CFC $20...Countrywide's Fate, Cerberus's Hell, Iceland's Deals: Timshel
By David Wilson
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A Countrywide home loan branch in Chicago
Aug. 16 (Bloomberg) -- The appearance of the word ``bankrupt' in an analyst report on Countrywide Financial Corp., the biggest U.S. mortgage lender, suggests the fear surrounding the home-loan industry has become too extreme.
Merrill Lynch & Co.'s Kenneth Bruce, who reduced the stock's rating to ``sell' from ``buy' yesterday, raised the possibility in explaining his move. The analyst, based in San Francisco, wrote that Countrywide might have to resort to loan sales in the absence of funding from banks and bond investors.
``If liquidations occur in a weak market, then it is possible for CFC to go bankrupt,' he wrote, using the stock symbol for the Calabasas, California-based company.
This sentence appeared in the middle of seven pages of words and tables, rather than in the headline: ``Liquidity is the Achilles heel.' Based on the market reaction, though, the position was irrelevant.
Countrywide fell 13 percent, the biggest one-day decline since the market crashed in October 1987. The stock's drop for this year reached 50 percent, moving the company to last place among 92 members of the Standard & Poor's 500 Financial Index.
The declines show how much confidence in the debt markets, a lifeline for the likes of Countrywide, has been lost because of rising defaults on subprime mortgages.
`Unprecedented Conditions'
Countrywide's sources of financing include asset-backed commercial paper, or borrowing for nine months or less that's secured by mortgages. The amount of paper outstanding averaged $17 billion a day in the first half, according to its second- quarter filing with regulators.
Upheaval in the mortgage market has caused this source of funds to dry up. Mortgage-related companies can't borrow to pay off maturing paper because ``lenders to them don't want their collateral,' Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York, wrote in an e-mail yesterday.
Yet the damage from what Countrywide has described as ``unprecedented market conditions' is far from fatal. The company has about $185 billion in credit lines available, according to Merrill's Bruce.
Even if the situation worsens enough to cut off the flow of funds, Countrywide has an ace in the hole: its relationship with the Federal Reserve. Countrywide Securities Inc., a unit that trades mortgage-backed debt, is one of 21 securities dealers required to bid at the Treasury's bond sales.
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At a minimum, the central bank would presumably do everything in its power to prevent the company -- and by extension, the mortgage market -- from falling apart.
Bruce's report raises the issue of bankruptcy without referring to what the Fed might do. There are precedents for some kind of action, including Drexel Burnham Lambert Inc.'s failure in 1990 and Continental Illinois National Bank & Trust Co.'s brush with collapse in 1984.
There may be lots of time to study those examples and determine how they would apply to Countrywide. It's a long way from a word halfway through an analyst report to the reality of a bankrupt company, no matter how fearful investors might be.
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Cerberus Capital Management LP takes its name from a mythical three-headed dog that guarded the gates of hell. The association is more appropriate than ever because the subprime industry's plunge has been hellish for the private-equity firm.
Scottish Re Group, which received a $300 million investment from the New York-based firm in May, delivered the latest blow. The reinsurance company's shares fell 24 percent yesterday and set a record low after its announcement that $3.1 billion of bond investments are backed by less-than-prime mortgages.
The holding was disclosed a day after Aegis Mortgage Corp., a subprime lender controlled by Cerberus, filed for bankruptcy. Residential Capital LLC, part of the buyout firm's GMAC LLC unit, said last week that nonprime mortgages account for 71 percent of its $62.7 billion in loans held for investment.
There might be more to come. Cerberus agreed in April to acquire H&R Block Inc.'s Option One subprime unit for as much as $800 million. The proposed takeover raises the issue of how much hell the firm and its investors can withstand.
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Iceland's financial-service and investment companies thoroughly dominate the local stock market. They account for more than 90 percent of the value of its benchmark index, the OMX ICEX 15. Now they're pushing into the rest of Europe.
Kaupthing Bank hf, the country's biggest bank, just agreed to spend 3 billion euros ($4 billion) acquiring NIBC Holding NV, a Dutch securities firm hurt by losses on subprime investments. The takeover will be the biggest ever by an Icelandic company outside its home country, according to Bloomberg data.
Glitnir Bank hf, the second largest, has expanded throughout the Nordic region and also does business in Canada, China and Luxembourg. Landsbanks Islands hf, the third largest, is buying Bridgewell Group Ltd., an investment bank, to add to its U.K. operations.
The OMX ICEX 15's performance suggests investors are generally happy with the strategy. Even though the index has slumped in the past month, its 23 percent advance this year is the biggest among benchmarks for Western Europe's 18 markets.
To contact the writer of this column: David Wilson in New York at dwilson@bloomberg.net
Last Updated: August 16, 2007 00:11 EDT
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