There’s nothing at all altruistic about BAC’s move here, IMHO.
They bought a ton of 7.25%-yielding preferred stock.
They probably shorted the bloody daylights out of CFC common as a hedge, and if they did so when CFC was 25 the other day, they already have a 15% 3-day return, was 20% earlier today w/CFC @ 20.high. This is a very common configuration for bondholders in a company. If the co. goes BK, the short bet pays off. Meanwhile, BAC collects 7.25% from CFC. Whatever happens to CFC, BAC will have an ongoing strangle (by that I mean, both a long and short position they can trade partially in and out of) and they get paid 7.25% to maintain. Not bad.
Should CFC go belly up, not only will BAC’s senior position in the preferred give them a serious equity foot in the door wrt a possible takeover, but the gain from shorting the common (which goes to zero in BK) pay for it.
I have no particular love for either company, but it’s a screaming brilliant move on the part of BAC.
>> They probably shorted the bloody daylights out of CFC common as a hedge... This is a very common configuration for bondholders in a company.
I get the advantages of this strategy if the shorted company goes bankrupt or its common stock significantly declines in value.
But what happens if it goes the other way... if the bondholder’s investment turns the other company around? When & how do they cover the short?