BAC-WT - Bank of America Warrants

[Rabbitisrich]

Does anyone have a link to the exact terms of Buffett's warrant/preferred deal?

 

It's difficult to model potential dilution from these unusual warrants. The exercise price adjustment is dependent upon the market price at the dividend period. The shares issuable adjustment depends on the exercise price. The net dilution depends on the amount of fractional shares issuable. Lots of moving parts.

 

[ERICOPOLY]

Does anyone have a link to the exact terms of Buffett's warrant/preferred deal?

 

It's difficult to model potential dilution from these unusual warrants. The exercise price adjustment is dependent upon the market price at the dividend period. The shares issuable adjustment depends on the exercise price. The net dilution depends on the amount of fractional shares issuable. Lots of moving parts.

 

I think I read somewhere that his preferred investment didn't contribute to Basel III capital.

 

So mentally I figure if he exercises the warrants then BAC will get his $5 billion and effectively use it to buy shares back up to $14.  So his $5 billion will wind up initially bumping up the share count by 700 million shares, but potentially it will only really hurt us to the tune of 350 million shares or less (depending on whether the shares are retired for less than $14).

 

So I mentally just plan on 350 million share dilution from his warrants.

[JEast]

This may have been posted earlier, but I have not heard anyone discuss the adjustments based on share repurchases.  Prospectus below:

 

http://www.sec.gov/Archives/edgar/data/70858/000119312510047426/d424b5.htm#tx70043_35

 

Cheers

JEast

[berkshiremystery]

Here's also some interesting article about writing 2014 BAC leaps puts at a $7 strike price.

 

Bank Of America: A 20% Yield That Beats Buffett's Deal

http://seekingalpha.com/article/676801-bank-of-america-a-20-yield-that-beats-buffett-s-deal

 

Covered Put Tables

https://www.doubledividendstocks.com/index.php?page=coverdputtables

 

 

 

[leadingusforward]

Does anyone have a link to the exact terms of Buffett's warrant/preferred deal?

 

It's difficult to model potential dilution from these unusual warrants. The exercise price adjustment is dependent upon the market price at the dividend period. The shares issuable adjustment depends on the exercise price. The net dilution depends on the amount of fractional shares issuable. Lots of moving parts.

 

Here's the link to Berkshire's security purchase agreement.  Discussion of adjustment features starts at bottom of page 7 of the warrant document (3rd document down.)

http://sec.gov/Archives/edgar/data/70858/000119312511232422/dex11.htm

 

The ongoing discussion on the future and risks of BAC and its warrants on this thread has been tremendously educational.  Thanks to everyone for the generous public analysis and debate.  You have all selflessly contributed to the investment public's knowledge base.

 

Along with JEast, I'm trying to determine if these TARP warrants receive an adjustment similar to the one for dividends with open market share repurchases under the "pro-rata repurchase" clause.  BAC investor relations tells me they will.  WFC investor relations tells me they won't and there has been no change in the strike price or the number of shares a warrant will convert to despite their repeated open market common stock repurchases since the TARP warrants were sold to the public.  Yet the language covering share repurchases in the supplemental prospectuses for both BAC and WFC warrants appears to be identical outside of some sentences being in different locations (language copied below).

 

Any clarity anyone can offer would be most appreciated.

 

 

BAC-WTA

 

"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."

 

Top of page S-29

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm#suptx70043_6

 

WFC Warrants

 

"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 an affiliate of ours 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 this 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 which is a pro rata repurchase or (b) the date of purchase of any pro rata repurchase that is not a tender offer or exchange offer."

 

Bottom of page S-23

http://sec.gov/Archives/edgar/data/72971/000119312510123882/d424b7.htm#stoc99150_10

 

[ERICOPOLY]

I can't see why a share repurchase would cause any reduction in warrant strike price.  The warrants benefit from share repurchase every bit as much as the common.  So why would there be any special provision?

 

[Hielko]

I don't know, but given the language quoted below it seems to be there is some sort of adjustement when shares are repurchased. So the big question is not why it's there, but if it also applies to open market share repurchases.

[PlanMaestro]

I can't see why a share repurchase would cause any reduction in warrant strike price.  The warrants benefit from share repurchase every bit as much as the common.  So why would there be any special provision?

