tag:blogger.com,1999:blog-4815867514277794362.post8480142996823765871..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Bank of America: some comment on the Buffett dealJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger47125tag:blogger.com,1999:blog-4815867514277794362.post-32064323625666391832012-02-29T08:04:28.635+11:002012-02-29T08:04:28.635+11:00John,
Nice post
You said "Buffett got $7.14 w...John,<br />Nice post<br />You said "Buffett got $7.14 warrants with slightly longer albeit less nice terms" <br />Which terms are you referring to when saying "less nice"?<br /><br />Thanks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-90301695810974454452011-08-30T18:48:00.863+10:002011-08-30T18:48:00.863+10:00John,
Using your sample analogy, there are three ...John,<br /><br />Using your sample analogy, there are three cases at t=10yrs; given the price of the perpetual in the market we can see there is approximately a 1/3 chance of default by this time.<br /><br />1)the company has defaulted, the stock is worth zero, as are your warrants, you maybe have clipped a few coupons, whopppeee dooodah. value of structure = $0.<br /><br />2)the stock price hasn't moved or is below the strike. you convert the warrants, using the prefs to pay the strike, you get $5bn back and have $3bn of coupon collected.<br />value of structure $8bn.<br /><br />3)unless the stock is massively overpriced at the same time that the prefs are massively underpriced for the stock to have been trading at $6.99 we need the third scenario stock price to be $19.27. In this case the warrants are worth $8.5bn and your prefs are worth $8bn.<br /><br />and so the total value of the structure is 1/3 * (0+8+8+8.5) = $8.16bn pv'd = $6.52bn<br /><br />I think that is a very conservative valuation of $1.52bn profit at inception. and is equivalent to a $3.23 warrant price.<br /><br />Using a proper convertible bond valuation model the profit at inception is a lot higher though.TheRavenhttps://www.blogger.com/profile/04283848251928531247noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-55432794347640621822011-08-30T04:09:47.632+10:002011-08-30T04:09:47.632+10:00these prefs are significantly different to other i...these prefs are significantly different to other issues trading in the market inmho, as they can be used to pay the strike on the conversion of the warrant.TheRavenhttps://www.blogger.com/profile/04283848251928531247noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-55389053754157612042011-08-29T06:26:07.171+10:002011-08-29T06:26:07.171+10:00Don't worry 'bout that Colin. My business ...Don't worry 'bout that Colin. My business partner made the same mistake.<br /><br />Imagine though if you will when the stock price is $6.88.<br /><br />$6 seems outrageous for an option you need to pay $7.14 to exercise to get a share that is currently worth $6.88.<br /><br />How about $5? Possible but only if the shares are really really binary - zero or lots.<br /><br />I don't think I mispriced them.<br /><br />There are in my view three outcomes - a debacle, a very dramatic recovery or the Japanese option which is sideways. Jap banks trade at 2/3 book ten years later.<br /><br />The options are bad in two out of three of those. The shares are bad in only one out of three.John Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-69871029600872032052011-08-29T05:58:54.956+10:002011-08-29T05:58:54.956+10:00I am definitely wrong. Options are definitely cap...I am definitely wrong. Options are definitely capped at the stock price (though I would still argue you have underpriced them significantly). [foot in mouth]Colinhttp://www.google.comnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-80835861628688948032011-08-29T02:52:51.623+10:002011-08-29T02:52:51.623+10:006% coupon, never mind when it's callable.........6% coupon, never mind when it's callable...... and the right to buy at 7.14 anytime in the next ten years...... i'll take it.<br /><br /><br /><br />ten years, aye. where what and who were you ten years ago?chris hausernoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-79800203600034562042011-08-29T01:34:12.941+10:002011-08-29T01:34:12.941+10:00Regardless of the details of the terms on the deal...Regardless of the details of the terms on the deal, isn't the most pertinent question to ask of BoA "Why do this now?"? If they aren't going to raise a significant amount of capital, it seems pointless from a BoA perspective. $5 billion isn't going to alter the capital structure much is it? Couldn't they have raised $5 billion just by selling shares or a rights offering and got better terms? A "Buffett bounce" might allow a better price. What other reason could they're be for this deal? <br />These are genuine questions John, not rhetorical ones, I respect your opinions very much.<br /><br />Perhaps those who think that warrants can be worth more than the underlying could give a concrete example of a situation where it is true.cargocultinvestorhttps://www.blogger.com/profile/01741832702762624526noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-49326611752339463002011-08-28T11:22:49.263+10:002011-08-28T11:22:49.263+10:00Another way of saying it - if the shares and the w...Another way of saying it - if the shares and the warrant were available at equal price what would you want.<br /><br />Obviously the shares.<br /><br />In other words to induce you to take the warrants over the shares they have to be cheaper than the shares.<br /><br />The shares were $6.88 on the day the deal was negotiated.<br /><br />The warrants MUST have been worth less than $6.88 on that day.<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-37759982411041382472011-08-28T08:23:19.183+10:002011-08-28T08:23:19.183+10:00Yes - your downside is what they are worth.
