BofA Sees $5 Billion Collateral Need in Credit Downgrade

Bank of America Corp., the lender that has bought back debt to strengthen its balance sheet, said credit downgrades in a hypothetical scenario may trigger demands for about $6.2 billion in collateral.

A two-level downgrade of long-term senior debt ratings would have prompted the bank to post about $5.1 billion of collateral tied to derivatives contracts and other trading agreements as of March 31, the Charlotte, North Carolina-based firm said yesterday in a regulatory filing. It would have had to post an additional $1.1 billion of collateral if trading partners opted to tear up contracts in a two-level cut.

Moody’s Investors Service, which is reviewing banks and securities firms with global capital markets operations, has said it’s considering downgrades of lenders including Bank of America, ranked second by assets in the U.S. While ratings cuts typically raise borrowing costs and force banks to increase collateral, analysts have said the change was expected.

Bank of America may be cut by one grade to Baa2, the second-lowest investment-grade rating, Moody’s said on Feb. 16. Competitors such as New York-based Morgan Stanley (MS) may be cut as many as three levels, Moody’s said. The ratings company wrote that credit profiles of investment banks are weakening amid worsening government finances, economic uncertainty and higher funding costs.

‘Evolving Challenges’

“Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions,” Moody’s said in February. “These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness and opacity of risk, have diminished” the industry’s prospects, Moody’s said.

The three major ratings firms -- Moody’s, Standard & Poor’s and Fitch Ratings -- cut Bank of America’s credit grades last year. The figures in the lender’s hypothetical scenario apply to future downgrades by all three firms.

A one-level cut would have required the bank to post about $2.7 billion of collateral tied to derivatives contracts and other trading agreements and an additional $800 million tied to the termination of contracts, the firm said.

To contact the reporter on this story: Rick Green in New York at rgreen18@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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BofA Sees $5 Billion Collateral Need in Credit Downgrade

A Bank of America Corp. branch in New York. Photograph: Victor J. Blue/Bloomberg

A Bank of America Corp. branch in New York. Photograph: Victor J. Blue/Bloomberg