Countrywide Financial Corp. (CFC)

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Countrywide’s Debt Problem

Posted by David Gaffen May 2, 2008, 2:33 pm

Countrywide Financial Corp., which has taken plenty of shots to the gut during the credit crunch, was sucker-punched again today, causing investors to sell the shares and boost expectations of a potential default on its debt.

Ratings agency Standard & Poor’s downgraded the company’s credit rating to junk status at about 2 p.m. ET. The rating agency was reacting to a regulatory filing by Bank of America Inc., which plans on acquiring Countrywide, but suggested that it may not want to take on all of its debt obligations.

“Bank of America is currently evaluating alternatives for the disposition of the remaining Countrywide indebtedness, including the possibility of redeeming, assuming, or guaranteeing some or all of this debt, or allowing it to remain outstanding as obligations of Countrywide (and not Bank of America),” the bank said in its filing.

Well, ok then. Credit-default swap spreads, which measure protection against the potential for default on debt, have bounced sharply. Countrywide’s five-year swaps were lately traded at 250 basis points, which translates to a cost of $250,000 to insure $10 million in bonds for five years. Thursday, those swaps closed at $165,000, according to brokerage Phoenix Partners Group.

The stock, meanwhile, was lately down 3.6% to $5.83 a share, falling below break-even shortly after the news was announced, and there’s a fresh bout of pessimistic betting going on in the options market in contracts way, way down the road, according to Rebecca Engmann Darst of Interactive Brokers. A total of 9,800 contracts in the October puts at a $3 strike have traded today — compared with existing interest of 1,848 contracts prior to Friday trading — which suggests new bearish positions.

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One will fall… and the rest are following… quickly now… it’s all how you define quickly… you think!
The OZ

Comment by I told everyone about this Pig in a Polk... last year! - May 2, 2008 at 2:44 pm
It’s a nice trick if you cn pull it off, mergering just the assets. But I think it is entirely contrary to public policy. If BAC doesn’t want a real merger let CFC go to bankruptcy, and offer to by the servicing at auction. That is what the SEC should b telling them right now.

Comment by Mike Powers - May 2, 2008 at 2:53 pm
2:44, did you take your Adderall today? Your posts are incomprehensible.

Comment by H95 - May 2, 2008 at 3:01 pm
Bondholders only have themselves to blame if they allowed Countrywide to borrow money from them without restricting its ability to sell its assets without paying them off.

Comment by ss - May 2, 2008 at 3:03 pm
So, all those bull clowns thought the problems were over? I wonder how JP Morgan is going to feel about assuming Bear Stearns bad paper?

Comment by Hank - May 2, 2008 at 3:03 pm
Retribution alright - butcher Mozillo belongs in prison for claiming all along last year that CFC was in great shape, while he sold out of his shares…

Comment by monkey fist - May 2, 2008 at 3:19 pm
Will the Fed bail CFC out the way it did to Bear Stearns?

Comment by Lay Person - May 2, 2008 at 3:27 pm

http://blogs.wsj.com/marketbeat/2008/05/02/countrywides-debt-problem/?mod=WSJBlog