Your ...Yes - your downside is what they are worth.<br /><br />Your downside with the share is $6.88. That is what it is worth.<br /><br />Your downside with the warrant. That is what it is worth.<br /><br />The warrant is worth less than the share.<br /><br />End of story. I simply do not see why people do not get this.<br /><br />---<br /><br />More to the point. You have a pile to choose... 700 million shares or 700 million warrants.<br /><br />You have already paid the 5 billion dollars for the bonds - you just have to chose one or the other. That is just the extra.<br /><br />Of course you chose the shares. They are shares. The warrants only have potential to be shares.John Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-21144002833469720902011-08-28T08:17:18.681+10:002011-08-28T08:17:18.681+10:00I give you a choice. You can own the share now. It...I give you a choice. You can own the share now. It is worth $6.88.<br /><br />Or you can own a warrant which is a right to buy the share in the future for $7.14.<br /><br />Your choice.<br /><br />Of course you take the share now. You must. Wonderfully clear choice that.<br /><br />So the warrant MUST be worth less than the share.<br /><br /><br />--- you are forgetting the downside. By buying the share your downside is $6.88. By buying the warrant your downside is the price of the warrant. This is a significant differenceAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-88787930670374052062011-08-28T05:08:43.099+10:002011-08-28T05:08:43.099+10:00Colin, the key is that the strike price was above ...Colin, the key is that the strike price was above the current share price. Any advantages that options have over shares (leverage, less downside risk) come from the fact that the options always cost less than the actual shares if they are not in the money.<br /><br />Example: would you ever pay $7 for a call with a strike price of $7? No, because with that $7 you would just buy the stock directly.Walterhttps://www.blogger.com/profile/04745318865555357144noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-76243253618754007852011-08-27T14:00:35.042+10:002011-08-27T14:00:35.042+10:00Hi John, thanks for the write-up. I really enjoyed...Hi John, thanks for the write-up. I really enjoyed it.<br /><br />You're right that Buffet's pfd is Tier 1 right now but it won't be so in 2013 because of Collins Amendment (just search "Collins Amendment" on http://www.skadden.com/Cimages/siteFile/Skadden_Insights_Special_Edition_Dodd-Frank_Act1.pdf) <br />Matt O'Connor of Deutsche mentions this in his note and expects BAC to redeem Buffet's pfd before 2013.Investment Reading Noteshttps://www.blogger.com/profile/04731219304684868829noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-58363600495260054672011-08-27T13:03:40.274+10:002011-08-27T13:03:40.274+10:00Colin. Your maths is not good.
If the share is $2...Colin. Your maths is not good.<br /><br />If the share is $2 would you rather the warrant or a share? <br /><br />Well the share is a share and you would need to pay $7 to turn the warrant into a share (which you would not do).<br /><br />So you would prefer the share.<br /><br />If the shares were $100 would you rather a warrant or a share?<br /><br />Well the share is a share and you need to pay $7 to turn the warrant into a share.<br /><br />--<br /><br />At any price you would prefer 1 share to 1 warrant.<br /><br />--<br /><br />The shares were $6.88 the day Buffett did the deal.<br /><br />That is the price of a share.<br /><br />The price of the warrant ON THAT DAY must be below $6.88 because no matter what the outcome you would prefer the share to a warrant.<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-4833022908361019592011-08-27T09:36:50.770+10:002011-08-27T09:36:50.770+10:00If you think the warrants are capped at the share ...If you think the warrants are capped at the share value then I have a bridge for sale (unless you have some long-dated options I can buy). You aren't taking into account the time value of money. Long-dated options can easily exceed the value of the stock. Also, are you arguing a 7 strike call 10yr call is worth $1.5 less than a 8yr 13 strike call?<br /><br />Not that your point on the over-priced preferreds isnt correct (and this is the only place I have seen it mentioned), but you are way off on your option pricing.Colinhttp://www.google.comnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-13925135246169100862011-08-27T06:19:47.642+10:002011-08-27T06:19:47.642+10:00Per dealbreaker, Buffet has the option of paying t...Per dealbreaker, Buffet has the option of paying the exercise price either <br />(a) in cash or <br />(b) with his 6% preferred at face value<br /><br />How much option value do you assign to that? I guess it's only worth something if the fair yield on the preferred's doesn't decline from 6% (from current 8% or something) and the common is higher than the strike.