Possible preferred-for-common swap boosts Bank of America preferreds; RBS up on earnings

By Stephanie N. Rotondo

Portland, Ore., Nov. 4 - Preferred stocks were upwardly mobile during Friday's session, spurred by news out late Thursday about a possible preferred exchange from Bank of America Corp.

"They are thinking about registering [common] shares to exchange for trust preferreds, possibly [other] preferreds and possibly senior notes," a trader said. In theory, he said, the plan could prove successful if the Charlotte, N.C.-based bank was able to exchange preferreds at a discount to par, but at a premium to current trading levels.

"Everybody wins," he said, though he added that he had his doubts about the outcome of the move.

Still, the news resulted in massive trading action within the Bank of America family, by far dominating the day's volume. In fact, a market source remarked that all the trading within the bank's structure caused volume to increase "significantly."

Away from Bank of America, however, there was little else notable going on, traders reported. Royal Bank of Scotland Group plc reported earnings Friday, and while volume in that name was thin, the preferred issues were heading upward.

Bank of America rises

After stating that it would not issue new stock in order to raise capital, Bank of America reversed its position late Thursday when it heralded a plan that would convert preferred stock issues into common equity.

One market source speculated that the move was an attempt to convert the preferreds ahead of their "faze out as tier 1 capital."

The idea is that the bank could exchange certain preferreds - including trust preferreds - at a discount to par, but at a premium to current levels. For example, if a preferred security was trading at $12 to $14 per share, the company could offer up to $20 of common equity.

"Everybody wins," the source said of that scenario. "They could take them out at a cheaper price than they would have to down the road," and also put money back into the bank's pockets. Investors would then receive more bang for their buck.

On the news, the issues seen as the most likely to be part of an exchange "jumped considerably because people are hoping that they will be part of the tender."

The floating-rate series 5 noncumulative depositary shares (NYSE: BMLPL) linked to Merrill Lynch won the day's top trading spot, with more than 2.4 million shares changing hands. The issue rose $1.89, or 12.76%, to $16.70.

The Merrill Lynch floating-rate series 2 noncumulative depositary shares (NYSE: BMLPH) were also busy, gaining $2.32, or 18.27%, to $15.02.

And, the 8.625% noncumulative depositary shares (NYSE: BMLPQ) earned 18 cents to close at $24.65.

Elsewhere in the BofA complex, the 8.2% series H depositary shares (NYSE: BACPH) improved by 28 cents, or 1.18%, to $24.10, while the 7% capital securities (NYSE: CFCPB) moved up 65 cents, or 3.16%, to $21.25.

"This was a very big piece of news," the source said. "If they are successful, I think it's a fantastic move, it makes sense.

"If it doesn't work...I could see that happen," he posited, given that some investors would rather hold preferreds - and particularly trust preferreds - than common equity.

The bank is reported to have not made a final decision on the potential exchange, but news outlets quoted at least one source as saying it could launch soon.

RBS gains post-earnings

Royal Bank of Scotland's preferreds were on the rise despite a 63% decline in profit. The gains in the securities were attributed to areas where the U.K. government-controlled bank had improved, such as a decrease in its loan-to-deposit ratio and an increase in tier 1 capital.

Still, trading in the name was light compared to Bank of America.

The 5.75% noncumulative dollar preference shares (NYSE: RBSPL) were one of the few down issues, slipping 5 cents to $15.30. The 6.08% noncumulative guaranteed trust preferreds (NYSE: RBSPG), however, gained 20 cents, or 1.81%, to $11.28.

The 6.6% noncumulative dollar preference shares (NYSE: RBSPS) were among the bank's top percentage gainers, moving up 38 cents, or 2.9%, to $13.50.

For the third quarter, RBS posted a profit of $428 million. The dip was due in part to a 29% decline in investment banking revenue.

However, there were positives in the earnings report, even as the bank warned of a "difficult" fourth quarter - including another potential round of job cuts.

Bad loan impairments fell to £1.54 billion, down £728 million. Loan-to-deposit ratios dropped 2% to 112% and tier 1 capital ratio rose to 11.3% from 11.1%.

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