 

There is no adjustment to the strike price, but my understanding is that there might be an adjustment of the number of shares that each warrant converts adjust to our benefit.

 

Rabbiritsch (sic) commented on this before:

It refers to a tender or exchange offer, so the specificity implies that open market purchases aren't covered. However, it makes sense to remain agnostic on the issue because an open market bid is arguably an offer to "substantially all holders".

 

The intent seems to be to exclude open market bids. BAC adjusts for stock dividends but not for issuances.

[Rabbitisrich]

Does anyone have a link to the exact terms of Buffett's warrant/preferred deal?

 

It's difficult to model potential dilution from these unusual warrants. The exercise price adjustment is dependent upon the market price at the dividend period. The shares issuable adjustment depends on the exercise price. The net dilution depends on the amount of fractional shares issuable. Lots of moving parts.

 

I think I read somewhere that his preferred investment didn't contribute to Basel III capital.

 

So mentally I figure if he exercises the warrants then BAC will get his $5 billion and effectively use it to buy shares back up to $14.  So his $5 billion will wind up initially bumping up the share count by 700 million shares, but potentially it will only really hurt us to the tune of 350 million shares or less (depending on whether the shares are retired for less than $14).

 

So I mentally just plan on 350 million share dilution from his warrants.

 

Thanks. It seems like there are two ways for Buffett to exercise the warrants: http://www.sec.gov/Archives/edgar/data/70858/000119312511232422/dex11.htm

(B) payment of the Exercise Price for the Shares thereby purchased at the election of the Warrantholder by (i) tendering in cash, by certified or cashier’s check payable to the order of the Corporation, or by wire transfer of immediately available funds to an account designated by the Corporation and/or (ii) the surrender to the Corporation of shares of the Corporation’s 6% Cumulative Preferred Stock, Series T (“Preferred Stock”), valued for purposes of payment of the Exercise Price at the per share sum of (x) $100,000 per share of Preferred Stock and (y) the amount of any accrued and unpaid dividends on each of such surrendered shares of Preferred Stock (including all past due dividends) with such accrual computed from the last dividend payment date through the applicable exercise date of this Warrant.

 

My interpretation of the last line is that dividends only count to the per share valuation if they are unpaid AND accrued.

 

 

 

There is also an interesting provision regarding buybacks:

(iv) Certain Repurchases of Common Stock. In case the Corporation effects a Pro Rata Repurchase of Common Stock, then the Exercise Price shall be adjusted to the price determined by multiplying the Exercise Price in effect immediately prior to the effective date of such Pro Rata Repurchase by a fraction of which the numerator shall be (i) the product of (x) the number of shares of Common Stock outstanding immediately before such Pro Rata Repurchase and (y) the Market Price of a share of Common Stock on the trading day immediately preceding the first public announcement by the Corporation or any of its Affiliates of the intent to effect such Pro Rata Repurchase, minus (ii) the aggregate purchase price of the Pro Rata Repurchase, and of which the denominator shall be the product of (i) the number of shares of Common Stock outstanding immediately prior to such Pro Rata Repurchase minus the number of shares of Common Stock so repurchased and (ii) the Market Price per share of Common Stock on the trading day immediately preceding the first public announcement by the Corporation or any of its Affiliates of the intent to effect such Pro Rata Repurchase. In such event, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be adjusted to the number obtained by dividing (x) the product of (1) the number of Shares issuable upon the exercise of this Warrant before such adjustment, and (2) the Exercise Price in effect immediately prior to the Pro Rata Repurchase giving rise to this adjustment by (y) the new Exercise Price determined in accordance with the immediately preceding sentence.

 

So the warrants receive "protection" from buybacks if the stock price rises following the announcement of buybacks (because the repurchase outlay reduces the numerator by more than the [before-announcement price  X  shares repurchased] reduces the denominator). Then the issuable shares increases by the ratio of old to new exercise price. It's just for pro rata buybacks, but it's something to watch given the size of the dilution.

