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Rating Action:

Moody's downgrades two hybrid securities of Bank of America to Ba3 from Baa3

24 Apr 2009

All other Bank of America ratings affirmed

New York, April 24, 2009 -- Moody's Investors Service today downgraded to Ba3 from Baa3 the ratings on the Floating Rate Hybrid Income Trust Securities (HITS) issued by BAC Capital Trust XIII and BAC Capital Trust XIV. Both issuers are subsidiaries of Bank of America Corporation (BAC). The rating outlook for both issuers is negative. All other ratings of BAC were affirmed. The rating action was taken as a followup to Moody's March 25 ratings actions on BAC, in order to address the differential between the ratings assigned to the HITS and the ratings assigned to BAC's preferred stock.

BAC's HITS were issued in February 2007 by trusts that hold junior subordinated notes of BAC plus a forward purchase contract that obligates the trust to purchase non-cumulative perpetual preferred stock from BAC five years from the date of issuance. Beginning in 2012 the junior subordinated notes will be remarketed to new investors and the proceeds of the remarketing will be used to satisfy the trusts' obligations to purchase BAC non-cumulative preferred stock under the terms of the forward contract. If the remarketing is not successful, then the trust is obligated to exchange the junior subordinated notes for BAC non-cumulative preferred stock no later than March 2013. This process can be accelerated only if BAC's regulatory capital ratios fall below "well capitalized" or its regulator determines that the company is at risk of falling below "well capitalized." BAC's current regulatory capital ratios exceed the "well capitalized" threshold by at least 200 to 400 basis points (between $55 and $70 billion).

It is Moody's normal practice to rate bank hybrid securities at the same rating level as preferred stock if the hybrid's ultimate claim on the banking company is a preferred stock claim, even if for an interim period the hybrid is backed by a subordinated debt security -- as is the case with the BAC HITS. However the Ba3 rating on these securities is three notches higher than the B3 rating on BAC's non-cumulative preferred stock. The higher rating on the HITS reflects two key factors. First, Moody's believes that BAC's sizable amount of preferred stock outstanding limits the risk of a near-term dividend suspension or distressed exchange for the HITS where the forward contract would have to be accelerated first. Second, the timing of the BAC HITS conversion to a preferred stock position in 2012/2013 is likely later than the timing of any distressed exchange of existing preferred stock that BAC might seek to undertake, which would benefit BAC's entire capital structure including the HITS.

To address the first point, BAC has approximately $33 billion in outstanding non-cumulative preferred stock, and another $45 billion in cumulative preferred stock issued to the U.S. government. This compares with approximately $60 billion of tangible common equity (before unrealized gains on securities and excluding after-tax fair value gains on BAC's own debt). Moody's believes that an exchange of all or even just a portion of these preferred securities into common equity would substantially strengthen BAC's tangible common equity position -- and this could be achieved without impairing the BAC HITS securities.

To address the second point, in Moody's view, given the pressures facing BAC and the U.S. government, the risk of such any distressed exchange is greatest over the next year or two. Under the terms of the instrument, the HITS are likely to continue to be backed by junior subordinated debt, rather than by preferred stock, during this period. As a result, Moody's believes that the risk of a distressed exchange involving the HITS is considerably more limited than it is for BAC's outstanding preferred stock. In addition, if the distressed exchange of BAC's preferred stock happened, the HITS would also benefit from the layer of new common equity below it. For this reason, the Ba3 rating for the HITS is three notches higher than the B3 rating on BAC's preferred stock.

The latest rating action on BAC Capital Trust XIII and BAC Capital Trust XIV was on March 25, 2009 when Moody's lowered the rating to Baa3 from Baa1.

The principal methodologies used in rating this issuer were "Bank Financial Strength Ratings: Global Methodology" (February 2007) and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" (March 2007), which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

The following ratings were affected:

..Issuer: BAC Capital Trust XIII

....Preferred Stock downgraded to Ba3 from Baa3

..Issuer: BAC Capital Trust XIV

....Preferred Stock downgraded to Ba3 from Baa3

Bank of America Corporation is headquartered in Charlotte, North Carolina. The bank reported total assets of $2.3 trillion as of March 31, 2009.

New York
David Fanger
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades two hybrid securities of Bank of America to Ba3 from Baa3
No Related Data.
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