B of A recaps at market

From Institutional Investor:

At the Market Deal for Bank of America

03 Jun 2009
Steve Rosenbush

BofA issues stock to withstand market volatility.

Raising $33.9 billion in capital is no mean feat for a bank, especially given the violent mood swings that have gripped the financial markets of late. Nonetheless, such were the marching orders that the Federal Reserve Board handed Bank of America on May 7, when the Fed announced the results of its stress test of 19 U.S. lenders. The financial giant sprang into action the very next day, announcing that it would reduce a big part of the capital deficiencies identified in the stress test by issuing $13.46 billion in equity.

The issue took an unconventional form. Instead of executing the deal in one fell swoop, as companies commonly do, BofA parceled out the shares over the next eight trading sessions. This piecemeal approach, pioneered more than 15 years ago by utilities and real estate investment trusts, which recapitalize frequently, is known as an at-the-market offering, or “dribble out.” The bank’s ATM was the largest in history.

BofA had determined that the structure made sense, given the volatile nature of the market. Its own shares — whipsawed, like those of many big banks, by investor fears over the health of the industry — had plunged 93.6 percent, from a 52-week high of $39.50 on September 19 to a low of $2.53 on February 20, before recovering somewhat. “In a volatile market, the ATM structure is beneficial because it allows you to sell shares when you like the price and leave the market when you don’t,” explains Lisa Carnoy, global co-head of equity capital markets at BofA, which was book runner on its own deal. “It was a perfect approach for us. We were able to minimize dilution and maximize flexibility.”

Demand for the shares was strong, according to Carnoy. In an ATM, the sale of a fixed amount of equity can be stretched out over a month or more, but the company decided to complete the sale on the eighth day, in a so-called cleanup trade. The shares, which had rallied in anticipation of the offering, closed at $14.17 on May 8, dipped to an issue low of $10.67 on May 15 and finished the offering on May 19 at $11.25. The bank sold 1.25 billion shares at an average price of $10.77.

“In this environment, the ATM is a flexible way to raise money. However, with the capital markets open, it made sense to get the equity offerings behind them,” says Jason Polun, a large-cap-bank analyst at T. Rowe Price, a major holder of BofA shares. Polun has a favorable view of the company. And many apparently agree. Hundreds of institutional investors, including pension funds and mutual funds, lined up to participate in the offering. “We could have kept selling, but we just decided to get it done,” Carnoy says.

An ATM structure helps maximize price, minimize dilution and maintain flexibility with respect to size and timing of a deal. In BofA’s case, timing mattered because it had to coordinate the issue with other components of its capital raising plan, including asset sales and conversion of preferred shares. By June 25 the effort was all but complete.

The case for the ATM was bolstered by the disappointing performance of more-traditional offerings, says Carnoy, citing secondary placements this year that have priced as much as 15 percent below where they launched. Morgan Stanley issued $4.5 billion worth of stock in a follow-on offering on May 8 at $24 a share, an 11.57 percent discount, according to research firm Dealogic. And on May 12, bank BB&T offered $1.75 billion worth of shares priced at $20, which Dealogic pegs at an 11.11 percent discount. By May 28, BB&T shares had gained 5.95 percent and Morgan Stanley was up 19.21 percent, according to Dealogic. “If the market happens to be down on the day that you initiate a secondary offering, you are simply out of luck,” Carnoy says. BB&T says it was pleased with the demand for the issue.

BofA’s success with its ATM has already inspired one bank to follow its lead. Fifth Third Bancorp announced on May 20 that it would issue as much as $750 million worth of stock and sell the shares “from time to time” using the structure. It has hired BofA and Morgan Stanley as co–book runners on the deal.

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