 

Since TRuPs no longer count as regulatory capital, they effectively play the same role as debt financing in BAC's capital structure.  At 7% or 7.5%, it represents $2 billion of very expensive debt.  BAC can retire the TRups and replace them with lower cost debt, or given their existing comfortable regulatory capital levels, perhaps they can just not be replaced altogether.

 

So, yeah, it's a minor good thing.  The only bad thing is having to recognize a gain on the re-purchase which will trigger an income tax bill for an event which is otherwise of little significance.

 

 

SJ

 

what gain on the re-purchase?  they're not re-purchasing it at a discount. 

 

You are correct.  It's a small loss, not a small gain.

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I feel a little like we've got a value trap here. We've got a company that's 40% below book value. They are buying back $800 million of stock per quarter, which is accretive to per share book value... On top of this, the Fed won't allow them to distribute all of their earnings, so book value is rising even more. It seems like this should be a slam dunk investment... However, this situation has existed for years  now.

 

Perhaps I'm doing the right thing, or perhaps I'm the idiot here, but I was buying today.

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I thought the Fed's  approval is based on LAST year's earnings 

 

So 2015 returns were not very much because 2014's reported earnings were very little due to the legal expenses.

 

2015 has so far been doing better...

 

0.37

0.45

0.27

-----

1.09

 

Analysts are expecting 0.31 in Q4 so would make 2015 total 1.40 $ EPS.

 

I believe all of 2014 EPS was $0.36  LOL 

 

So shouldn't we see a few fold increase in dividends & buybacks?

 

 

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I feel a little like we've got a value trap here. We've got a company that's 40% below book value. They are buying back $800 million of stock per quarter, which is accretive to per share book value... On top of this, the Fed won't allow them to distribute all of their earnings, so book value is rising even more. It seems like this should be a slam dunk investment... However, this situation has existed for years  now.

 

Perhaps I'm doing the right thing, or perhaps I'm the idiot here, but I was buying today.

 

Buying common or warrants?

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Stock is $15.80 today, tangible book was $15.50 last quarter, and a quarter has passed since then (earnings in 2 weeks). 

 

Likely trading at roughly tangible book today.  So the odds of getting better than 10%-12% forward returns are quite high, even without any multiple expansion.

 

Compared to the general market, not bad.

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I believe BAC is quite attractive - in US $ terms

 

As a Canadian... it's now actually more expensive than it was at these levels a while back when the exchange rate was around $1.2...

 

$15.75 x 1.2  = $18.9 CAD/share

$15.75 x 1.41 = $22.2 CAD/share 

 

We've been making money south of the border here LOL.....

 

I also learned that unless BAC shares are held in the Canadian registered retirement account (RRSP);  we will be paying the taxes on BAC shares as if they were income... so for some investors that's still working full time; it could mean 25 - 40%.....    albeit one can deduct the 15% withholding tax  the US government takes & also the gain can be reduced against interest paid if one uses margin... 

 

Still; my rough math seems to suggest if they ever pay a $2 dividend/buyback; one uses leverage could still get about 20% after tax return  just on the free cash returned to the shareholders alone; without any multiple expansion.... not too shabby. 

 

 

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