BoA Merrill raises equity to repay Tarp

Bank of America Merrill Lynch has raised $19.3 billion through a sale of securities -- the largest by a US company since 2000 -- as part of its Tarp repayment programme.

BoA Merrill issued 1.29 billion "common equivalent securities", comprising one depositary share and one warrant, which are each convertible into one common share. The issue is subject to shareholder approval. BoA Merrill shares closed at $16.28 on Friday.

The offering, which was completed after the US market closed on Thursday, follows an earlier $13.5 billion share sale by BoA Merrill in May. At that time the bank issued 1.25 billion shares at an average price of $10.77 per share.

BoA Merrill is raising capital to repay the $45 billion capital injection it received last year under the US government's Troubled Asset Relief Program (Tarp), which intended to provide capital to stressed banks. The stock issuance will be used as part repayment of the Tarp funding, with the balance coming from $26.2 billion of excess liquidity BoA Merrill said Thursday.

The bank has also agreed to sell a further $4 billion worth of assets by June 30 next year to increase its equity. The assets it sells will have to be approved by the board of the Federal Reserve. Specialists say the insistence on the asset sales is to force BoA Merrill to shrink its balance sheet. Analysts have speculated that BoA Merrill could sell its stakes in Brazilian bank Banco Itau and money manager BlackRock, or in its high-net-worth wealth management business US Trust.

BoA Merrill said the repayment will help it save $3.6 billion in annual dividends due on the Tarp funding. However, the widely prevailing belief is that more than escaping the dividend payment, BoA Merrill is trying to get away from the government oversight and salary caps that come with Tarp. The bank's chief executive officer, Kenneth Lewis, announced earlier this year that he will retire by December 31. Lewis is resigning without naming a successor. Some large BoA Merrill shareholders have demanded that the next CEO should be an external candidate, arguing that internal candidates have not delivered for shareholders. The ability to offer an attractive pay package may help BoA Merrill to attract top-notch talent for the job.

BoA has been able to create value out of the Merrill Lynch acquisition and in its earnings call for the third quarter of 2009, held in October and posted on seekingalpha, Lewis commented that Merrill Lynch was accretive to earnings year-to-date "as these market-sensitive businesses offer diversification to offset the core credit headwinds we are facing". He added that Tom Montag, who joined Merrill in 2008 to head the markets businesses, has been able to "attract really outstanding people" when the bank has lost staff or needed to fill a position.

Only BoA Merrill and Citi are still shackled by Tarp funding. This means that despite Tarp pay restrictions, BoA Merrill is still able to effectively compete for and attract talent with other investment banks that are openly able to pay top dollars to attract talent. However, specialists say that for the head honcho's job the government is bound to impose pay restrictions, even if it is turning a blind eye to the return of the multi-million dollar pay packages at other levels. If BoA Merril was still a recipient of Tarp money, irate taxpayers would not have taken kindly to their tax dollars being used to pay a hefty sign-on bonus to a new CEO.

BoA Merrill said its tier-1 capital ratio will be 8.5% following the Tarp repayment, based on September 30 numbers.

Fitch Ratings commented favourably on BoA Merrill's capital raising plan, saying that while total equity will decline slightly, the improved mix of capital will better protect creditors from risk. But Fitch also noted that challenges remain, including the appointment of a successor for Lewis, issues related to earnings and asset quality, and the loan portfolio.