This is just a factual take at the recent loan given by Warren Buffet to Bank of America
The terms have been simple as before
1) Berkshire will get 50,000 preferred shares that carry a dividend of 6% a year and are redeemable at a 5% premium.
2) The investment also includes warrants to purchase 700 million Bank of America shares at $7.14 each over the next 10 years.
3) If Bank of America is unable to pay the preferred dividend, not only do the dividends cumulate but they do so at 8% per annum and the bank is restricted from paying dividends or buying back stock, in the meantime.
There is a very good article written by Aswath Damodaran about this deal which states Warren Buffet is making a 15 % effective yield on the investment.
Now the deal says Warren Buffet has the option to buy 700 million shares but the chances of Bank of America buying back the preferred shares at 5% premium seem to be higher whenever it has the money as no one would want a loan at 6% when its available much lower.
So in good times the Bank may buyback the preferred shares from Warren Buffet like Goldman Sachs did. A little article on how much Warren Buffet made on Goldman.
Not getting into the details its a $ 5 billion at an interest rate of 6% and if Bank of America does miss it will have to pay 8%. A pre-payment charge of 5%:) Well thats a really exciting deal which no Bank in America would get in lending 🙂 but this is how America is now – Banks need Loans 🙂
So the question comes to is Warren Buffet a Bank or is Bank of America the Bank :).
Well this is just a personal take i have no idea how it impacts Bank of America or anything else 🙂