BofA to Buy Back $3.9B TruPS

On Friday, Bank of America Corporation (BAC - Analyst Report) jumped on the bandwagon of redeeming trust preferred securities (TruPS) and announced the redemption of $3.9 billion in TruPS. Over the last couple of weeks, banks have been redeeming TruPS since these will no longer qualify for Tier 1 capital ratio calculations beginning 2013.

BofA stated that the redemption of TruPS would be in the range of 100-103% of the liquidation amount. The redemption amount will also include accrued and unpaid distributions until the redemption date. The Bank of New York Mellon Corporation (BK - Analyst Report) and Deutsche Bank Trust Company Americas, unit of Deutsche Bank AG (DB - Snapshot Report), are acting as the transfer/paying agents.

BofA further mentioned that it will use the existing available cash to fund these redemptions. The redemptions of all the TruPS will be done on July 25.

BofA’s decision to redeem TruPS follows the announcement of the new capital rules by the Federal Reserve earlier this month. As per the new proposal, the TruPS issued prior to May 19, 2010 would not be considered for the calculation of Tier 1 capital ratio.

Similar Actions

Apart from BofA, many other banks have announced the redemption of TruPS in the last few weeks. BB&T Corporation (BBT - Analyst Report) announced the redemption of $3.1 billion of TruPS, while JPMorgan Chase & Co. (JPM - Analyst Report) would be redeeming nearly $9 billion in TruPS.

Further, SunTrust Banks Inc. (STI - Analyst Report) stated that it will be redeeming TruPS worth nearly $1.19 billion. Citigroup Inc. (C - Analyst Report), whose extra capital deployment request was rejected by the Fed, has also announced the redemption of TruPS.

Conclusion

Redemption of TruPS is a modestly positive step for the banks, enabling these to bring down interest expenses, as these securities demand higher rates than other securities. At times, the banks replace TruPS with equity or other low-cost debt. Further, according to Dodd-Frank Act, banks will no longer be able to consider these securities as regulatory capital beginning 2013.

Moreover, beginning the third quarter of 2012, BofA is hopeful of saving approximately $230 million interest expenses per quarter as it plans to bring down its long-term debt by nearly $40 billion in the current quarter. The company’s Chief Financial Officer (CFO) Bruce Thompson stated this while addressing Morgan Stanley’s (MS - Analyst Report) investor conference in New York.

Further, a reduction in long-term debt will go a long way in improving the overall financials of BofA. However, the company should not get complacent with its efforts to improve the balance sheet. It should continue striving for more improvements in its balance sheet and capital ratios.

BofA currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain our long-term ‘Neutral’ recommendation on the stock.