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Bank of America Corporation (BAC - Analyst Report) has announced redemption of nearly $5.1 billion worth of trust-preferred securities (TruPS). The efforts to trim the company’s long-term debt stems from the new rules set by the Basel III norms, which do not recognize TruPS that have features of both equity and debt as Tier 1 common equity.
The redemption of TruPS involves redemption of Capital securities and Floating Rate Preferred securities. Capital securities worth nearly $4 billion will be redeemed on November 5, 2012 whereas redemption of $10 million worth of Floating rate securities is scheduled for November 15, 2012.
BofA stated that the redemption of TruPS would be in the range of 100%–102% of the liquidation amount. The redemption amount will also include accrued and unpaid distributions until the redemption date arrives. The Bank of New York Mellon Corporation (BK - Analyst Report) and Deutsche Bank Trust Company Americas, unit of Deutsche Bank AG (DB - Analyst Report), are acting as the paying agents for this redemption.
The redemptions will lead to a $100 million pretax charge in the fourth quarter. Also, it will result in pre-tax net interest income savings of roughly $50 million for the fourth quarter of 2012 and about $300 million for 2013.
Following the above-mentioned redemptions, BofA also announced the redemption of $850 million worth of the 6.523% Fixed/Floating Non-cumulative Trust Securities of ABN AMRO North America Preferred Capital Repackaging Trust I. The redemption is scheduled for April 3, 2013, and the cash redemption price to be paid on the redemption date will be 100% of the liquidation preference amount of the TruPS, including accrued and unpaid distributions up to the redemption date.
Earlier in July this year, BofA had redeemed nearly $3.9 billion worth of TruPS. Apart from BofA, many other banks have redeemed TruPS in the last couple of months. BB&T Corporation (BBT - Analyst Report) redeemed $3.1 billion of TruPS, while JPMorgan Chase & Co. (JPM - Analyst Report) has redeemed nearly $9 billion in TruPS. Further, SunTrust Banks Inc. (STI - Analyst Report) stated that it has redeemed TruPS worth nearly $1.19 billion
Redemption of TruPS is a positive step for the banks, enabling these to bring down interest expenses, as such securities demand higher rates than others. 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.