Japanese to Buy $130 Million in B of A’s Notes
Four decades after Bank of America became the first U.S. bank to provide financing to rebuild Japan’s war-torn economy, nine Japanese banks agreed Wednesday to come to the stricken giant’s aid by investing $130 million in its corporate parent, BankAmerica.
The agreement, disclosed in Japan, follows months of difficult negotiations during which the Japanese held out for and won a higher rate of interest than BankAmerica initially offered. The $130-million purchase of BankAmerica notes is the first part of an overall Japanese capital infusion in the San Francisco-based bank that could total $350 million.
Observers called the agreement a small step in BankAmerica’s recovery but a powerful symbol of Japan’s preeminence in world financial markets.
Called a ‘Watershed’
“This is a watershed event, reminiscent in many ways of General Motors’ approach to Toyota a few years back to learn better management and manufacturing methods,” said William J. Barnds, president of the Japan Economic Institute of America. The Washington-based research organization is funded largely by the Japanese government.
“The numbers have been there for a year or so,” Barnds added, noting that seven of the world’s eight largest banks, three of the five top insurance companies and the world’s biggest securities firm are Japanese. “But an event like this really drives it home. Not too long ago, Bank of America was the world’s largest bank.”
Today, BankAmerica is the third-largest banking concern in the United States--behind New York’s Citicorp and Chase Manhattan--but with assets of $96.9 billion it remains the largest in California.
In terms of profitability and other measures of performance, however, BankAmerica is at or near the bottom of any list, having been weakened by staggering loan losses, management upheaval, financial scandals and data-processing woes.
The banking firm posted a net loss of $1.07 billion in the first half of 1987 despite the profitable sale of its Charles Schwab & Co. discount stock brokerage unit. The company also lost $518 million in 1986 and $337 million in 1985--again despite huge gains from the sale of such assets as its headquarters buildings in Los Angeles and San Francisco.
Still, there is a growing confidence in financial markets that the worst may be behind the company. On Monday, Merrill Lynch Capital Markets increased the size of an offering of three-year BankAmerica notes to $300 million from $250 million as a result of strong investor demand.
And BankAmerica’s shareholders recently bought $8 million in newly issued common shares during the first month of a new plan that gives them a 5% discount.
“That comes out to $100 million a year and, in my view, is even more significant than the Japanese investment,” said Donald Crowley, an analyst in San Francisco for the brokerage firm of Keefe, Bruyette & Woods. He noted that selling new shares bolsters BankAmerica’s badly depleted equity capital, while selling notes does not.
Nevertheless, coming against the backdrop of rising trade tensions between the United States and Japan, BankAmerica’s months-long negotiations with the Japanese assumed a high profile.
To BankAmerica’s chagrin, newspapers on both sides of the Pacific chronicled pilgrimages to Tokyo for personal appeals by BankAmerica Chairman A. W. Clausen and Chief Financial Officer Frank N. Newman. A BankAmerica spokesman said that the bank understood that the Japanese have agreed among themselves to provide the funding, although he could not provide official confirmation of the deal.
In Japan, the investment in BankAmerica was viewed as a way of appeasing U.S. anger over the continuing trade imbalance between the two nations and the sale of militarily sensitive technology to the Soviet Union by a subsidiary of Toshiba Corp.
But it took a boost in the interest rate of a quarter of a percentage point to persuade the Japanese banks to buy the notes, according to Reuters news service. BankAmerica will pay a floating rate 1.25 percentage points more than a London benchmark rate for three-month interbank deposits, Reuters reported. The London rate was 7% Wednesday.
In addition, BankAmerica was forced to waive a hoped-for interest-rate cap of 12% on the notes, Reuters said.
The news agency said Dai-Ichi Kangyo Bank, Mitsui Bank, Sanwa Bank and Industrial Bank of Japan will buy $20 million each of the 12-year notes, while Fuji Bank, Sumitomo Bank, Mitsubishi Bank, Bank of Tokyo and Yasuda Trust and Banking will buy $10 million each.
Humbling Experience
In addition, BankAmerica wants other Japanese banks to purchase another $120 million in notes and Japanese insurance companies to buy $100 million in convertible preferred stock.
“There is no question BankAmerica would rather not do this,” because of the humbling nature of the pleas to Japan, said analyst Dan B. Williams of Sutro & Co. in San Francisco. “But they have to raise money every way they can.”
