BAC leverage

[CorpRaider]

Hah!  Yeah its been a very useful thought exercise for me and I very much appreciate it.  I'm still working on full getting the second step of the anti dilution adjustments.  Seems like the strike is adjusted down based on the ratio to the price of the common the day prior to payment of the dividend..fairly straight forward but the number of shares per warrant; I've got to spend some more time figuring out the import of that.

[ERICOPOLY]

Seems like the strike is adjusted down based on the ratio to the price of the common the day prior to payment of the dividend..fairly straight forward but the number of shares per warrant; I've got to spend some more time figuring out the import of that.

 

Just think of it as a a synthetically leveraged portfolio of common that is enrolled in synthetic DRIP.

 

A normal DRIP plan just reinvests the dividend in the stock at the prevailing price.  You get more shares when the price is lower, and fewer when the price is higher.

 

That's why you are seeing the same thing going on with the warrants when they adjust upon dividend.

 

It will be exactly the same # of shares adjustment (comparing the plain vanilla leveraged common portfolio to the warrants-only portfolio).  It's pretty clever how they just simulated reinvestment into the common stock -- of course, that's the only way you can fully bake in an anti-dilutive provision protection from dividends.

 

 

[CorpRaider]

Thanks.  You're right that is pretty slick drafting.  So the adjustment down in the strike and up in the number of shares per warrant just put you in the same position if you had DRIPed the dividends in excess of the threshold?  In this case $.01.

[ERICOPOLY]

Thanks.  You're right that is pretty slick drafting.  So the adjustment down in the strike and up in the number of shares per warrant just put you in the same position if you had DRIPed the dividends in excess of the threshold?  In this case $.01.

 

Yes.

 

 

[CorpRaider]

Thanks.  Sorry to belabor the point.  That's sort of what I thought on the first (ok maybe third) read through, but with Klarman buying the citi warrants and Berkowitz and chou talking about "secrets"  I was about to try and go da vinci code on the prospectus.

[ERICOPOLY]

Thanks.  Sorry to belabor the point.  That's sort of what I thought on the first (ok maybe third) read through, but with Klarman buying the citi warrants and Berkowitz and chou talking about "secrets"  I was about to try and go da vinci code on the prospectus.

 

The secret they aren't telling us is how poorly they've done in these warrants considering the leverage.

[ERICOPOLY]

I remember the "A" warrants were selling for $2 when the stock was at $5 in late 2011.

 

Since that point up to today, you've made 258% in the warrants and 226% in the common.

 

You had to take on 2.5x leverage in order to make an extra 9.8%.  That's pretty sad considering the stock more than tripled over 3 years.

 

The cost of leverage was about 24% annualized back then, for the full 7 years.  Ridiculous!

[CorpRaider]

Wow that is crazy.  I guess people were just thinking "cheap stock 2.5 times leverage" without looking at the costs of that leverage.

[rkbabang]

Yes the warrants have baffled me for years.  The other thing I find strange, which was the point of my original post yesterday, is that they don't seem to trade in any type of leveraged lockstep with the common the way calls usually do.  With calls if the common goes up the calls go up more, if the common goes down the calls go down more, the warrants don't do that.  For an example using my last few trades in my wife's Roth IRA.

 

Oct 31, 2013:  Sold BACWSA @ $6.05, Bought BAC @ $14.09

Dec 30, 2013:  Sold BAC @ $15.53, Bought BACWSA @ $6.40

May 06, 2014: Sold BACSWA @ $7.26, Bought BAC @ $14.82

Aug 26, 2014: Sold BAC @ $16.35, Bought BACWSA @ $7.19

 

This resulted from Oct to now, without any new money added, an increase in BACWSA warrants by over 16%. in that account.  Does anyone understand why these trade so erratically?

 

 

[Mephistopheles]

People thought the warrants were the best thing ever, but how fucked up can it get more than being leveraged and doing worse than plain vanilla common after a roaring 35% gain in the common?  I mean, that's like being unable to get laid in a whorehouse.

 

Especially if you're a sex starved man in a whorehouse

[rayfinkle]

People thought the warrants were the best thing ever, but how fucked up can it get more than being leveraged and doing worse than plain vanilla common after a roaring 35% gain in the common?  I mean, that's like being unable to get laid in a whorehouse.

 

zing! put pricing proved really important!

