In an attempt to remove the vestiges of the financial crisis,
Bank of America Corporation
) announced a comprehensive plan to settle its legal dispute with
). The 5-year-old legal dispute involved conflict over guarantees
on commercial mortgage-backed securities (CMBS).
Terms of the Agreement
Under the terms of the agreement, BofA will pay nearly $1.6
billion in cash and give back $137 million worth of MBIA 5.70%
senior notes (acquired through a tender offer in Dec 2012)
maturing in 2034 to MBIA. Further, the company will provide a
senior secured credit facility worth $500 million to MBIA
Insurance Corp, MBIA's structured finance division.
Notably, BofA will get warrants to buy 9.94 million of MBIA
shares at an exercise price of $9.59 per share. This represents
approximately 4.9% of MBIA's current shares outstanding.
Moreover, these warrants have to be exercised prior to May 2018.
Further, BofA will close the outstanding credit default swap
(CDS) protection deal, which was purchased from MBIA on CMBS. In
addition to that, all the pending litigations between the 2
parties will be resolved.
The agreement also states that BofA will pull out from the
lawsuits challenging MBIA's restructuring. Similarly, MBIA has
agreed to withdraw charges against BofA related to the quality of
bonds underlying the guarantees on CMBS.
The agreement requires certain approvals from the New York State
Department of Financial Services, which are expected to be
received soon, following which all the terms of the deal will be
The Blackstone Group
) acted as a financial advisor to MBIA in relation to the
Impact on BofA's 1Q Earnings
As BofA has still not filed its quarterly report for the period
ended Mar 31, 2013, with the Securities and Exchange Commission
(SEC), these settlement charges will be adjusted with its
first-quarter results. The settlement charges will lower the
company's earnings, while leading to an improvement of its
As a result of the settlement agreement, the litigation charge
will lower BofA's first-quarter net income to $1.5 billion or 10
cents per share. On Apr 17, while announcing the first-quarter
results, the company reported net income of $2.6 billion or 20
cents per share.
Notably, BofA's estimated Tier 1 common capital ratio under Basel
III as of Mar 31, 2013, rose by 10 basis points to 9.52%. This
reflects reduction in risk-weighted assets (RWAs) related to the
terminated CDS contracts, partially offset by extra litigation
Still a Long Way to Go
For MBIA, the settlement will do away with many obligations to
guarantee regular principal and interest payments on commercial
real estate related bonds, which could again default under the
current economic scenario. The deal also clears the big hindrance
that lay in its way of restructuring.
For BofA, the settlement agreement is another positive step in
resolving its legal and legacy issues. The company has been
facing many lawsuits, some of which are related to the sale of
mortgage backed securities by Countrywide Financial - acquired in
In Jan 2013, BofA announced nearly $11.6 billion worth of
) to end its mortgage related problems. Further, in 2011, the
company had reached an $8.5 billion settlement deal with the
private investors who had brought those risky MBS.
We believe that the settlement deal will go a long way to improve
BofA's overall efficiency. The company has been striving hard to
regain its past glory. For this, it has announced several
initiatives that are now bearing fruit. All the initiatives will
lead to enhanced financial performance going forward.
Currently, BofA carries a Zacks Rank #3 (Hold).
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