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-22504367528182711452011-08-27T05:01:04.684+10:002011-08-27T05:01:04.684+10:00How do you know that Buffet could have done the $5...How do you know that Buffet could have done the $5B either way, with less warrant value and more preferred value? Maybe BAC only would do this deal, in which they don't have to pay as much cash out in the foreseeable future.<br /><br />In the end of the day, it was not just Buffet dictating the terms. It was a deal that both sides could agree on.<br /><br />The historical evidence is that the common stock performance after a private placement is negatively related to the relative size of the equity component of the private placement. The company management knows more about the state of affairs than the investor in private placements, and the deal signals the management's view of the stock more so than the investor's.<br /><br />Maybe buffet is different, although I don't think he is different in this respect.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-9918913872899841582011-08-27T03:20:20.763+10:002011-08-27T03:20:20.763+10:00John-
Regarding the GS/BAC comparison and saying t...John-<br />Regarding the GS/BAC comparison and saying there is perference for equity value versus FI value in the cpn...could it be GS was repaid faster than he thought. Maybe he thought 10% premium in the GS deal would ensure a longer deal. And he wants to avoid that here and this reactionary to that.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-4341699589774536792011-08-27T02:24:33.357+10:002011-08-27T02:24:33.357+10:00Although one cannot replicate the Buffett deal, sm...Although one cannot replicate the Buffett deal, smaller investors could have still bought (as of 25 Aug) a different series of BAC Pfd that traded at a >30% discount to par, and offered a 6% yield (at mkt).<br /><br />Although not cumulative, this particular series offers some inflation protection.<br /><br />Shame about the lack of warrants, though.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-59157815537835235402011-08-27T02:16:50.715+10:002011-08-27T02:16:50.715+10:00John, breath. You are not the only one thinking th...John, breath. You are not the only one thinking the last weeks have been BofA crazy.<br /><br />And you are not going to convince the skeptics either. The data is out there. MBS, CRE, putbacks, Europe. And they still do not want to see and prefer to wave their hands.PlanMaestrohttp://variantperceptions.wordpress.comnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-66382175142835826162011-08-27T01:06:45.927+10:002011-08-27T01:06:45.927+10:00Seems like a reasonable analysis to me.
My impres...Seems like a reasonable analysis to me.<br /><br />My impression is that some of the more vocal internet bank doubters (which include just about everybody with a post or a comment on banks) are in effect opposed to the operation of time when it comes to banking.<br /><br />They jump on the first whiff of marked to market loss without considering the effect of net interest margin generation over time - or the fact that market valuation judgements evolve over time and in large part are translated to an impact on capital over time.<br /><br />It is a predisposed toxic attitude toward banks, leveraged by MMT myopia.JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-34171903579300682742011-08-27T00:52:50.115+10:002011-08-27T00:52:50.115+10:00Price was less than $7 on the day Buffett negotiat...Price was less than $7 on the day Buffett negotiated the deal.<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-88688278946379600322011-08-27T00:35:23.512+10:002011-08-27T00:35:23.512+10:00You day traders can't price equity derivatives...You day traders can't price equity derivatives at all huh?<br /><br />John - carry trading joke. You promised.Nemo Incognitohttps://www.blogger.com/profile/07345185457108156269noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-24995256021732296162011-08-27T00:33:08.615+10:002011-08-27T00:33:08.615+10:00This comment has been removed by the author.WSMhttps://www.blogger.com/profile/00131532131659441620noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-39486859333126127622011-08-27T00:28:33.222+10:002011-08-27T00:28:33.222+10:00John, can you clarify the math on this?
"If...John, can you clarify the math on this? <br /><br />"If fair value is $7 and Buffett paid $5.34 then the dilution is the difference times the proportion of the company this represents.<br /><br />Call it 15 percent of 7% or about 1%."<br /><br />Where do you get the 15 percent and where do you get the 7 percent?<br /><br />I calculate $5.34 as a 24% discount to $7.00.<br /><br />Thanks -WSMhttps://www.blogger.com/profile/00131532131659441620noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-22511806911791189892011-08-26T22:57:56.624+10:002011-08-26T22:57:56.624+10:00http://www.businessweek.com/
bwdaily/dnflash/
cont...http://www.businessweek.com/<br />bwdaily/dnflash/<br />content/sep2008/<br />db20080923_622401.htm<br /><br />He'll be able to exercise the warrants at any time over five years. Goldman's stock closed Sept. 23 at 125.05, up 3.5%, and it was climbing past 133 a share in after-hours trading after news of the deal broke.Anonymousnoreply@blogger.com