[Rabbitisrich]

 

 

Along with JEast, I'm trying to determine if these TARP warrants receive an adjustment similar to the one for dividends with open market share repurchases under the "pro-rata repurchase" clause.  BAC investor relations tells me they will.  WFC investor relations tells me they won't and there has been no change in the strike price or the number of shares a warrant will convert to despite their repeated open market common stock repurchases since the TARP warrants were sold to the public.  Yet the language covering share repurchases in the supplemental prospectuses for both BAC and WFC warrants appears to be identical outside of some sentences being in different locations (language copied below).

 

Hey Leadingusforward, can you share BAC's response to your query? Maybe they didn't understand that your question required a clarification that pro rata includes open market bids.

[xazp]

My reading is there is no adjustment for open market purchases.

 

Two more items for thought:

1)  The deal did raise $5Bn of Basel 1 capital.  In the short-term, due to the B3 "phase-in" period, it also raises Basel 3 by $4-$5Bn.  So, in theory, it means that BAC can buy back around $4-$5Bn more stock than they could have otherwise, because it's improving their current (but not long-term) capital ratios.  In that sense, it could be a big wash.

 

2)  If one believes that BAC can earn $20Bn/year, and pay out 30% as a dividend ($6Bn) - then buying today, you would get  a similar return to Buffett.  His preferred would pay 6%, your stock would pay out 7.5% (but would start later).  You get the common shares for ~ the same price as he does. 

 

 

 

 

 

 

 

 

 

 

 

I don't know, but given the language quoted below it seems to be there is some sort of adjustement when shares are repurchased. So the big question is not why it's there, but if it also applies to open market share repurchases.

[leadingusforward]

I can't see why a share repurchase would cause any reduction in warrant strike price.  The warrants benefit from share repurchase every bit as much as the common.  So why would there be any special provision?

 

There is no adjustment to the strike price, but my understanding is that there might be an adjustment of the number of shares that each warrant converts adjust to our benefit.

 

Rabbiritsch (sic) commented on this before:

It refers to a tender or exchange offer, so the specificity implies that open market purchases aren't covered. However, it makes sense to remain agnostic on the issue because an open market bid is arguably an offer to "substantially all holders".

 

The intent seems to be to exclude open market bids. BAC adjusts for stock dividends but not for issuances.

 

Plan -

 

The odd thing is I asked WFC ir about both the strike price and how many shares are currently converted into, they told me the strike price was unchanged and each warrant coverts to a single share currently.  WFC has been repurchasing common on the open market for some time.  One indication of what a good deal these warrants are is they appear to have been spending even more money repurchasing their TARP warrants.

 

Can you share why you believe there might be an adjustment to the number of shares?

 

BTW, your blog's posts on banking and the TARP warrants are outstanding.  It was your most recent post (and your anonymous contributor) that got me have started looking into the TARP warrants.  Much appreciated!

[leadingusforward]

 

 

Along with JEast, I'm trying to determine if these TARP warrants receive an adjustment similar to the one for dividends with open market share repurchases under the "pro-rata repurchase" clause.  BAC investor relations tells me they will.  WFC investor relations tells me they won't and there has been no change in the strike price or the number of shares a warrant will convert to despite their repeated open market common stock repurchases since the TARP warrants were sold to the public.  Yet the language covering share repurchases in the supplemental prospectuses for both BAC and WFC warrants appears to be identical outside of some sentences being in different locations (language copied below).

 

Hey Leadingusforward, can you share BAC's response to your query? Maybe they didn't understand that your question required a clarification that pro rata includes open market bids.

 

Unfortunately, it was done via a phone call.  I asked several different ways to try to confirm open market purchases of the common would adjust the strike price and number of warrants similar to the dividend adjustment.  The IR person repeatedly told me they would.  Given the conflicting information, I'm going to try email, but will need to chase down an employee's email address because BAC hasn't responded to my initial email to their general IR email address from a couple of days ago.

 

I'm inclined to trust WFC's information given they have actually done a stock buy back.

[Rabbitisrich]

I see, thanks.

[PlanMaestro]

Can you share why you believe there might be an adjustment to the number of shares?

 

If the repurchase is a tender offer, I am almost sure there is an adjustment. If it is done through open market transactions there is ambiguity in the language as Rabbitisrich explained. That might also explain the  BAC/WFC confusion. I am not counting on repurchase adjustments and the repurchases themselves are a good deal at these prices.

