Warren Buffett to swap US$5 billion BofA stake for US$17 billion of stock

Investor Warren Buffet arrives for the premiere of the film "Wall Street: Money Never Sleeps" in New York, US, on Sept 20, 2010.
Investor Warren Buffet arrives for the premiere of the film "Wall Street: Money Never Sleeps" in New York, US, on Sept 20, 2010. PHOTO: REUTERS

WASHINGTON (BLOOMBERG) - Warren Buffett's Berkshire Hathaway plans to swap US$5 billion (S$6.9 billion) of preferred stock in Bank of America Corp. for 700 million common shares, worth US$17 billion at Thursday's closing price.

Berkshire will exercise its warrants to buy common stock at a discounted rate of US$7.14 a share when the bank raises its per-share dividend to 12 cents, Berkshire said in a statement Friday. Buffett acquired the preferred shares through an investment in the lender six years ago.

The move, which will make Berkshire the bank's biggest shareholder, is a fresh vote of confidence in Bank of America from one of the world's savviest investors. It also was a sound move for Berkshire. Buffett laid out his thinking in a February letter to shareholders, saying that the decision would come down to simple math: The preferred investment pays US$300 million a year in dividends, so it makes sense to convert that into common stock if those shares began earning more.

After receiving Federal Reserve approval of its capital plan, Bank of America said on June 28 that it planned to boost its dividend 60 per cent to 12 cents a quarter. By converting the preferred stake into common shares, Berkshire's payout will rise to US$336 million a year.

Mr Buffett shored up confidence in Bank of America and its chief executive officer, Brian Moynihan, at a critical juncture.

In 2011, the lender was still struggling to work its way out from under the weight of legal settlements and other costs tied to the housing-market bust.

With backing from Berkshire's billionaire CEO, Bank of America soon rebounded. That generated a massive paper profit on the warrants. The stock closed at US$24.32 on Thursday. Berkshire collected more than US$1.5 billion in dividends from the preferred stake.

The episode highlighted Mr Buffett's role as a financial firefighter and mirrored confidence-boosting investments he made in Goldman Sachs Group and General Electric during the 2008 crisis.

In those cases, he was also able to extract generous terms in exchange for vouching for those companies' long-term prospects.