[gary17]

I think for those that have limitation with access to funds they would have no choice but to leverage with warrants. So while it did not beat Commons, the funding required is less...  if all I have is $50,000 and I can't borrow or margin... I buy warrants...

[ni-co]

People thought the warrants were the best thing ever, but how fucked up can it get more than being leveraged and doing worse than plain vanilla common after a roaring 35% gain in the common?  I mean, that's like being unable to get laid in a whorehouse.

 

zing! put pricing proved really important!

 

Exactly. Warrants aren't simple leverage. They are much less risky than leverage and you're paying up for it.

 

The thing is that you have to take dividends into account when you're comparing them to LEAPs and those can be a huge factor over the next 4.5 years. What happened for the last two years is that BAC surprisingly didn't pay a dividend above $0.01/share though this was priced into the warrants. I think this is what caused the erratic behavior.

 

Momentarily, I find the A warrants to be reasonably priced, especially considering the risk of rising interest rates. If you subtract about ~$2.5 from the strike price for accumulated dividends until expiration the implied volatility is about 25% 29% – not that expensive (edit: I took the wrong risk free rate at first; now it's 1.65% – the 5 yr US treasury yield).

[ni-co]

Subtract today's warrant price from today's stock price.  The remainder then compounds to $13.30 at what rate?  That's the cost of leverage.

 

Eric, I know you've been making this argument for a while but in this short-handy way it's simply not true. I know that you know it but I don't get your point. It's the cost of leverage PLUS the cost of the put. You cannot gloss over this because the put price is the much larger part of the equation. It's paying up for non-recourse debt. This is what makes this kind of leverage expensive.

 

To put it another way: You're cost of leverage is stock price - (warrant price + put price). This will turn out to be the risk free rate, otherwise there would be an arbitrage opportunity.

 

Therefore, I don't get the point of comparing the warrant to the levered ownership of the common. It makes only sense to compare it to the levered ownership of the common plus the puts.

 

Edit:

Rereading it, I've overlooked this comment of yours. But how do you reconcile this statement with your statement above?

 

Subtract today's warrant price from today's stock price.  The remainder then compounds to $13.30 at what rate?  That's the cost of leverage.

 

The warrant adjustments are merely a synthetic DRIP plan.  Nothing more.  Now, if you borrow money on margin to buy shares that you then enroll in a DRIP plan, can you then argue for a lower margin rate when dividends are paid? No.

 

That makes sense to me.  Thanks for the explanation.  You are correct that you could not argue for a lower margin rate. 

 

I was just looking for someway to account for the lost dividend with the calls and not with the warrants.  I guess that is impossible without knowing before hand exactly how much the strike price will decrease each quarter between now and 2019.

 

Use coomon+puts+margin instead of calls for comparing with warrants.  This way lost dividends don't come into play.

[ERICOPOLY]

Subtract today's warrant price from today's stock price.  The remainder then compounds to $13.30 at what rate?  That's the cost of leverage.

 

Eric, I know you've been making this argument for a while but in this short-handy way it's simply not true. I know that you know it but I don't get your point. It's the cost of leverage PLUS the cost of the put. You cannot gloss over this because the put price is the much larger part of the equation. It's paying up for non-recourse debt. This is what makes this kind of leverage expensive.

 

To put it another way: You're cost of leverage is stock price - (warrant price + put price). This will turn out to be the risk free rate, otherwise there would be an arbitrage opportunity.

 

Therefore, I don't get the point of comparing the warrant to the levered ownership of the common. It makes only sense to compare it to the levered ownership of the common plus the puts.

 

Edit:

Rereading it, I've overlooked this comment of yours. But how do you reconcile this statement with your statement above?

 

Subtract today's warrant price from today's stock price.  The remainder then compounds to $13.30 at what rate?  That's the cost of leverage.

 

The warrant adjustments are merely a synthetic DRIP plan.  Nothing more.  Now, if you borrow money on margin to buy shares that you then enroll in a DRIP plan, can you then argue for a lower margin rate when dividends are paid? No.

 

That makes sense to me.  Thanks for the explanation.  You are correct that you could not argue for a lower margin rate. 

 

I was just looking for someway to account for the lost dividend with the calls and not with the warrants.  I guess that is impossible without knowing before hand exactly how much the strike price will decrease each quarter between now and 2019.

 

Use coomon+puts+margin instead of calls for comparing with warrants.  This way lost dividends don't come into play.

 

The cost of leverage includes the put that is embedded in the warrant.  The put is embedded in the warrant, and hence is in the equation implicitly.

