The bond market has not been kind to BAC bonds the past few weeks. Spreads have widened substantially and CDS spreads
have exploded to the upside ... 2 times the level of Citi and 3 times the levels of Wells Fargo and JP Morgan.
What are the chances of a coupon interruption ? What are the chances of principal not being repaid at maturity ?
(1) There is no evidence of any run on deposits at BAC. Customer deposits have grown for 6 consecutive quarters ( last
reported June 30 2011 ). (2) Short-term debt as a percentage of total debt is substantially less than their peers. BAC
is at 46% as of June 30th. AA-rated industry peers report upwards of 70% of their debt as short-term. (3) Revenues are
projected to be in the range of $140 billion for each of the next couple of years. Interest expense is projected to
be in the range of $22-25 billion for each of the next couple of years. Revenue in 2008 was only $73 billion, with interest
expense at $40 billion ... an important improvement. And there is plenty of room for revenue to drop and still maintain
a comfortably small interest expense percentage (4) Cash is currently sitting at $100 billion.
It is no surprise
that the bond market is reflecting on the lousy equity market price action of BAC more so than the future of BAC. Sometimes
the bond market reacts to the price action of the common stock and the preferred stock and not the financial ratios important
to debt service. Current spreads on 5-year senior debt are pricing in a downgrade to low BBB / high BB. BAC has
issues with their CEO. BAC as issues with their mortgages. BAC is definitely trading like a highly leveraged real
estate company in a terrible real estate market. BAC bonds are "dollar good" in our humble opinion.
August 22, 2011