 

Glad the post helped and if you find more about this please share. Welcome to the board.

[leadingusforward]

Don't forget about Warren's warrants. Not an insignificant number, especially with the dividends you guys are talking about.

 

Mr. B -

 

Your contributions to this discussion have been very enlightening particularly your posts on an earlier Francis Chou thread and spreadsheet on the FFBCW thread.

 

I completely agree it's wise to keep in mind the diluting impact of Buffett's warrants.  On the surface the valuable adjustment features with the low dividend threshold and the strike price near TBV appear very favorable for BAC-WTA, but the Buffett's warrants with similar features will eat away at the value of these adjustments.  The question is how to quantify the dilution.

 

Care to share how you're estimating the dilution impact of Buffett's warrants on BAC's?

[MrB]

Don't forget about Warren's warrants. Not an insignificant number, especially with the dividends you guys are talking about.

 

Mr. B -

 

Your contributions to this discussion have been very enlightening particularly your posts on an earlier Francis Chou thread and spreadsheet on the FFBCW thread.

 

I completely agree it's wise to keep in mind the diluting impact of Buffett's warrants.  On the surface the valuable adjustment features with the low dividend threshold and the strike price near TBV appear very favorable for BAC-WTA, but the Buffett's warrants with similar features will eat away at the value of these adjustments.  The question is how to quantify the dilution.

 

Care to share how you're estimating the dilution impact of Buffett's warrants on BAC's?

 

The spreadsheet (attached) is a good start, because it provides the mechanics and is essentially the tool you need to answer your own question. Please double check the formulas!

The rest is down to your assumptions bearing in mind 2.2(b) of the supplement to the Buffett warrant's prospectus, which basically says that the existing capital structure does not trigger anti-dilution adjustments. For example(6) on page 6 of which the language says "(6) 272,168,730 shares of Common Stock exercisable pursuant to warrants originally issued to the United States Department of the Treasury"

which I understand says that the issue of shares under our warrants does not trigger the Buffett Warrant's anti dilution adjustments.

So essentially you have to come up with your own parameters of what dividends are likely to be paid, etc and plug it into the spreadsheet.

 

On another note. You can use the spreadsheet in support of your questions to IR. Plug in assumptions, mail it to IR and simply ask them to point out any mistakes in your assumptions or calculations you might have made. Also try Kenneth.Lovik AT bankatfirst.com (First Financial Bank) who seems to be on top of the situation.

 

P.S. Thank you for the good words...just paying back.

BAC-WFC-warrants.xlsx

BAC-WFC-warrants.xlsx

[MrB]

Can you share why you believe there might be an adjustment to the number of shares?

 

If the repurchase is a tender offer, I am almost sure there is an adjustment. If it is done through open market transactions there is ambiguity in the language as Rabbitisrich explained. That might also explain the  BAC/WFC confusion. I am not counting on repurchase adjustments and the repurchases themselves are a good deal at these prices.

 

Glad the post helped and if you find more about this please share. Welcome to the board.

 

PM I agree with your logic, but what I don't understand is that it is not dilution right? Why would they incorporate it in the first place? I note that on page 11 (number S-7) of the AIG warrants prospectus it actually has a limit of 30%. So only gets triggered if tender is more than 30% of outstanding.

 

Notes to the board:

1. When talking about the prospectus it is actually the supplement to the prospectus that contains the relevant information.

2. I have found the AIG prospectus to be the place to start, because it actually spells out the formulas in addition to the language.

[Uccmal]

Not to denigrate the good works above, but Buffett's warrant dilution is a moot point in the greater scheme of things.  700 million shares on 10 billion is 7%. 

 

Scenarios: Bac  still trades at 7- 8 in the new year, and they buy back at least that amount of shares.  Since the preferreds don't count in the common equity ratio they use Buffets 5 B plus another 10-20 b to retire shares quickly.

 

2) BAC trades way up on higher earnings as this year progresses into next.  Buffett likely won't be in any hurry to exercise his options, since they still pay him above market interest, unless a dividend makes it more tax efficent for him.  BAC retires some shares below TBV and gives back the rest as dividends.  My preferred option.

 

3) BAC crashes - buffett does okay and the rest of us get killed.

