May 4, 2012 / 12:59 AM / in 6 years

BofA: Downgrades could require billions in collateral

(Reuters) - Bank of America Corp (BAC.N) would have been required to post $5.1 billion in collateral under derivatives contracts as of March 31 if major ratings agencies had downgraded its debt by two notches, the bank said in a quarterly filing on Thursday.

A Bank of America logo can be seen in a bank branch in New York April 28, 2009. REUTERS/Lucas Jackson

The bank’s estimate comes as one of three major ratings agencies, Moody’s Investors Service Inc, has said it’s considering a possible downgrade of the company’s long-term debt rating, as well as its banking subsidiary’s long-term and short-term debt ratings. Moody’s is reviewing 17 financial institutions with global capital markets operations.

Credit ratings are opinions on a company’s creditworthiness used by counterparties to determine its ability to repay loans and price the risk. Downgrades can also trigger counterparties to require banks to post additional collateral under derivatives contracts or to terminate contracts.

Moody’s is expected to conclude its review between early May and the end of June, according to the filing. The agency has offered guidance that a downgrade to the bank’s ratings, if any, would likely be one notch, the filing said.

A one-notch downgrade would have required the company to post $2.7 billion in collateral, the filing said. The bank’s estimates contemplate a downgrade by all three major ratings agencies and quantify the impact for a historical point in time.

    In addition, under a one-notch downgrade of certain ratings, the derivative liability that would be subject to termination by counterparties was $3.3 billion as of March 31, against which Bank of America has already posted $2.5 billion of collateral, the filing said. Under a two-notch downgrade, the derivative liability subject to termination was an additional $5 billion, against which the bank has already posted $4.7 billion of collateral.

    Editing by Eric Meijer

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