 

You capture it by just subtracting the warrant price from today's stock price, and calculating the rate at which the remainder compounds to the warrant strike.

 

It's in there -- all is well.

 

And yes, we're talking about non-recourse leverage all along -- so the value of the put is important to capture.  It's a critical piece.  This is why it's compared to other forms of non-recourse leverage, such as either calls or common+puts+margin.

[ERICOPOLY]

Yes the warrants have baffled me for years.  The other thing I find strange, which was the point of my original post yesterday, is that they don't seem to trade in any type of leveraged lockstep with the common the way calls usually do.  With calls if the common goes up the calls go up more, if the common goes down the calls go down more, the warrants don't do that.  For an example using my last few trades in my wife's Roth IRA.

 

Oct 31, 2013:  Sold BACWSA @ $6.05, Bought BAC @ $14.09

Dec 30, 2013:  Sold BAC @ $15.53, Bought BACWSA @ $6.40

May 06, 2014: Sold BACSWA @ $7.26, Bought BAC @ $14.82

Aug 26, 2014: Sold BAC @ $16.35, Bought BACWSA @ $7.19

 

This resulted from Oct to now, without any new money added, an increase in BACWSA warrants by over 16%. in that account.  Does anyone understand why these trade so erratically?

 

Today BAC is at $17.16 and BACWSA is at $7.15.  The cost of leverage in the warrants dropped.  I believe it is near the cheapest it's been since this thread began.

 

Roughly 7% annualized (not counting the missing 1 cent quarterly dividend).

 

 

 

[rkbabang]

Yes the warrants have baffled me for years.  The other thing I find strange, which was the point of my original post yesterday, is that they don't seem to trade in any type of leveraged lockstep with the common the way calls usually do.  With calls if the common goes up the calls go up more, if the common goes down the calls go down more, the warrants don't do that.  For an example using my last few trades in my wife's Roth IRA.

 

Oct 31, 2013:  Sold BACWSA @ $6.05, Bought BAC @ $14.09

Dec 30, 2013:  Sold BAC @ $15.53, Bought BACWSA @ $6.40

May 06, 2014: Sold BACSWA @ $7.26, Bought BAC @ $14.82

Aug 26, 2014: Sold BAC @ $16.35, Bought BACWSA @ $7.19

 

This resulted from Oct to now, without any new money added, an increase in BACWSA warrants by over 16%. in that account.  Does anyone understand why these trade so erratically?

 

Today BAC is at $17.16 and BACWSA is at $7.15.  The cost of leverage in the warrants dropped.  I believe it is near the cheapest it's been since this thread began.

 

Roughly 7% annualized (not counting the missing 1 cent quarterly dividend).

 

 

Yes, I've noticed that.  Unfortunately I have no more of the common to sell. I converted it all to warrants in August.  The warrants are a great deal right now.

[Mephistopheles]

Now that the dividend is greater than the threshold, is there anywhere we can check to see the updated strike price and shares/warrant, such as maybe an SEC filing or such?

[rkbabang]

Now that the dividend is greater than the threshold, is there anywhere we can check to see the updated strike price and shares/warrant, such as maybe an SEC filing or such?

BAC_Statement_Regarding_Adjustment_of_Warrants_2.pdf

[morningstar]

Now that the dividend is greater than the threshold, is there anywhere we can check to see the updated strike price and shares/warrant, such as maybe an SEC filing or such?

 

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-warrantinfo

 

Right on their website :)

[Mephistopheles]

Thanks guys!

[gary17]

I wonder if anyone has thought about what the strike place for the A warrants might be in 2019 , assuming a very conservative dividend policy from the fed.... tia!

[ERICOPOLY]

I started this thread when common was at $12 and warrant at $5.65.

 

Today, common up 47% and warrant up 26.5%.

 

Ouch.

[gary17]

I started this thread when common was at $12 and warrant at $5.65.

 

Today, common up 47% and warrant up 26.5%.

 

Ouch.

 

hi Eric... do you think the warrants are attractively priced now - or may be put another way the cost of leverage is now "cheap"?

[ERICOPOLY]

I started this thread when common was at $12 and warrant at $5.65.

 

Today, common up 47% and warrant up 26.5%.

 

Ouch.

 

hi Eric... do you think the warrants are attractively priced now - or may be put another way the cost of leverage is now "cheap"?

 

I find little to criticize today.