Bank of America Corp. raised $19.29 billion in a complex securities sale Thursday evening to help pay back federal rescue funds, with a variable structure that hinges on whether shareholders approve an increase in shares.
The banking giant priced its "common equivalent securities" at $15 each. The securities will have two components: a depositary share representing interests in common equivalent junior preferred stock and a feature called a "contingent warrant."
The deal, which was first outlined in a 6 a.m. EST filing with the Securities and Exchange Commission, accelerated its timeline to the same day after bankers initially projected pricing as late as Monday.
Depending on the outcome of a shareholder vote that will occur within the next several months, the depositary shares will convert fully or partially into common stock. The warrants could either separate and begin to trade independently, separate and become exercisable for a month, or expire without allowing holders to exercise them.
The securities are being structured this way because Bank of America needs shareholder approval to increase the bank's authorized common shares beyond the current 10 billion level, and it won't hold that vote until after the $18.8 billion sale.
Bank of America's decision to raise the money to help buy back $45 billion in preferred stock from the U.S. government received mixed reviews from investors. Some expressed confusion over the deal's structure and dismay at analyst reports indicating that new shares could dilute their stakes by as much as 10%.
A counterargument praised the $3.6 billion saved annually by eliminating the preferred stock's dividend and amortization, which would be accretive to earnings. Others said that paying back the money would give the company more flexibility to hire and retain key executives, including hiring a new chief executive.
No matter how stockholders view it, Bank of America isn't going to make it easy to say "no" to its request to authorize more stock. If the proposal gets rejected, then the depositary shares will partially convert into common stock, with the unconverted portion receiving a special dividend. At the same time, the warrants for up to 60 million shares will instantly become exercisable within 30 days.
The unconverted shares will receive an initial annual dividend rate of 10%. After the first quarter that these dividends are paid, the initial annual rate will increase by 2% for each subsequent quarter to a maximum annual rate of 16%. The payment of the dividends isn't ironclad; if the board votes against issuing dividends for all shareholders, for example, then the common equivalent holders won't receive their extra yield either.
Beyond drawing in buyers for its new securities, Bank of America is clearly constructing its offering in a way that penalizes current shareholders if they vote against the plan. If the warrants are exercised for 60 million shares, shareholders will end up being diluted even if they vote against authorizing more shares. And with current common shareholders receiving a penny a share dividend--a yield that doesn't even rate 1%--the potential overhang of those special dividends for the unconverted common equivalent is a powerful prod toward approval.
"The contingent warrants attached to the common equivalent securities are a way of forcing shareholders to approve the increase in shares and reassure investors participating in the common equivalent offering," said Linus Wilson, an assistant professor of finance at the University of Louisiana.
If shareholders approve the plan to increase the bank's common stock, the warrants will expire without becoming exercisable, and each depositary share will simply convert into a share of common stock, without any special dividends.
In a third scenario, if there is a delayed vote and shareholders take more than 105 days to approve a plan, the depositary shares and warrants will separate. The warrants to purchase shares will then trade independently, and the common equivalent stock will only partially convert into common stock, as it would under a "no" vote.
Under the delayed vote, the warrants won't be exercisable--unless shareholders later vote no--but the special dividend will apply to the unconverted common equivalent stock, as it would under a "no" vote.
Bank of America further outlines in its Securities and Exchange Commission filing that if its plan is rejected at first, it will continue to seek approval "at least as frequently as every six months."
In order to facilitate the partial conversion of shares under the delayed or no vote, Bank of America is preparing to issue an additional 200 million shares of common stock, which it can do without additional stockholder authorization.
Besides Bank of America, UBS AG is acting as an underwriter on the securities sale. Net proceeds, along with additional funds, will be used to repurchase the preferred stock that Bank of America issued to the U.S. Department of the Treasury as part of the Troubled Asset Relief Program.