Bank of America's Game-Changer

CHARLOTTE, N.C. ( TheStreet) -- Looks like Bank of America's ( BAC) departing CEO Ken Lewis is getting the last laugh.

The announcement after Wednesday's market close of a deal for Bank of America, the largest U.S. bank holding company, to repay the Treasury $45 billion received via the Troubled Assets Relief Program, or TARP, was a slam dunk for the bank, a watershed for the industry and underlines an amazing opportunity for investors.

The discussion Wednesday about the possibility of a breakup of Bank of America already seems like ancient history.

In a late October report supporting a "Buy" rating on Bank of America, Sandler O'Neill analyst Jeff Harte said the threat of dilution to common shareholders from a capital raise tied to the repayment of TARP would be "outweighed" by the "opportunity to reduce preferred dividends." He also said "the limited available shares for issuance limit the firm's near-term capital raise ability."

The company aims to get around its limit of 10 billion authorized shares (with 8.7 billion common shares already outstanding and another 1 billion reserved for convertibles, warrants, etc.) by issuing a new class of preferred shares that will be junior to other preferred shares but senior to the common, and automatically converted one-for-one to the common once current shareholders authorize a substantial increase in the allowed number of common shares.

The deal requires shareholder approval to raise the authorized share limit within 105 days. If current shareholders fail to increase the authorized share limit, the company will stay within the current limit of 10 billion shares, automatically converting 200 million of the new preferred shares into common.

Sweeteners for investors who buy the new preferred shares and take the slight risk that current common shareholders reject the authorization of additional shares, include warrants to purchase 60 million common shares for a penny a piece and a 10% dividend rate on the new preferred shares that aren't converted.

Considering what a terrible blow the company would take if common shareholders voted against authorizing additional shares to get the capricious government monkey off Bank of America's back, along with the generous dividends the company would have to pay to holders of the new preferred shares, common shareholders are very likely to authorize the issuance of additional shares.

While Bank of America expects the redemption of all of the government's preferred shares to reduce fourth-quarter income available to common shareholders by $4.1 billion, the company expects to save $3.6 billion in dividends and amortization next year.

As part of the agreement with regulators to repay TARP, Bank of America also is required to "raise $4 billion through the sale of assets," by the end of 2010. That won't be a tall order for a company with a balance sheet of $2.3 trillion.

Bank of America remains a compelling play over the next several years for investors confident in the U.S. economy's ability to rebound and rebuild, with a diversified business, including Merrill Lynch and Countrywide.

The company will join J.P. Morgan Chase ( JPM) as the second among the big four domestic banks to repay TARP, and puts pressure on Wells Fargo ( WFC) to follow suit, and maybe on Citigroup ( C) to attempt a partial repayment.

-- Written by Philip van Doorn in Jupiter Fla.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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