Debt woes over for BofA, Rusal

A year is a long, long time in banking. Just 12 months after Bank of America received its first slug of government funds, the bank is repaying the Treasury's entire $45 billion (Dh165.3 billion) investment.

That is good news for taxpayers, who have pocketed about $2.5 billion in dividends to date, and are left with only one real mega-bank, Citigroup, as an ongoing concern. More perplexing, perhaps, is why shareholders, who marked BofA's shares up three per cent in after-hours trading, are so pleased.

Investors, presumably, see liberation from the heavy hand of government outweighing the mammoth capital raising that BofA requires to buy its freedom. In fact, the bank will not repurchase warrants granted to the Treasury as part of its investment.

That means a wrangle over their valuation is still to come. But this $45 billion repayment is the significant step that Ken Lewis, the outgoing chief executive, sought and, more important, will shake off the more onerous restrictions on compensation.

That may make it easier for BofA to reap the strategic benefits of its messy tie-up with Merrill Lynch. It should also ease the process of finding a suitable candidate to take over from Lewis.

Shareholders are being strong-armed into approving common stock issuance required to raise $18.8 billion — "common equivalent securities" will be issued with dilutive penalties if they refuse. But the bank perhaps could have waited until stronger earnings gave it greater wherewithal to repay its debts.

The need to bump up capital ratios means $4 billion must also be found through asset sales,. Among the stress test banks, BofA has one of the highest percentages of realised to expected losses, according to Barclays Capital, with more undoubtedly still to come. With or without government money, banks remain a risky bet.

Restructuring

Oleg Deripaska, Russia's one-time richest man, has stared into the abyss this past year. But now the Rusal aluminium group he controls has completed a labyrinthine restructuring of its $16.8 billion debt mountain, including $7.4 billion owed to 70-odd international lenders. Typically, a restructuring that size would mean radical haircuts for creditors and shareholders. Apparently, neither lenders nor Russian officials — with several state-owned Russian banks among the creditors — wanted that to happen with a Russian national "champion". So the deal extends repayments of the international debt over seven years, including a novel "pay-if-you-can" provision in the first four years, with similar terms for Russian banks.

But Rusal is not out of the woods. Hong Kong's stock exchange has postponed from yesterday to Monday discussion of Rusal's plans for a roughly $2 billion initial public offering that would enable debt repayment to start before the year-end. That may put Rusal's testing target of listing by December 23 beyond reach. And this flotation has significant ballast. One issue is London litigation by a former Deripaska partner, Michael Cherney, claiming he is owed 13 per cent of Rusal. Rusal says the suit is baseless, and anyhow targets Deripaska himself, hence is no risk to other shareholders. Deripaska, moreover, is reported to have been denied US visas in the past; Rusal says he faces no travel restrictions. Goldman Sachs withdrew from a potential IPO advisory role saying it needed more time to familiarise itself with the deal, though plenty of other big banks have signed up.

If the IPO happens, Rusal will doubtless be touted as a chance to buy into an aluminium recovery via a company whose low costs, thanks to cheap Siberian hydro-power, give it the greatest margin upside.

— Financial Times