During 2011, Bank of America turned to billionaire investor Warren Buffett when they needed a capital injection. The lender has recently come to an agreement with Berkshire Hathaway about the terms of this investment so that regulators treated more favorably.
The amendment to this agreement allows Bank of America to count preferred shares with a $2.9 billion carrying value as tier 1 capital, we learned from an SEC filing made by the Charlotte, North Carolina-based lending institution. The banking conglomerates shareholders have to approve the deal with Berkshire Hathaway when they vote in May, we also learned according to the filing.
This agreement will “benefit our tier 1 capital and leverage ratios,” said BOA in the filing. “We do not expect any impact to our financial condition or results of operations as a result of this amendment.”
Brian T. Moynihan, Bank of America CEO, has been selling off company assets as a way to prepare for tighter regulation and help simplify the business. International and United States watchdogs are trying to push lenders to hold on to more capital to prevent the need for further bailouts in the event of another financial crisis. A measure of a bank’s ability to absorb losses is known as tier 1 capital.
This amendment is going to force Bank of America to wait a minimum of five years from its approval in order to redeem the preferred stock. Based on the 2011 deal, the bank was able to redeem these preferred shares at any time, as long as they had paid a premium of 5%.
Berkshire Hathaway’s Warrants
On the securities, Buffett and Berkshire get a 6% annual interest. With the revised deal, Buffett made an agreement to give up a dividend provision that allowed him the opportunity to recover any missed payments.
In 2011, Berkshire Hathaway invested $5 billion in the lender after Bank of America stock dropped over 45% due to mortgage losses.
Additionally to the preferred stake, Buffett also received warrants allowing his company Berkshire Hathaway to purchase 700 million shares of BOA stock for $7.14 per share. Around the time of this writing, the stock recently closed at $16.34 per share. This provides Buffett would a $6.4 billion paper profit on those contracts.
Buffett and Bank of America have negotiated the changes, which didn’t involve any fourth quarter payments, according to someone who has knowledge about this matter. After a request was made, Buffett did not immediately respond.