How badly does Bank of America want to get out from under government supervision? Enough to have its bankers working overtime to dream up a way to do it ASAP with a clever financing structure that sidesteps a little share authorization issue. The company negotiated with the Treasury and the Fed to repay its $45 billion of government bailout money and to do so through an equity offering, existing cash and an asset sale. It also agreed to pay some executives bonuses in restricted stock rather than cash.
It has been reported, though, that ever since Ken Lewis announced he was resigning from Bank of America, the bank has had an extremely difficult time finding a replacement – in part because of government intervention on pay packages for executives. So, getting out from under the government’s supervisory hand should make that hiring process a little easier.
But here’s the rub:
Bank of America has about 8.6 billion shares outstanding (as of Oct. 31) and has shareholder approval to issue up to 10 billion shares. To raise $18.8 billion in equity at the current stock price would create an additional 1.17 billion shares and push the bank up very close to that 10 billion share limit.
So, it has come up with a complicated common equivalent security and warrants that will ultimately turn into common shares if and when shareholders approve a higher share outstanding authorization. The table above explains some of the scenarios for these new securities if there is or isn’t approval.
It will be interesting to see if the buyers of the new securities are mainly existing shareholders or whether they will be new investors. Certainly not the kind of security for mom and pop.