BofA Reaches Deal With Buffett on Preferred Stake
Bank of America Corp. (BAC), the lender that turned to Warren Buffett in 2011 for a capital injection, reached a deal with the billionaire’s company to change terms so the investment is treated more favorably by regulators.
The amendment would allow the bank to count preferred shares with a $2.9 billion carrying value as Tier 1 capital, the Charlotte, North Carolina-based lender said in a filing with the U.S. Securities and Exchange Commission yesterday. The deal with Buffett’s Berkshire Hathaway Inc. (BRK/A) must be approved by the bank’s shareholders in a May vote, according to the filing.
The agreement will “benefit our Tier 1 capital and leverage ratios,” Bank of America said in the filing. “We do not expect any impact to our financial condition or results of operations as a result of this amendment.”
Bank of America Chief Executive Officer Brian T. Moynihan has been selling assets to simplify the company and prepare for tighter regulation. U.S. and international watchdogs are pushing lenders to hold more capital to prevent a repeat of the bailouts in the financial crisis. Tier 1 capital is a measurement of a bank’s ability to absorb losses.
The amendment would force Bank of America to wait at least five years from its approval to redeem the preferred stock. Under the 2011 deal, the bank was able to redeem the preferred stake at any time as long as it paid a 5 percent premium.
Berkshire gets 6 percent annual interest on the securities. Under the revised deal, Buffett agreed to give up a dividend provision that gave him the right to recover missed payments.
Berkshire made the $5 billion investment in the bank in 2011 after the lender’s stock fell more than 45 percent amid losses on mortgages.
In addition to the preferred stake, Buffett received warrants allowing his Omaha, Nebraska-based company to buy 700 million shares of Bank of America for $7.14 each. The stock closed at $16.34 yesterday, giving Buffett a paper profit of about $6.4 billion on those contracts. The shares were little changed at 9:40 a.m. in New York.
Bank of America and Buffett negotiated the changes, which didn’t involve payments, in the fourth quarter, according to a person with knowledge of the matter. Buffett didn’t immediately respond to a request for comment sent to an assistant.
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