Junk Debt Puts Countrywide Rescue in Jeopardy
US' biggest mortgage lender suffers deterioration in stricken loan portfolio and downgrade in debt to junk status
Doubts are mounting over a $4bn (£2bn) rescue bid for the US' biggest mortgage lender, Countrywide Financial, after a deterioration in its stricken loan portfolio and a downgrade in its debt to junk status.
Countrywide's shares slumped 11% to $5.28 in early trading in New York yesterday after a broker's note suggesting that Bank of America could renegotiate or walk away from a buyout that was agreed in January to avert bankruptcy.
Paul Miller, an analyst at Friedman, Billings, Ramsey, raised the alarm about a recent regulatory filing in which Bank of America said it could not give an assurance that it would guarantee Countrywide's outstanding debt. Miller said this was "most likely the first step in renegotiating the entire deal".
Bank of America's share-for-share takeover is worth about $7.15 a share but Miller said a renegotiation could take the price below $2.
He said the value of Countrywide's loan portfolio may have to be marked down by as much as $22bn. "We estimate that if fair-value adjustments to the loan portfolio could exceed approximately $22bn, this would increase the odds of Bank of America renegotiating the transaction or walking away."
The slump in Countrywide's stock could prove a financial headache for the British hedge fund SRM Global, which has been buying shares and agitating for a higher price from Bank of America. The fund raised its stake in Countrywide to 8.13% last month.
Such has been the outcry over Countrywide's lending practices that its chief executive, Angelo Mozilo, agreed to forfeit $37.5m in severance pay under the terms of the proposed takeover.
The company is under investigation by prosecutors in several US states for its allegedly overzealous promotion of inappropriate mortgages to low earners.
On Friday, Standard & Poor's cut its rating on Countrywide's debt to "BB plus", taking it below investment grade.
At its peak, California-based Countrywide provided one in seven of US mortgages. It was a leading provider of sub-prime loans that homeowners have struggled to repay in a declining property market.
Countrywide's shares slumped 11% to $5.28 in early trading in New York yesterday after a broker's note suggesting that Bank of America could renegotiate or walk away from a buyout that was agreed in January to avert bankruptcy.
Paul Miller, an analyst at Friedman, Billings, Ramsey, raised the alarm about a recent regulatory filing in which Bank of America said it could not give an assurance that it would guarantee Countrywide's outstanding debt. Miller said this was "most likely the first step in renegotiating the entire deal".
Bank of America's share-for-share takeover is worth about $7.15 a share but Miller said a renegotiation could take the price below $2.
He said the value of Countrywide's loan portfolio may have to be marked down by as much as $22bn. "We estimate that if fair-value adjustments to the loan portfolio could exceed approximately $22bn, this would increase the odds of Bank of America renegotiating the transaction or walking away."
The slump in Countrywide's stock could prove a financial headache for the British hedge fund SRM Global, which has been buying shares and agitating for a higher price from Bank of America. The fund raised its stake in Countrywide to 8.13% last month.
Such has been the outcry over Countrywide's lending practices that its chief executive, Angelo Mozilo, agreed to forfeit $37.5m in severance pay under the terms of the proposed takeover.
The company is under investigation by prosecutors in several US states for its allegedly overzealous promotion of inappropriate mortgages to low earners.
On Friday, Standard & Poor's cut its rating on Countrywide's debt to "BB plus", taking it below investment grade.
At its peak, California-based Countrywide provided one in seven of US mortgages. It was a leading provider of sub-prime loans that homeowners have struggled to repay in a declining property market.
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