BofA’s debt cuts leave 3-year capital cushion

BANK OF AMERICA expects to use consumer deposits to fund operations for the next three years, thanks to an aggressive debt-reduction program it has undertaken.
Posted 7/20/12

CHARLOTTE, N.C. - Bank of America Corp.’s record $53 billion reduction of long-term debt in the second quarter will help the lender go three years without needing to tap the bond market, the biggest cushion in its history.

Bank of America said this week its long-term debt fell to $302 billion as improving loan performance led to a $2.46 billion quarterly profit after a record loss a year earlier. The second-biggest U.S. bank by assets said it probably won’t issue long-term senior bonds this year and won’t need to tap capital markets for another 37 months.

The bank has hustled to pare its balance sheet, cut debt and get in line for pending regulation that requires higher capital cushions. The Charlotte-based firm has repaid all of its debt from the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program, including $24 billion in the second quarter.

“They’re on the Jenny Craig diet, getting down to fighting weight, selling off assets that aren’t profitable, being very rational about their costs,” said David Hendler, an analyst at CreditSights Inc. with an “outperform” rating on the lender’s fixed-income securities. “Whereas a year ago, you weren’t sure they were going to reach capital levels, now it’s pretty much a layup.”

Defective mortgages

The lender’s bonds surged this week, with its $2.25 billion of 5.7 percent notes due in 2022 and issued in January reaching 115.7 cents on the dollar, the highest ever, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes ended yesterday at 114.7 cents to yield 3.84 percent.

CEO Brian T. Moynihan, 52, has soothed investor doubts about whether the firm was on track to comply with coming capital rules set by the Basel Committee on Banking Supervision. He has sold more than $50 billion in assets, committed more than $40 billion to clean up defective mortgages and targeted $8 billion in annual cost cuts since taking over in 2010.

The company’s Tier 1 Common ratio, a measure of financial strength that includes common stock, retained earnings and perpetual stock, is now 11.2 percent, up from 8.2 percent in the second quarter last year, according to data compiled by Bloomberg.

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