Wednesday night, glued to the talking heads on CNBC, I heard Charlie Gasparino (author of The Sellout) announce that BAC was going to issue $18.8B of preferred securities. Being a preferred investor I thought this might open the market to new issuance. Or not. As the prospectus states (emphasis mine):
Bank of America Corporation is offering $18,800,000,000 of Common Equivalent Securities, consisting of depositary shares representing interests in shares of our Common Equivalent Junior Preferred Stock, Series S (the “Common Equivalent Stock”), and warrants (the “Contingent Warrants”) to purchase an aggregate of 60,000,000 shares of our common stock. Upon issuance of the Common Equivalent Securities, the depositary shares and the Contingent Warrants will not be separable or transferable separately and the Contingent Warrants will not be exercisable. Each Common Equivalent Security consists of one depositary share, representing a 1/1,000th interest in a share of Common Equivalent Stock, and a Contingent Warrant to purchase of a share of our common stock for a purchase price of $0.01 per share. Each depositary share entitles the holder, through the depository, to a proportional fractional interest in all rights and preferences of the Common Equivalent Stock represented thereby, including conversion, dividend, liquidation and voting rights.
We have agreed to use our reasonable best efforts to hold a special meeting of our stockholders as soon as practicable, but not later than 105 days following completion of this offering, at which we will seek to obtain the requisite stockholder approval of an amendment to our amended and restated certificate of incorporation to increase the number of authorized shares of our common stock from 10,000,000,000 to a number at least sufficient to permit the full conversion of the Common Equivalent Stock into common stock.
Okay, now we know that these start as preferreds and are mandatory converts. This conversion should occur no later than 105 days - assuming the board authorizes an increase in common shares. The warrants fall away and become voided.
What happens if shareholders refuse? Well,
If our stockholders reject the common stock amendment at the special stockholders’ meeting, then at 9:30 a.m., New York City time, on the first business day following the negative stockholder vote:
- the Contingent Warrants and the depositary shares will separate and begin to trade separately (if not previously separated as a result of the failure to obtain stockholder approval on or before the 105th day following the completion of this offering as discussed below), the Contingent Warrants will become exercisable for a 30-day period, at the end of which they will expire, and the Common Equivalent Securities will cease to exist; and
- if not previously partially converted as described below due to the failure to obtain stockholder approval on or before the 105th day following the completion of this offering, the Common Equivalent Stock automatically will partially convert into our common stock, to be effected by our issuance of 200,000,000 shares of common stock (subject to certain anti-dilution adjustments) to the holders of the Common Equivalent Stock; the conversion rate for the Common Equivalent Stock will be reduced proportionately as described herein; and the liquidation preference amount of the Common Equivalent Stock, as defined below, will be reduced in the same proportion as is the conversion rate as described herein.
Thereafter, the Common Equivalent Stock will remain outstanding and automatically convertible in full, at the reduced conversion rate (subject to certain anti-dilution adjustments), upon subsequent stockholder approval of the common stock amendment.
In addition, upon the earlier to occur of the negative stockholder vote or the failure to obtain stockholder approval on or before the 105th day following the completion of this offering, additional non-cumulative quarterly cash dividends will become payable on the Common Equivalent Stock, when, as, and if declared by our board of directors (the “Additional Dividends”) prior to the payment of dividends on the common stock. The Additional Dividends will be payable at an initial annual rate of 10% of the liquidation preference amount, defined below. For each quarterly period subsequent to the first period for which this dividend is payable, the initial annual rate of this dividend will increase by 2% to a maximum annual rate of 16%.
Liquidation Preference Amount: Common Equivalent Stock in an initial amount equal to the product of (1) the public offering price of a Common Equivalent Security set forth on the front cover of this prospectus supplement and (2) 1,000 (the “liquidation preference amount”), together with declared and unpaid dividends.
Dividends are declared and occur only if common is to receive a dividend and there is a dividend stopper which states that no dividend can be paid on common or parity securities.
The conversion feature:
Each share of Common Equivalent Stock will automatically convert in full into shares of our common stock, with no action on our part or the part of the holder, at 9:30 a.m., New York City time, on the first business day following the later of approval of the common stock amendment at the special stockholders’ meeting held on or before the 105th day following the completion of this offering or the effectiveness of the common stock amendment. The initial rate of such conversion is 1,000 shares of common stock for each share of Common Equivalent Stock (or one (1) share of common stock for each depositary share), so that, in the aggregate, based on this initial rate, shares of our common stock will be issuable upon conversion of the Common Equivalent Stock.
Currently pricing has not been set.
Bottom line, these are just forward equity which are meant to repay TARP, increase tier one common from 7.3% to 8.5% (assuming $4B asset sales) and tangible common from 4.8% to 5.6% (again assuming $4B in asset sales). Ultimately, my question is: if you want BAC shares, why not just buy them? This question does not assume an issuance price significantly (5-10%) below current market. If you want to get long BAC common, wait for the issuance price talk and make the decision.
As an aside, why the common is rallying given the coming dilution is beyond me. Sure, it throws off the yoke of the government (to a degree) but dilution is dilution.
Disclosure: Long BAC preferreds.