 

Needless to say BRk does well no matter which scenario.

[PlanMaestro]

PM I agree with your logic, but what I don't understand is that it is not dilution right? Why would they incorporate it in the first place? I note that on page 11 (number S-7) of the AIG warrants prospectus it actually has a limit of 30%. So only gets triggered if tender is more than 30% of outstanding.

 

1. Right.

2. Because it could be a way to sideline the double adjustment (strike+#share) when paying a dividend. It is capital distribution by another name. But as I said, I am not sure it plays out and not counting on it.

3. Good catch.

[MYDemaray]

Anyone have any thoughts on this Whalen piece? http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

[racemize]

Anyone have any thoughts on this Whalen piece? http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

 

hard to take an analyst that writes like that seriously--he uses the term "rape" four times in the article...

[PlanMaestro]

"It's all for nothing if you don't have freedom." William Wallace

 

Laughing my socks off ... Yeah right, Bank of America is Longshanks. By itself responsible of the whole crisis.

 

The fact is that Bank of America had nothing to do with the crisis. It did not own Countrywide or Merrill when they were stupid or even evil, it only stepped up and bought them when they cracked. Whalen should send a thank you note to the shareholders that approved those transactions.

 

But let's take Mr. "hundreds of billions of dollars in legal liabilities" on his arguments not his "political" biases. I don't know how to call those biases at this moment. Investing bias when he is running a hedge fund based on the large banks unbankability? Commitment bias when he has been so wrong about the large banks profit trends (improving, improving, improving)? OK, OK  .... his arguments. 

 

Let's start with what he does not mention. No mention that the Countrywide acquisition was structured behind the bankruptcy veil. No mention of the 95% of the buyers that approve the settlement. No mention of the 2/3 of the principal of the 2005-2008 vintages that had run off or paid off. No mention that the AGs were not the main plaintiff or even a plaintiff . No mention of the statute of limitations. No mention that Walnut's litigious tactics (conflict of interest? federal court?). No mention of Walnut's securities were worth only $1.4B face value within a settlement that included hundreds of billions of dollars in face value.

 

Then he does a sleight of hand and mentions the recent tax litigation as if they were part of the same allegations. They are not. Then he says "Consider one example." when it's his only example and not a very good one. Then he waves the flag of bankruptcy when this litigation is not even close to be life threatening, minuscule. And then ... he goes on his "rape" tirade that is as good as any of Taibbi's pieces for the Rolling Stones.

 

"This may be why Walnut Place has withdrawn from the Countrywide put back litigation; because they know that obtaining justice in a NY kangaroo court is impossible."

 

Yeah right. Did he follow Walnut's litigious tactics and their complete failure? How does he know what Walnut thinks when Klarman is not talking and Whalen is not a journalist that spoke to him off the record? And then he ends, with one of the few worthy statements in his whole piece ... if you strip out the anger:

 

So ask not whether there will ultimately be a settlement in the BAC litigation; there will. The only question is the cost to be borne by investors and home owners. In that sense the cynical calculus of Wall Street that says that BAC will eventually emerge from a decade of litigation is correct. The only wild card that exists is whether the courts or one of the politicians concerned decides to do the right thing, in which case BAC could still end up in a restructuring. Indeed, there is a school of thought that says that BAC may ultimately be restructured and thus made an example to the other TBTF banks. The message: when the political collection plate passes by, give generously.

 

Hey, I hate bankers, especially investment bankers, and I'm pro-Glass Steagall. But I hate falseness more. When a central part of a thesis proves wrong, you don't double down or clutch at straws.

 

Whalen's obsession with Bank of America is ridiculous. I used to have respect for him, but now he's part of show business.

 

PS: "the cynical calculus of Wall Street that says that BAC will eventually emerge from a decade of litigation." Has he checked BAC's share price lately? A trilemma, one of those three words (cynical, calculus or Wall Street) does not belong in that phrase.

 

 

 

[MYDemaray]

well put Plan...

[Rabbitisrich]

Yeah, it can be frustrating reading Yves Smith or Chris Whalen, but that same bias drives them to collect as much negative information as possible. Just take a skim approach and pick out the facts, while controlling annoyance with a cup of peppermint tea.